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In an important victory for the Federal Trade Commission in the appellate courts, the U.S. Court of Appeals for the Ninth Circuit recently affirmed last year's decision from the District of Idaho in Saint Alphonsus Medical Center v. St. Luke's Health System, No. 14-35173, in which the FTC successfully sued to undo a 2012 merger of two health care providers in Nampa, Idaho.

As reported in this column last year, the FTC—joined by the state of Idaho and certain competitor hospitals—filed an action in the U.S. District Court for the District of Idaho in 2013 to unwind a merger between St. Luke's Health Systems, an Idaho health care system, and Saltzer Medical Group, an Idaho-based physician group. St. Luke's operated several hospitals in Idaho and employed 500 physicians, including eight primary care doctors based in Nampa. Saltzer employed 16 primary care doctors in Nampa. After years of negotiation regarding potential affiliation, St. Luke's acquired the assets of Saltzer in December 2012. Following the Saltzer acquisition, St. Luke's controlled 80 percent of the adult primary care physicians in Nampa. The FTC's complaint asserted that the combination violated Section 7 of the Clayton Antitrust Act, which prohibits mergers if "the effect of the acquisition may be substantially to lessen competition, or tend to create a monopoly."

A bench trial was held in the fall of 2013 before U.S. District Chief Judge B. Lynn Winmill of the District of Idaho. In January 2014, the court ruled for the FTC and ordered that St. Luke's divest itself of the Saltzer physician group. The court's opinion acknowledged that the country's health care system was "at a crisis point" due to soaring costs with no attendant rise in quality of care. One potential solution, the court noted, was for providers to move toward a system of integrated care and value-based reimbursement, which incentivizes improving patient outcomes, in place of fee-for-service reimbursement. The court praised St. Luke's and Saltzer for their efforts to improve patient care, crediting their claim that this was the primary intent of the merger. Despite these laudable goals, however, the district court found that the merger could not stand due to its likely anticompetitive effects.

The district court found that the merger would significantly increase St. Luke's share in the already concentrated adult primary care physician market in Nampa. The court noted that the HHI index, the leading measure of market concentration, yielded a value more than double the threshold for a presumptively anticompetitive merger. The court further found it likely that the merged entity would extract higher primary care reimbursement rates from insurers and would bill more ancillary services, like X-rays and laboratory work, at a higher rate used for services performed in a hospital. Based on these findings, the court concluded that the FTC had made a prima facie case that the Saltzer acquisition was anticompetitive. The court rejected St. Luke's argument that the merger should be allowed because the combined entity would gain efficiencies that outweighed any anticompetitive effects. St. Luke's had argued that the merger would permit a more integrated approach to health care, which would facilitate value-based reimbursement. The court held, however, that these efficiencies could have been achieved under other organizational structures and did not require the wholesale acquisition of the Saltzer group.

St. Luke's appealed the district's court decision but a unanimous Ninth Circuit panel affirmed the district court's opinion in nearly all respects. The panel first upheld the district court's holding that the FTC had made its prima facie case, though it rejected the finding regarding ancillary services, concluding that the record included no evidence that St. Luke's had market power in the ancillary services market or would bill ancillary services for Saltzer patients at the hospital rate. The panel took note of internal pre-merger communications in which St. Luke's and Saltzer executives discussed using an increased market share to force higher primary care reimbursement rates from insurers. The opinion makes plain, however, that the "extremely high" HHI score associated with the merger was sufficient by itself to establish the FTC's prima facie case.

The Ninth Circuit went on to uphold the district court's finding that the efficiencies St. Luke's asserted would result from the merger had failed to rebut the FTC's prima facie case. In doing so, the court expressed doubt regarding whether an "efficiencies defense" could ever be used to rebut a prima facie case of anticompetitiveness in a Clayton Act Section 7 case, noting language from the U.S. Supreme Court suggesting that such a defense was not viable. The court stated that it remained "skeptical" about the defense, but went on to consider the defendants' arguments regarding efficiencies. Since the Clayton Act is expressly concerned with "competition," however, any successful efficiencies defense must respond directly to the prima facie case and demonstrate that the merger will not have anticompetitive effects. The court held that the efficiencies asserted by St. Luke's failed because they related to patient service, not competition. As the court put it, "the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations."

Importance for Future Mergers in Health Care

The Ninth Circuit opinion in the St. Luke's matter will be helpful to the FTC going forward in future challenges to mergers in the health care space. Most obviously, the panel's analysis is now binding law in the Ninth Circuit and will carry more persuasive weight outside the jurisdiction as well. Further, the opinion makes clear that a prima facie case of anticompetitiveness can be made by nothing more than the market share calculations, when the numbers are high enough. Defendants will need to rebut that prima facie case by proving the pro-competitive benefits of an acquisition that significantly increases concentration in a health care market. It may be difficult for defendants to make a successful rebuttal if other courts follow the Ninth Circuit's position on the relevance of claimed efficiencies that will flow from the merger. Under the panel's analysis, it appears that efficiencies related to improved patient care will not save the merger unless recast as promoting competition.

On the other hand, the impact of St. Luke's may be more limited. The 80 percent post-merger market share in the St. Luke's case resulted from the definition of the relevant geographic market as limited to Nampa, based on the court's finding that patients are not willing to travel for primary care. St. Luke's had vigorously argued that the market should include physicians in Boise, Idaho, 20 miles away, but the Ninth Circuit disagreed and upheld the district court's limitation of the market to Nampa. Other mergers that do not implicate primary care services might be analyzed differently. Further, such high market share numbers will be less likely in more populous areas. Regarding efficiencies, other courts may find merger-related improvements in patient care to be pro-competitive if the defendants can demonstrate that providers compete on the basis of quality. And while St. Luke's argued that the Saltzer acquisition was a step toward value-based reimbursement, which should ultimately decrease costs, the court found only "the desire of St. Luke's to move in that direction"—but no actual plan to do so. St. Luke's credibility on this point presumably was not helped by its own documents stating its plan to raise rates. Future similarly situated litigants might be able to make a more persuasive case that consolidation will ultimately facilitate a transition to value-based reimbursement.

Health care entities considering consolidation should take a lesson from the St. Luke's experience and seek antitrust counseling early in the game to avoid the potential for major headaches. St. Luke's and Saltzer endured prolonged uncertainty regarding their attempted merger, including over two years of litigation, a 19-day bench trial and appeal. St. Luke's will also forfeit a $9 million payment to the Saltzer group that, under the acquisition agreement, would be kept by Saltzer even if the deal were unwound. The competitor plaintiffs and the state of Idaho have also sought to recover a total of almost $10 million in legal costs from St. Luke's. This outcome might have been avoided had the parties approached the transaction with a more careful eye toward its possible antitrust implications. The parties might have more seriously explored non-merger alternatives or drawn up more definite plans for adopting value-based reimbursement. At a minimum, better awareness of the potential for antitrust scrutiny might have prevented the creation of a damaging paper trail playing up the ability of the merged entity to demand higher reimbursement rates from insurers.

The FTC Remains Focused on Health Care

As reported in this column last year, the FTC's decision to intervene against the St. Luke's-Saltzer transaction sent a message that, even when a merger is too small to trigger Hart-Scott-Rodino review, the agency is willing to act against potentially anticompetitive mergers in the health care industry. Despite the passage of the Affordable Care Act and its promotion of integrated care and value-based reimbursement, the FTC will not permit these policy goals to be pursued in ways that harm competition. Recent comments indicate that the FTC will remain highly interested in consolidation in health care. FTC Chairwoman Edith Ramirez was quoted last week as stating that health care was one of the "top priorities for the FTC's competition agenda" and that health care companies' "awareness of antitrust law is often in the background" while they are "scrambling to react to a new business and regulatory environment." Ramirez specifically mentioned two types of mergers in which the agency is becoming increasingly interested: urban hospitals' acquisition of suburban hospitals and hospitals acquiring imaging or diagnostic providers.

The St. Luke's matter was also a topic of discussion at Baker &amp; Hostetler's Symposium on Section 5 of the FTC Act, held in Washington D.C., last week, which can be viewed at http://goo.gl/iRIAyI. The scope of the FTC's enforcement authority to alone address "unfair methods of competition" under Section 5 has long been unsettled and is still very much a subject of vigorous debate. Presently, FTC Commissioners Joshua Wright and Maureen Ohlhausen, who spoke at the daylong symposium, have proposed guidelines to define the parameters of Section 5. The other FTC commissioners have opposed any guidelines and Congress has been pressing the commission to enact guidelines out of fairness and to promote clarity. While Section 5 clearly can be used to act against conduct that violates the Sherman Act, it remains unclear what types of additional conduct, except invitations to collude, might be addressed in a "stand-alone" Section 5 case. Also speaking at the Baker &amp; Hostetler symposium, Deborah Feinstein, current director of the FTC's Bureau of Competition, stated that the St. Luke's case involved a "very straightforward horizontal theory" based on the fact that the post-merger entity would have "a really, really significant share of the primary care physicians" in the area. She characterized the case as "no different" from other cases that the agency brings "every day" challenging horizontal transactions. She also acknowledged that the case was pursued only under the Sherman Act because it was thought not necessary to be also pursued under Section 5 of the FTC Act. She further stated that only injunctive relief would be sought in stand-alone Section 5 cases, noting the commission's 2012 statement, "We do not intend to use monetary equitable remedies in stand-alone Section 5 matters." Another panelist at the symposium cited the St. Luke's victory as a turning point in the FTC's efforts to rein in anticompetitive mergers in the health care industry, following a lengthy period during which the agency struggled in this area. Stay tuned

Reprinted with permission from the March 3, 2015 issue of The Legal Intelligencer. Copyright 2014. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

FTC’s Appellate Win Reflects Focus on Health Care Consolidation