With the trial over, post-trial briefs due November 1, and closing arguments scheduled for November 7, a lot more is at stake than whether St. Luke’s Health System (“St. Luke’s”) can keep Saltzer Medical Group (“Saltzer”) – a for-profit, physician-owned, multi-specialty group comprising approximately 44 physicians located in Nampa, Idaho.  St. Luke’s closed its acquisition of Saltzer back in December 2012, but only after convincing a federal district court judge to allow the transaction to go forward despite objections from two rival hospitals and repeated requests by the FTC and Idaho AG to delay the closing so each could complete an investigation.  In March, the FTC and AG joined the battle over St. Luke’s acquisition by filing a complaint seeking to unwind the transaction.

As previously reported, the FTC and Idaho AG allege that St. Luke’s acquisition of Saltzer is anticompetitive because it creates a single dominant provider of adult primary care physician services in Nampa, with a combined share of nearly 60%.  The newly-combined primary care practices, the FTC and AG allege, give St. Luke’s greater bargaining leverage with healthcare plans, with higher prices for services eventually being passed on to local employers and their employees.  St. Luke’s rival hospitals – but not the FTC or AG – also contend that the combination may choke their access to inpatient admissions referred by Saltzer physicians.

What is at stake in addition to whether St. Luke’s gets to keep Saltzer?

For one thing, in FTC Commissioner Wright’s view, as reported, a loss in Idaho might well cause the FTC to turn its focus to completed hospital-physician deals to build needed experience to win such challenges.  For healthcare providers that means the possibility of another healthcare merger retrospective review like the one initiated more than a decade ago which led to the FTC’s 2004 challenge to Evanston Northwestern Healthcare’s acquisition of Highland Park Hospital in 2000.  The FTC won that challenge in 2007, which reversed a string of losses stretching back years.  Since then, the FTC has amassed an impressive record of victories in horizontal hospital merger cases.  Now, the FTC may attempt to get a similar running start in taking on horizontal physician practice acquisitions or vertical hospital acquisitions of physician practices.

More broadly, though, how competitive benefits outside the relevant product market(s) are taken into account in a merger review (if at all) is at stake too.  As Commissioner Wright recently pointed out in a speech, “the antitrust agencies recognized the potential importance of out-of-market efficiencies in the 2010 Guidelines by providing that efficiencies not strictly in the relevant market, but so inextricably linked with it, can make a difference in whether a merger is challenged when those out-of-market efficiencies ‘are great and the likely anticompetitive effect in the relevant market(s) is small so the merger is likely to benefit customers overall.’”  These out-of-market efficiencies should not be confused with in-market efficiencies such as cost reductions.  The FTC and DOJ grudgingly acknowledge the role of in-market efficiencies in merger analysis, although they demand a high standard of proof, and say that in-market efficiencies cannot save a deal with substantial anticompetitive effects.

In the St. Luke’s challenge, St. Luke’s is pointing to all kinds of competitive benefits in areas outside of the alleged relevant product market which St. Luke’s says flow from its acquisition of Saltzer.  US Airways and American Airlines (the “Airlines”) are making the same argument in response to the DOJ’s challenge to their proposed merger.  The Airlines are touting “immense benefits to the traveling public” that the combined “US Airways and American Airlines will offer” with “more and better travel options for passengers through an improved domestic and international network, something that neither carrier could provide on its own.”  The Airlines say that models “routinely used by the airlines in their businesses demonstrate that these positive network effects” of “a unified network” would “attract millions of additional passengers to the merged airline” and that methods used by the government “conservatively demonstrate that the value of these consumer benefits would exceed $500,000,000 every year, net of any fare effects.”

Even if St. Luke’s and the Airlines succeed in claiming that out-of-market benefits are fair game for assessing merger effect, current merger law may still doom each merger.  As Commissioner Wright explained in his speech, a merger may violate Section 7 of the Clayton Act “despite the fact that it increases consumer welfare because current law precludes counting efficiencies outside the relevant market.”  This is because “the merging parties cannot rely upon consumer gains outside of the narrowly defined product market to defend the merger, even if the increase in consumer welfare is huge and dominates any potential anticompetitive effects.”

How the district court judge in Idaho deals with St. Luke’s claimed benefits may well impact how the Airline’s claimed benefits are viewed.  Time will tell.

Drawing on the complementary experience of members of our business group, our team of antitrust lawyers has the depth and experience to handle the most significant transactions.  If you have any questions regarding this matter, or would like to learn more about our antitrust capabilities, please contact Jonathan L. Lewis, jllewis@bakerlaw.com or 202.861.1557, or Lee H. Simowitz, lsimowitz@bakerlaw.com or 202.861.1608.