A federal judge’s recent order to unwind the acquisition of Saltzer Medical Group, an independent physicians group, by St. Luke’s Health System, Ltd., a hospital system with its own staff of physicians, presents challenges for hospitals, physician groups, and other healthcare providers navigating the landscape of the Patient Protection and Affordable Care Act (also known as the “Affordable Care Act” or “ObamaCare”). One of the reforms in the act is the Medicare Shared Savings Program, which encourages different levels of providers to establish accountable care organizations (ACOs) in order to serve Medicare fee-for-service beneficiaries and to promote integrated healthcare systems for commercially insured patients.

However, this ruling from Chief Judge Lynn Winmill of the U.S. District Court for the District of Idaho will test the boundaries of ACOs and similar integrated healthcare arrangements under the federal antitrust laws. This tension between the ACO structure and the antitrust laws is not entirely unprecedented. When the Centers for Medicare and Medicaid Services released their final rule adopting the Medicare Shared Savings Program, the Federal Trade Commission (FTC) and Department of Justice (DOJ) issued a policy statement regarding ACOs participating in the program. The antitrust agencies, recognizing the potential for improved quality of care, cost savings, and other efficiencies of ACOs, advised that they would apply the more relaxed “rule of reason” analysis, rather than a “per se” unlawful rule, to ACOs that met certain criteria. The agencies also specifically emphasized that while the policy statement applied to otherwise independent providers and provider groups constituting the ACO, the statement did not apply to merger transactions, which would continue to be evaluated under the agencies’ Horizontal Merger Guidelines.

Although this case, which the FTC brought alongside the Idaho attorney general, addresses the anticompetitive effects of a merger among healthcare providers, the Idaho district court’s decision will have significant implications for ACOs. The factors that weigh in favor of unwinding a hospital’s acquisition of a physicians group will influence the factors that weigh in favor of breaking up an ACO. St. Luke’s’ appeal of the ruling to the U.S. Court of Appeals for the Ninth Circuit, which was announced earlier this month, will be watched closely and will prove significant to hospitals, physician groups, and other healthcare providers, as it will shed light on a crucial question: what are the legal boundaries of an ACO when it comes into contact with the antitrust laws?

As Judge Winmill recognized in his decision, ACOs represent a bona fide effort by the United States Congress and several executive agencies to address the mounting healthcare crisis in the U.S. ACOs can generate compelling benefits for consumers, as their structure enables moving away from the “perverse incentives” of fee-for-service payment methods and toward the benefits of outcome-based payment plans. Additionally, these increasingly comprehensive systems can drive down costs and enhance quality of care by eliminating duplicative services and reducing friction between decision makers. A successful ACO can deliver higher-quality medical services while spending healthcare dollars more judiciously.

Judge Winmill acknowledged that St. Luke’s’ purchase of Saltzer conformed with this movement in the U.S. toward a more integrated and cost-effective healthcare system. In fact, he went so far as to applaud St. Luke’s for its “foresight and vision,” as well as its efforts to improve the delivery of healthcare through the merger. Nevertheless, after a four-week bench trial, Judge Winmill found that the acquisition would have greater anticompetitive effects than pro-competitive benefits. Employing standard antitrust analysis applicable to any merger, as set forth in the Horizontal Merger Guidelines, Judge Winmill examined the structure of the local healthcare market and weighed the valid interests of integrated healthcare and the ACO against the equally valid interests of the federal antitrust laws. He concluded that the transaction would lead to an increase in healthcare costs in Nampa, Idaho, where the combined entity, through the combination of the hospital-staff physicians and the independent physicians, would control 80 percent of primary care physicians. According to the court’s January 24, 2014, order, St. Luke’s and Saltzer would be able to negotiate higher reimbursement rates from health insurance companies, and charge “hospital” rates for routine services performed outside the hospital.

Crucial to the court’s decision were the leverage positions of St. Luke’s and Saltzer, as measured in part by their size and reputation. Pre-acquisition, St. Luke’s had three of the top five highest-paid hospitals in Idaho, and its top hospital received reimbursements 21 percent higher than the average Idaho hospital. Saltzer was recognized as “the preeminent group of primary care physicians” in the Nampa region, and the largest health plan in Idaho considered Saltzer to be a “must have provider” in Nampa. Pre-acquisition, if a health plan were negotiating with Saltzer, its best outside option in Nampa was St. Luke’s, and if a health plan were negotiating with St. Luke’s, its best outside option was Saltzer. Post-acquisition, the health plan’s best outside option in each scenario was eliminated, allowing St. Luke’s’ bargaining leverage to increase substantially. Greater bargaining leverage would enable St. Luke’s to negotiate higher reimbursement rates from health plans, the costs of which would ultimately be passed on to the patients.

This ruling represents the first time a federal court has found a hospital’s purchase of a physician practice to be unlawful. Following the court’s January 24, 2014, order, FTC Chairwoman Edith Ramirez issued a statement applauding the decision as “an important victory” for both competition and consumers.¹ Despite the strong stance taken by the FTC against the acquisition, St. Luke’s announced earlier this month that it would appeal the ruling to the U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit advised on March 7, 2014, that it had received St. Luke’s’ notice of appeal and issued a Time Schedule Order in the case, under which St. Luke’s’ appellate brief will be due June 12, 2014, and answering briefs due June 14, 2014.

The Ninth Circuit is expected to hear the case in the latter half of 2014 or early 2015. Wilson Sonsini Goodrich & Rosati will be monitoring these developments closely and updating you accordingly.