FTC's Success in St. Luke's Challenge Shows Litigation Risks to Merging Hospitals and Physicians

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In the first fully litigated challenge by the Federal Trade Commission (FTC) to a hospital acquisition of physician practices, a federal district court judge ruled that St. Luke’s Health System’s (St. Luke’s) acquisition of a large multi-specialty physician group violated federal and state antitrust laws. St. Alphonsus Med. Ctr. v. St. Luke’s Health Sys., No. 12-CV-00560 (D. Idaho Jan. 24, 2014) [PDF]. St. Luke’s has appealed the decision to the Ninth Circuit, where a final resolution will probably take months or even years. St. Alphonsus Med. Ctr. v. St. Luke’s Health Sys., No. 14-35173 (9th Cir. filed Mar. 7, 2014).

The initial lawsuit was filed in late 2012 by St. Alphonsus Health System, a private entity competing with St. Luke’s in Boise and Nampa, Idaho. St. Alphonsus claimed the planned acquisition by St. Luke’s of the Saltzer Medical Group (Saltzer) would reduce competition for primary care physician services, general pediatric services, general acute care hospital services, and outpatient surgery services in the Nampa and Boise areas. The plaintiffs alleged St. Luke’s already dominated those markets as a result of more than 20 earlier acquisitions of physician groups, surgery centers, and hospitals, and that the acquisition of Saltzer, with more than 40 physicians, was the final straw that would further reduce competition not only in these physician services, but also in hospital services by foreclosing competing inpatient facilities that relied on Saltzer physicians for a significant portion of their inpatient admissions.

At the time the private hospitals sued, the FTC and Idaho Attorney General (AG) were already investigating the merger. In March 2013, the FTC and State of Idaho filed their own complaint asking that the merger be unwound. Interestingly, the FTC and AG alleged that the merger would reduce competition in horizontal physician services markets, but did not allege any vertical foreclosure in inpatient hospital services. In the interim between the two complaints being filed, the transaction closed; however, after the FTC asked the court to enjoin any further integration, the defendants agreed to defer integrating until the underlying merger challenge was resolved at trial. The FTC and AG’s complaint was joined with the ongoing private litigation and the matter went to trial on September 22, 2013, and lasted almost five weeks.

The court found that the acquisition of Saltzer gave St. Luke’s 80 percent of the primary care physicians in the Nampa area and “significant bargaining leverage over health insurance plans.” The court concluded that the Saltzer acquisition will be anticompetitive because “it appears highly likely that health care costs will rise as the combined entity obtains a dominant market position that will enable it to (1) negotiate higher reimbursement rates from health insurance plans that will be passed on to the consumer, and (2) raise rates for ancillary services (like x-rays) to the higher hospital-billing rates.”

Although the court credited the defendants’ efficiencies defenses, acknowledging that the merging parties entered into the transaction “primarily to improve patient outcomes” and health care quality, and even stated the merger “would have that effect if left intact,” the court ultimately concluded “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 costs.” The court determined that St. Luke’s efficiencies defense could not overcome the presumption of illegality created by its dominant market share. The court noted that efficiencies achieved by a transaction must be “merger-specific” so that the transaction is the only way the efficiencies can be gained. In this case, the court found that St. Luke’s could achieve the same efficiencies without fully merging with Saltzer and employing its physicians. As a result, the court ordered St. Luke’s to divest itself fully of the Saltzer assets and permanently enjoined the acquisition.

On March 4, 2014, St. Luke’s moved to stay the order [PDF] requiring it to divest Saltzer while it appealed the decision to the Ninth Circuit. St. Luke’s argued it should not have to divest Saltzer while the appeal is pending because, according to St. Luke’s, there is no proof that competition would be harmed by keeping the physician group affiliated with St. Luke’s during the appeals process. St. Luke’s stated that “[i]mmediate divestiture would, as a practical matter, undercut defendants’ right of appeal in that it would be impossible to undo the effects of divestiture if the Court of Appeals were to reverse on either substantive or remedial grounds,” and “[b]y contrast, a delay of divestiture pending appeal would have little or no adverse effect on the parties or the public.” In effect, St. Luke’s argued that forcing it to go forward with the divestiture before the Ninth Circuit reviews the case would harm Saltzer by causing physicians to leave the group and eliminating it as an effective player in the market.

In addition, St. Luke’s told the court that its track record since the deal had closed showed that holding off on the divestiture would not harm competition: “There is no evidence that St. Luke’s has engaged in any anticompetitive pricing during the period of more than a year since the affiliation was effectuated, and nothing in the findings of fact of this Court supports a conclusion that any anticompetitive effects from the affiliation are imminent.” Finally, St. Luke’s argued that its appeal raises “serious legal questions” and has a substantial likelihood of success both on the merits and on the remedies the court imposed.

Although the St. Luke’s case is the first fully litigated challenge by the FTC or an AG of a hospital-physician merger, it is the latest in a string of challenges to these types of mergers since 2011 (and numerous non-public investigations) by the agencies. All of the prior challenges were resolved by a formal settlement (consent decree) agreement between the agency and the merging parties: Renown Health, Providence Health, MaineHealth, Urology of Central Pennsylvania (UCPA) and Geisinger/Lewistown Health. All but the Renown Health decree were resolved by “conduct” remedies – restrictions on the parties’ activities going forward (except Providence Health, which abandoned its transaction). The Renown Health decree was the first government challenge resolved by a “structural” remedy – i.e., a partial divestiture of some but not all of the acquired physicians. The Renown settlement was a creative solution to address an already-consummated merger, providing a blueprint for hospital acquisitions of physicians and resolving any ensuing government investigation in a way that does not hamstring the future operations of the resulting hospital-physician organization. For an in-depth discussion of the Renown Health settlement, refer to Mr. Berlin’s article, Renown Health—FTC Antitrust Agreement: Guidance for Hospitals Acquiring and Employing Physicians, which appeared in Health Law Alert, 2012: Issue 14.

In contrast, after the court’s decision, St. Luke’s is, at best, in limbo, as it cannot integrate the Saltzer physicians and move forward with its planned efficiencies. At worst, and more likely at this point in the litigation, St. Luke’s will be forced to divest the entire Saltzer group and achieve none of the benefits that even the court acknowledged would result from the transaction, and pay over $10 million in attorneys fees that plaintiffs are seeking as the prevailing party (not to mention paying its own sizeable defense costs). In light of the negative outcome thus far, years of uncertainty (and more to come) and substantial costs resulting from litigation, the St. Luke’s case should give merging parties pause. Merging hospitals and physicians should carefully weigh whether to “go to the mat” and litigate an agency challenge to resolution, or instead take steps to proactively resolve the merger investigation earlier on more certain, cost-effective, and potentially favorable terms through a negotiated consent decree.

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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