Healthcare providers frequently consolidate to cut costs and improve patient care. These benefits can result from sharing administrative costs such as billing and electronic recordkeeping, eliminating excess capacity, better coordinating care, and making investments in new facilities and services that may have been unaffordable before the transaction.

Antitrust enforcers generally regard these cost savings and quality improvements as procompetitive benefits of merging, and consider them relevant for the purpose of determining the likely effects of a merger on consumers. Although parties must provide "concrete evidence" to support a claim of procompetitive benefits in an antitrust investigation, the Federal Trade Commission (FTC) will "carefully consider evidence that the transaction will benefit consumers through improved quality, new services and/or decreased costs," as the director of the FTC's Bureau of Competition said in a recent speech. Indeed, the FTC recognizes that "[e]fficiencies may enhance a merged firm's ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products."

But what if a merger improves patient care while also creating market power that may lead to higher prices? How (if at all) should courts balance better outcomes for patients against higher prices to insurers? In the recent Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke's Health System Ltd. decision, the Ninth Circuit answered that no such balancing is allowed. If a merger creates market power that may lead to higher prices, it violates antitrust law regardless of its benefits to patients. The Ninth Circuit held that "better serv[ing] patients" does not provide a defense when a merger will substantially lessen competition in violation of § 7 the Clayton Act. The court made its focus clear: "[T]he job before us is not to determine the optimal future shape of the country's healthcare system, but instead to determine whether this particular merger violates the Clayton Act."

The Court Decision: Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke's Health System Ltd.

The St. Luke's litigation focused on the market for adult primary care physician (PCP) services in Nampa, Idaho. Nampa is located 20 miles west of Boise and has a population of 81,000. In 2012, St. Luke's Health System, the largest health system in Idaho, purchased the Saltzer Medical Group, a multi-specialty physician group with offices across Idaho. Saltzer's offices in Nampa included sixteen PCPs. Because St. Luke's already had nine PCPs, the transaction gave St. Luke's 80% of the PCPs in Nampa.

In November 2012, the only hospital in Nampa (Saint Alphonsus) sued to enjoin the merger. The FTC and State of Idaho joined the litigation in March 2013, alleging that the acquisition gave St. Luke's the ability to charge higher prices for PCP services in Nampa.

During a 19-day bench trial in 2014, St. Luke offered a defense focusing on the transaction's benefits to patients. St. Luke's argued that the merger was necessary to allow Saltzer to upgrade its electronic recordkeeping system, to better integrate its providers and coordinate care, and to transition to capitation or value-based billing. Although the district court agreed that the merger would "improve the delivery of health care" in Nampa, it rejected this defense on the grounds these benefits were not "merger-specific," meaning Saltzer could have achieved the same benefits without a merger. The district court concluded that "there are other ways to achieve the same effect that do not run afoul of the antitrust laws and do not run such a risk of increased cost." Largely on the basis of the 80% market share post-transaction, the district court held that the merger violated the Clayton Act and ordered divestiture. See our analysis of the trial court decision here.

The Ninth Circuit affirmed the rejection of St. Luke's efficiency defense on the grounds that it was not "clearly erroneous" for the district court to find that St. Luke's claimed efficiencies were not merger-specific. Although the court could have resolved the case on this basis alone, the court then went further, noting that even if the efficiencies proffered by St. Luke's had been merger-specific, the efficiency defense would still fail: "[T]he Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations." Indeed, "[i]t is not enough to show that the merger would allow St. Luke's to better serve its patients."

The court based its skepticism of the efficiencies defense on the difficulty of predicting and quantifying merger efficiencies. The court wrote: "It is difficult enough in § 7 cases to predict whether a merger will have future anticompetitive effects without also adding to the judicial balance a prediction of future efficiencies."

The Ninth Circuit did envision one scenario where efficiencies would figure into the analysis—namely, if the efficiencies show that the transaction would not reduce competition in the first place. "For example, if two small firms were unable to match the prices of a larger competitor, but could do so after a merger because of decreased production costs, a court recognizing the efficiencies defense might reasonably conclude that the transaction likely would not lessen competition." Of course, there was no "larger competitor" in Nampa. The court's example underscores its ruling: if a merger eliminates so much competition that prices will rise even as costs decline and outcomes improve, those efficiencies will not save the merger.

What Providers Need to Know

• Despite the direction of the Affordable Care Act that healthcare providers should strive to offer integrated service to lower costs and improve quality, the antitrust laws prohibit providers from achieving those goals through mergers that reduce competition.
• The efficiencies defense will be most successful when it can be used to rebut the presumption that increased market share will reduce competition —for example, by showing that the transaction will enable the merged entity to compete more vigorously against a dominant competitor.
• Parties should remain diligent about documenting the cost reductions and quality improvements that will flow from a transaction, but they must also be prepared to show that these benefits will be passed on to payers in the form of lower total cost of care.
• Defining the scope of the relevant market is critically important in defending merger cases, since government enforcers and courts rely heavily on pre- and post-merger market shares to predict anticompetitive effects.
• Defending mergers between healthcare providers remains highly complex and subject to an evolving body of case law. Merging parties should consult experienced antitrust counsel to evaluate any proposed transaction and, if necessary, to prepare a defense.