Hospital-Physician Mergers: Practical Issues and Steps to Minimize Antitrust Risk

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Recently, hospitals have been actively acquiring primary care and specialty physician groups, resulting in the employment of those physicians. This trend has occurred largely in response to reimbursement changes and other changes to market dynamics, as well as to position those hospitals and physicians for compliance with the Affordable Care Act. These hospital-physician group mergers can provide mechanisms to improve quality of care, reduce costs, and achieve other efficiencies. At the same time, these transactions can raise significant antitrust issues, and as a result there has been an increase in Federal Trade Commission (FTC) and state Attorney General (AG) (collectively, the Agencies), as well as private party, challenges to those mergers. Two recent challenges to hospital-physician group mergers provide a number of factors and affirmative steps that merging parties and their counsel should consider during each stage of the merger and during any Agency investigation that can maximize the likelihood of the Agency permitting the transaction to proceed and preserve the integrity and benefits of the transaction even if it is challenged.

Renown Health

On August 6, 2012, Renown Health (Renown) entered into consent decrees with the FTC and the state of Nevada Attorney General (NAG) settling the antitrust investigation of its consummated cardiology group acquisitions. It is the first FTC settlement of an investigation into a physician group acquisition, and the only antitrust consent decree by any federal or state agency applying a “structural” remedy to a physician merger – here, allowing partial divestiture of physicians – rather than “conduct” relief, as state AGs have imposed in several other recent physician merger settlements.

In January 2011, Renown, the largest hospital system in Reno, Nevada, acquired Sierra Nevada Cardiology Associates, with 15 cardiologists. Three months later, Renown acquired Reno Heart Physicians, the other major cardiology group in the region, with 17 cardiologists. The employment agreements between Renown and the cardiologists include noncompete covenants restricting any physician who leaves Renown from providing competing services in the Reno area, as well as other related constraints on their ability to separate from Renown and become a competitor. In their investigation and the subsequent antitrust complaints they filed, the FTC and the Nevada Attorney General’s office claimed that the resulting market consolidation increased Renown’s market share and concentration in adult cardiology services, and reduced competition for those services in the region, which “may” lead to higher prices, although they did not (indeed could not) identify any actual anticompetitive effects such as higher prices resulting from the (by then) over-one-year-old merger.

Under the settlement, Renown agreed to suspend the noncompete provisions for at least 60 days, allowing as few as six but no more than ten cardiologists to seek employment with other hospitals or to practice independently as long as they remain in the Reno area for one year. Alternatively, even if fewer than six cardiologists sought to leave Renown under the decree, Renown was not required to take any action other than to continue suspension of the noncompete provisions. Other consent decree provisions call for advance notification to the government of any future acquisitions of cardiology groups in Reno during the next five years, and creation of an antitrust compliance program for Renown. There are no provisions restricting Renown’s ability to contract with health plans, set prices, or otherwise limiting Renown’s ability to create ACOs or other innovative services to meet the demands of health care reform.

St. Luke’s Health System

More recently, on November 12, 2012, two private parties in the Boise, Idaho area, St. Alphonsus Health System and Treasure Valley Hospital, filed an antitrust lawsuit against St. Luke's Health System (SLHS), alleging that a merger of SLHS with Saltzer Medical Group, a large multi-specialty physician group, would reduce competition for primary care physician (PCP) services, general pediatric services, general acute care services, and outpatient surgery services in violation of Sections 1 and 7 of the Sherman Act as well as Idaho state antitrust laws. The plaintiffs sought a preliminary and permanent injunction barring the acquisition from closing on December 31, 2012.

The plaintiffs alleged that SLHS’s dominant position in the Boise area market for general acute care services and outpatient surgery services was enhanced by a string of recent acquisitions of 22 physician groups and several outpatient surgery centers, including most recently an agreement in principle to purchase Saltzer, a physician group that employs a significant number of the physicians which admit patients to the plaintiffs' facilities. The plaintiffs alleged that, after acquiring Saltzer, SLHS would control 67 percent of the market for PCP services and would have a "near-monopoly" in the market for general pediatric services in the geographic market, and would therefore be a "must have" system for health plans, resulting in higher prices. The plaintiffs also alleged that the acquisition would be anticompetitive because SLHS, as demonstrated by its alleged conduct in prior acquisitions, would direct Saltzer's physicians not to admit patients to plaintiffs' facilities or to refer business to specialist physicians employed by plaintiffs. St. Alphonsus explained that its Nampa facility obtained 40 percent of its adult admissions, and all of its pediatric admissions, from Saltzer.

On December 20, 2012, the court denied the plaintiffs’ motion for a preliminary injunction holding that they had failed to show they would suffer irreparable harm, as required to obtain a preliminary injunction, should the transaction close as scheduled.1 First, in responding to the contention that the acquisition would lead to higher premiums, the court noted that St. Luke's already had signed a contract with its largest payor that governs rates for the next two years, thereby negating the possibility the acquisition would have an impact on premiums before July 2013, when the trial on the matter is scheduled. Second, the court rejected the argument that, after the transaction, physicians employed by St. Luke's would steer patients to its facilities and away from plaintiffs' facilities, noting that the terms of the agreement permits doctors to admit patients to whatever facility they think appropriate, including plaintiffs' hospitals. Third, the court also rejected the argument that the acquisition would result in an immediate increase in prices for computed tomography and magnetic resonance imaging services. According to the court, patients who wish to avoid the price increases can travel a short distance to plaintiffs' own facilities in Nampa. Finally, the court noted that unwinding the transaction would not be difficult, if necessary after trial, because integration is scheduled to take place gradually over the next year and the parties' agreement provides a defined process for undoing the deal.

Subsequently, on March 12, 2013, the FTC and Idaho Attorney General filed their own complaint seeking to block the merger in the same federal court as the private action, and requested that the court consolidate the two actions for discovery and trial. The Agencies’ complaint similarly alleged that the transaction created a single dominant provider of PCP services in the Nampa area, and as a result, any health plan provider network must include the newly combined entities’ PCPs in order to be attractive to employers, giving St. Luke’s bargaining power with health plans and ultimately leading to higher prices. Contrary to typical Agency practice, the FTC and AG elected to file their own complaint after private litigation had already commenced, and (as to the FTC) did so in federal court rather than in an FTC administrative proceeding. Because the Agencies’ action followed the private suit and the court’s decision denying the motion for preliminary injunction, the Agencies apparently decided not to seek their own injunctive relief, despite having previously requested prior to closing that SLHS postpone the acquisition pending conclusion of the investigation (which the parties declined to do).

Lessons Learned

As noted above, there are several actions that parties to a transaction can take at various points in the merger process — during planning, implementation, and even during an Agency’s antitrust investigation — to minimize antitrust exposure and maximize the likelihood of the Agency permitting the transaction to proceed in a way that will preserve the parties’ ability to achieve efficiencies and other benefits of the transaction. The Renown investigation and settlement, and the St. Luke’s litigation (thus far) are instructive and provide tangible examples of these steps.

Specifically, merging parties should always communicate with significant area payors as early in the process as possible to provide information about the merger plan and reassure them about the parties’ intentions. Additionally, it is prudent to engage payors if possible to obtain their input and even collaboration on merger efficiencies and other aspects of the post-merger structure, such as services or contracting, that may be important to payors; for example, in this health care reform era payors may be interested in jointly creating innovative products such as bundled prices (e.g., acute care episode payments). Payors will typically be the most important and credible sources of information to an investigating Agency, and potentially the most important witness in any litigation. Thus obtaining the payors’ buy-in early is key, indeed, potentially dispositive to later obtaining Agency clearance for the merger.

Early in the Renown merger process, the parties went a step further and entered into a commitment to maintain current physician cardiology rates and other contract terms and not renegotiate payor contracts during the time that rival hospitals were recruiting new cardiologists to build their own heart programs. Recently, SLHS in Boise entered into an agreement with Blue Cross, its largest payor, memorializing price and other terms for two years (presumably at or near prevailing rates), which the court found would prevent the parties from exercising market power until after the case is resolved on the merits. Ultimately, in addition to helping to obtain payor support, both cases provide examples of methods to ensure the merger, if consummated, does not result in short to mid-term anticompetitive effects (such as higher prices), which in turn obviates the need for preliminary injunctive relief or any hold separate agreement with an investigating Agency.

Similarly as early as possible, merging physicians and hospitals should make public “community commitments” (as they were known in the 1990s, during the last hospital merger wave) for their newly employed physicians to maintain pre-merger coverage and referral patterns, continue providing medical directorships, and generally maintain the pre-merger level of physician support to rival hospitals for a defined period of time post-merger, or as in Reno, until the rival hospital can recruit physicians to a specific level. The commitment can also include a payor component, such as in the Renown example above, to not raise rates or renegotiate contracts. And in SLHS, the physicians’ right to make referral decisions based on the best interests of the patients was memorialized in one of the merger documents (i.e., the “professional services agreements” with the physicians). The point is to reassure competitors, to the extent possible, and the community at large, and again, ultimately, to preclude any concern over short-term anticompetitive effects, including vertical foreclosure concerns that a physician acquisition by a hospital will deprive its rival hospitals of access to specialty physicians needed to support their inpatient services.

Next, the parties to a hospital acquisition of physicians should strive to close the transaction as soon as possible, even during the pendency of an Agency investigation or private litigation if feasible. Typically, an investigating Agency will request that the parties “hold separate” or enter into a timing agreement deferring consummation of the transaction until after they complete their investigation. Of course, the Agency or private plaintiff may seek to outright enjoin consummation until any legal proceeding on the merits is resolved. As discussed above, however, a payor and/or community commitment can reduce or eliminate the need for holding separate or an injunction. There are a number of factors for the merging parties to consider in deciding whether to agree to hold separate versus proceeding to closing, but in short, the longer closing is delayed the greater the risk the transaction is abandoned, and, conversely, the sooner the transaction can be consummated, the faster the parties can begin integrating and implementing planned efficiencies.2

In addition, closing the transaction can bear benefits during the remaining Agency investigation by reducing the time pressure on the parties, which often is the Agency’s most powerful leverage in resolving a merger investigation on terms that are more favorable to the Agency and less so for the parties. In any event, “unscrambling the eggs” is considerably less difficult in physician acquisitions than other types of mergers, and can be contemplated and accounted for in the merger documents. In both the Renown and SLHS transactions, transaction documents provided for the contingency that all or part of the merger could be unwound pursuant to an Agency consent decree, by permitting divested physicians to return to independent practice, repurchase assets, access medical records and patient lists, and in Renown’s employment agreements with physicians, even obtain Renown’s support (at fair market compensation) for certain back-office administrative functions, office space, and similar activities.

There is the potential that declining the Agency’s request to hold separate may be perceived as uncooperative or even adversarial. For this reason, and just as a matter of good practice before the Agencies, it is important throughout any antitrust investigation to cooperate with the investigating staff, and maintain rapport and transparency. For example, if the merging parties decline to hold separate, they should be clear why they are doing so, and disclose what the transaction closing timing will be, to avoid any perception that the parties are attempting to secretly rush to consummation before the Agency can determine what steps it must take. Also, in joint investigations involving both the FTC and a state AG, the parties must be conscious of including and not neglecting the AG’s staff, who in some circumstances may have a leading role in the investigation and, under many state antitrust laws, have additional remedies at their disposal, such as civil penalties, and additional settlement provisions they may seek, such as antitrust compliance programs. State AGs also are much more likely than the FTC to seek restrictive conduct remedies rather than structural relief.

ENDNOTES

1 Saint Alphonsus Medical Center-Nampa, Inc., et al. v. St. Luke's Health System, Inc., No. 1:12-cv-00560-CWD, memorandum decision and order (D. Id. Dec. 20, 2012).

2 See William Berlin, Hold Separate Agreements and Remedies in Physician Mergers [PDF], ABA/AHLA Antitrust in Healthcare Conference, May 4, 2012.

Topics:  Affordable Care Act, Antitrust Litigation, FTC, Healthcare, Hospital Mergers, Hospitals, Medical Reimbursement, Mergers, Physician Hospital Organizations, Physicians

Published In: Antitrust & Trade Regulation Updates, Health Updates, Mergers & Acquisitions Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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