Competitive effects still matter in healthcare mergers, even in the face of a transaction’s claimed improvements in patient outcomes through integrated care and risk-based reimbursement consistent with the goals of the Affordable Care Act (ACA). On February 10, 2015, the United States Court of Appeals for the Ninth Circuit demonstrated this principle by affirming a district court judgment that the St. Luke’s Health System’s acquisition of Saltzer Medical Group violated the antitrust laws. See Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke’s Health System Ltd., -- F.3d --, 2015 WL 525540 (9th Cir. Feb. 10, 2015). Moreover, the Ninth Circuit affirmed the district court’s remedial order for complete divestiture. This significant victory for the Federal Trade Commission (FTC) and the State of Idaho shows that courts will not shy away from unwinding an already-completed transaction that causes or threatens to cause a substantial lessening of competition.
Both St. Luke’s and Saltzer’s provided health care services in Nampa, Idaho, a small city located approximately 20 miles west of Boise. In 2012, St. Luke’s acquired Saltzer’s assets and entered into a five-year agreement with Saltzer’s physicians. This combination included more than 75% of the adult primary care physicians (“PCPs”) in the immediate Nampa area.
In 2013, the FTC and the Idaho Attorney General filed a complaint alleging that the combination of St. Luke’s and Saltzer violated Section 7 of the Clayton Act and Idaho state antitrust laws because it gave the combined entity the market power to demand higher reimbursement rates for adult health care services provided by primary-care physicians in Nampa, Idaho, which would ultimately lead to higher consumer health care costs. To remedy the alleged violation, the FTC and the State of Idaho asked the court to unwind the acquisition. After a 19-day bench trial, the district concluded that the acquisition violated the Clayton Act and Idaho’s state antitrust laws and found that any post-acquisition efficiencies failed to excuse the potential anticompetitive price effects. The district court ordered St. Luke’s to fully divest the Saltzer group.
Market definition proved to be a critical battleground. The relevant product market was conceded to be PCPs, but the relevant geographic market was hotly contested. Applying the “clear error” standard, the Ninth Circuit agreed with the district court (and the government) that the relevant geographic market was limited to Nampa, Idaho itself, rather than the broader “Treasure Valley” area (a larger geographic area stretching to Boise) that St. Luke’s had advanced. This conclusion was largely based on testimony from insurers who said that they would need to contract with PCPs in Nampa, rather than a broader geographic area, in order to offer viable group health plan options to Nampa employers.
With this affirmance of the district court’s market definition, the legal presumptions afforded by a post-acquisition market share of 75% easily supported the government’s argument that the combined entity had sufficient market power to increase prices, rendering the transaction potentially anticompetitive. Evidence from St. Luke’s email files – that the merged entity intended to use that increased market share to drive up prices and negotiate more favorable terms with insurers – brought the presumption to life.
Of most interest was the Ninth Circuit’s extreme skepticism that an otherwise anticompetitive transaction could be justified because it would produce efficiencies that would outweigh the harm to competition. St. Luke’s argued that its acquisition of Saltzer would result in certain efficiencies, including improved patient services and a move towards the ACA’s goals of integrated care and risk-based (rather than fee-based) reimbursement. Although the Court acknowledged that the transaction might improve health care in the area, that was not enough to establish a successful efficiencies defense. Returning to the statutory language of the Clayton Act and its focus on protecting competition, the Court stated that an efficiencies defense must demonstrate that the prima facie case “portrays inaccurately the merger’s probable effects on competition.” In other words, unless the claimed efficiencies would actually have a positive effect on competition or decrease prices, St. Luke’s could not rebut the anticompetitive nature of the acquisition.
In addition, the Court agreed with the district court that the claimed efficiencies were not merger-specific. Even if the claimed efficiencies had been merger-specific, the Court concluded that the defense nonetheless would have failed. It found that while improved patient services were “a laudable goal,” the antitrust laws do “not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations.”
Finally, the Ninth Circuit rejected St. Luke’s argument that a conduct remedy less drastic than divesture would have been appropriate. For example, although St. Luke’s suggested that the merged entities could have simply been required to engage in separate contract negotiations with insurers, the Ninth Circuit held that such a remedy was complicated and hard to monitor. It noted that divestiture, in contrast, was “simple, relatively easy to administer, and sure,” supporting its conclusion that the district court did not abuse its discretion in ordering it.
For health care providers analyzing potential mergers and acquisitions, St. Luke’s provides three important lessons. First, market definition and market concentration analysis are alive and well in merger analysis. Therefore, analysis of markets, market definition, and market concentration remains critically important in any potential transaction where government enforcement is a risk. Second, the views of third-party payors (as well as of the parties themselves, as reflected in internal documents) about the transaction’s probable effects on competition still matter. Third, efficiencies tied to the broader goals of current health care reform legislation (including improved patient services and better reimbursement practices) are insufficient on their own to establish a successful efficiencies defense. For purposes of antitrust analysis, a successful efficiencies defense will require evidence that the transaction’s efficiencies will support or enhance competition enough to outweigh the perceived anticompetitive harm.