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

by Baker Donelson
Contact

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.

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.

© Baker Donelson | Attorney Advertising

Written by:

Baker Donelson
Contact
more
less

Baker Donelson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.