FTC Victory in Idaho Hospital-Physician Acquisition Case Should be a Wake-Up Call for Future and Past Deals

more+
less-

The ink is still drying on the Idaho federal district court’s order requiring St. Luke’s Health System (“St. Luke’s”) to unwind its acquisition of Saltzer Medical Group (“Saltzer”) – a for-profit, physician-owned, multi-specialty group comprising approximately 44 physicians located in Nampa, Idaho. But hospitals considering future acquisitions of physician groups, and those that the FTC may view as having failed to make good on their promises to improve care without hiking prices, better take notice.

St. Luke’s closed its acquisition of Saltzer in December 2012, after convincing the 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 its investigation of the transaction. As we covered, two competitors of St. Luke’s had sued to block the deal from closing, and in March 2013 the FTC and Idaho AG joined the battle by filing a complaint seeking to unwind the transaction.

Significantly, the Court found that “it appears highly likely that health care costs will raise as the combined entity obtains a dominant market position that will enable it to (1) negotiate higher reimbursement rates from health insurance plans that will be passed on to the consumer, and (2) raise rates for ancillary services (like x-rays) to the higher hospital-billing rates.” And even though the Court “applauded” St. Luke’s efforts to improve healthcare quality, it believed that those same improvements could be achieved through alternative arrangements short of a full merger without the higher reimbursement rates and increase in ancillary services fees. The Court has released only an abbreviated opinion; additional insights will be available after the Court resolves confidentiality issues and releases its full opinion.

Why is the FTC’s victory in Idaho a wake-up call for both future and past hospital-physician deals? First, the Court’s finding clearly shows that the theory of harm articulated by the FTC in hospital merger cases—that a transaction can increase bargaining leverage with health insurance plans resulting in higher reimbursement—is fully applicable to physician acquisition cases, and it highlights at least one way hospital systems can raise rates post-transaction—shifting lower priced physician provided ancillary services to higher hospital-billing rates. (Shifting to higher hospital-billing rates is seen as a means to provide higher compensation to the acquired physicians.) Second, the Court’s finding that the “there are other ways to achieve the same [improvements] that do not run afoul of the antitrust laws and do not run such a risk of increased costs” makes clear that affiliation models short of employing physicians after an acquisition need to be considered where a proposed deal is likely to raise competitive concern.

More importantly, the FTC’s victory further supports the call made by FTC Chairwoman Edith Ramirez last summer that the FTC launch a retrospective review of completed healthcare provider transactions.  While speaking at a symposium on retrospective analysis of agency determinations in merger transactions, she emphasized what the FTC learned from its first hospital merger retrospective, namely, that the FTC needed to “revamp” its approach to litigating horizontal hospital merger challenges. The FTC’s revamped approach now “emphasizes how a merger can leave an insurer—the direct payor for hospital services—with few alternatives to include in its network, increase the bargaining leverage of the combined hospital, and lead to higher prices.” The result from this new approach, beginning with the Evanston case in 2007, according to Chairwoman Ramirez, has been “a winning streak that now includes three successfully-litigated merger challenges and a growing list of hospital deals abandoned after the FTC threatened a challenge.” And as noted above, that revamped approach played a central role in the FTC’s win against St. Luke’s.

Since healthcare “remains a top agency priority,” Chairwoman Ramirez suggests that a renewed provider healthcare merger retrospective is on the horizon. But where would such a retrospective focus?

Chairwoman Ramirez sees much to be gained by examining more closely the effects of combinations that have “a significant vertical element.” An area of examination would include the impact of integration among physicians in different specialties that results from hospital acquisitions of physician practices, she said. Another, where she said the FTC hears “growing concerns,” involves “provider consolidation in non-overlapping product or geographic markets,” which may lead to higher prices. These combinations might include, for example, “center city hospitals acquiring smaller hospitals in outlying areas or a general acute care hospital acquiring a children’s hospital.” According to Chairwoman Ramirez, “preliminary economic evidence suggests that harm from this type of integration, ordinarily not what we would challenge, could be real and substantial.”