With the ink still drying on the Ninth Circuit’s opinion affirming the Idaho federal district court’s order requiring St. Luke’s Health System to unwind its acquisition of Saltzer Medical Group—a for-profit, physician-owned, multi-specialty group comprising approximately 44 physicians located in Nampa, Idaho—you may ask what the decision means for other providers? Hospitals considering future acquisitions of physician groups, and those that the Federal Trade Commission may view as having failed to make good on promises to improve care without hiking prices, better take notice.
The Ninth Circuit affirmed that the district court did not err in holding St. Luke’s would likely use its post-merger power to negotiate higher reimbursement rates from insurers for primary care physician services. This shows 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.
The Ninth Circuit also affirmed that the district court did not err in holding “the claimed efficiencies”—improved patient care resulting from a “team of employed physicians with access to Epic, the electronic medical records system used by St. Luke’s”—“were not merger-specific.” The appellate court went on to say that “even if we assume the claimed efficiencies were merger-specific, the defense would nonetheless fail” because St. Luke’s “did not demonstrate that efficiencies resulting from the merger would have a positive effect on competition.”
In other words, St. Luke’s did not show how the claimed efficiencies would “create a more efficient combined entity and thus increase competition.” This makes it clear that unless one can “clearly demonstrate” the claimed efficiencies will allow more effective competition through “lower prices, improved quality, enhance services, or new products,” affiliation models short of employing physicians need to be considered where a proposed deal may raise competitive concern.
What are some of the affiliation models short of employing physicians? There are several, including (1) physician advisory council, (2) advanced medical directorship, (3) co-management, (4) Professional Services Arrangement (“PSA”), and (5) a PSA/Management Services Agreement (“MSA”). Each of these arrangements carries a set of strategic, economic, and operational dimensions for both parties to consider.
What should you do if you are considering an acquisition? You should hire antitrust counsel and consultants (economic and others) early in the process to help assess and understand the competitive dynamics and the potential benefits of the proposed transaction. It may well be the case that the proposed transaction raises no competitive concern. Most do not. With some upfront work, you will be able to identify any that do raise concern and position them so they may become doable in the end.
*Dear Doctor by Mick Jagger and Keith Richards
