Judge Orders Health System Divestiture of Physician Group Practice Due to Antitrust Concerns

February 3, 2014

For the first time, a federal district judge has required the unwinding of a hospital’s acquisition of a physician group practice due to antitrust concerns. As a result of the ruling, released Jan. 24, 2014, the largest health system in Idaho, St. Luke’s Health System, must divest the state’s largest independent medical group, Saltzer Medical Group (SMG). The ruling sends a clear message that hospitals’ acquisitions of physician group practices are not immune from antitrust scrutiny and may require careful analysis under the antitrust laws.

Boise-based St. Luke’s acquired Nampa-based SMG in 2012. St. Luke’s had long-term plans to develop a new hospital in this area, 30 miles west of Boise, and its acquisition of SMG was a critical component of its justification for development. More immediately, it sought improved care coordination and development of an accountable care organization (ACO) through the SMG acquisition. The district judge endorsed St. Luke’s goals, “applauded … its efforts to improve the delivery of health care” and agreed that patient outcomes would have improved if the deal remained intact. The judge, however, ultimately agreed with the Federal Trade Commission (FTC), the Idaho attorney general and two of St. Luke’s competitors that the transaction violated federal antitrust law and would increase health care costs to insurers and consumers.

The judge noted that the combined organization comprised 80 percent of the primary care physicians in Nampa, thereby creating a dominant local market position. The court found uncompelling St. Luke’s argument that it needed additional employed physicians to create an integrated, risk-based payment and care model. In the end, the court believed the argument that St. Luke’s could demand higher reimbursement rates from health insurance plans and drive increased use of its ancillary services from its position of market dominance. In support of its position, the FTC pointed to St. Luke’s historical acquisitions of acquired hospitals and 30 physician group practices in the nearby Magic Valley region. After completion of these acquisitions, St. Luke’s was able to obtain higher reimbursement from insurers, making the region one of the most expensive in the state.

FTC Chairwoman Edith Ramirez called the federal district judge’s order “an important victory that will benefit both competition and consumers in Nampa, Idaho, and the surrounding areas.” Meanwhile, St. Luke’s CEO David C. Pate characterized the decision as “surprising and disappointing news.” He reacted on his blog, suggesting that the decision meant that the creation of ACOs may not be possible in smaller communities such as Nampa. He also questioned the feasibility of achieving various integration goals expressed in the Patient Protection and Affordable Care Act (PPACA) if the case serves as a bellwether for future FTC enforcement.

Early Lessons From the Case

This case provides some important lessons to consider for future hospital–physician transactions.

1. Hospitals should consider analyzing their impact on market share prior to completing an acquisition. Before this case, the FTC had not challenged a hospital–physician group merger case in federal court. Without a test case, it was unclear how courts would respond to such challenges. With this victory and the FTC’s string of recent successful actions against anticompetitive hospital system mergers, the FTC may be emboldened to target additional hospital–physician group transactions that threaten to reduce market competition and increase costs to insurers and consumers alike in a geographic area.

2. Antitrust concerns may exist regardless of the purchase price. St. Luke’s reportedly paid between $27 million and $29 million for SMG. This amount, like the amount paid by hospitals for many physician group practice acquisitions, falls well below the threshold established under the Hart-Scott-Rodino Antitrust Improvements Act for required reporting to the FTC ($75.9 million in 2014). Yet, as this case makes clear, hospitals should analyze the impact such deals may have on market competition, regardless of the size of the purchase price — or risk challenges to completed deals from area competitors, insurers and regulators.

3. Health reform’s goals do not trump antitrust concerns. Federal antitrust law allows “extraordinary efficiencies” to overcome market concentration concerns. Yet despite PPACA’s substantial changes to payment mechanisms, requirements for care coordination across care settings, and growing pressure on providers to achieve horizontal and vertical integration, courts have not found these arguments to be sufficient justifications to overcome concerns of reduced competition in a given geographic area.

This case is important because it signals the FTC’s willingness to challenge a hospital or health system’s acquisition of a physician group practice if it would result in reduced competition or higher prices to consumers and insurers, regardless of the size of such a transaction. McGuireWoods’ Healthcare and Antitrust and Trade Regulation departments have substantial experience in health care facility mergers and acquisitions, including scrutiny of such deals for antitrust concerns.

Please contact one of the authors below if you have any questions regarding the content of this client alert.