Summary

In an opinion issued February 10, 2015, the U.S. Court of Appeals for the Ninth Circuit affirmed a year-old decision by the Idaho District Court which held that St. Luke’s Health System’s acquisition of the Saltzer Medical Group violated Section 7 of the Clayton Act. In doing so, the Ninth Circuit allowed the District Court’s divestiture order to stand. This decision is critically important given the continuing acquisition of physician practice groups by health systems nationwide.

St. Luke’s acquired Saltzer effective December 2012. Private plaintiffs, concerned about the merger’s anticompetitive effects, sued to stop the merger in 2013, but were denied injunctive relief. The Federal Trade Commission ("FTC") and the State of Idaho separately sued in 2013; the FTC’s case limited the challenge to the merger on the basis of anticompetitive effects in only the "adult PCP market." The cases were consolidated and a 19-day bench trial resulted in a decision ordering St. Luke’s to divest all Saltzer physicians and assets because of the substantial risk of significant price increases in the Nampa, Idaho adult PCP market.

The Ninth Circuit’s decision is telling on many levels. In particular, the Court confirmed that the geographic market definition – Nampa, Idaho – was appropriate, despite the relative proximity (20 miles away) of Boise, Idaho. And, echoing the District Court, the Ninth Circuit made it clear that "the job before us is not to determine the optimal future shape of the country’s health care system, but instead to determine whether this particular merger violates the Clayton Act." (Opinion at 7).

The parties agreed that the product market – adult PCP services – was appropriate, but St. Luke’s vigorously contested the District Court’s determination that Nampa, Idaho was the proper geographic market. The District Court had used the "SSNIP" ("small but significant non-transitory increase in price") method to determine the relevant geographic market. That method determines whether the hypothetical monopolist (St. Luke’s) could impose a "small but significant non-transitory increase in price," which buyers would absorb. If buyers are likely to do so, their locations help to establish the geographic market. If the buyer response would be to purchase outside the proposed geographic market, the definition would be too narrow.

The District Court held that St. Luke’s, in the adult PCP market, could profitably impose a SSNIP on the buyers – insurance companies – because Nampa, Idaho residents strongly preferred access to local adult PCPs. Therefore, that geographic market was appropriate. This conclusion was bolstered by the District Court’s finding that St. Luke’s and Saltzer understood and communicated to each other, during their negotiations (and as evidenced by internal correspondence between them), that they would gain increased bargaining power with insurers by merging and could use that power to increase prices and obtain higher reimbursements.

The Ninth Circuit made it clear that the merger produced the extremely high HHI,¹ which "on its own establishes the prima facie case" required to shift the burden of proof to St. Luke’s. St. Luke’s attempted to rebut the prima facie case with evidence about the pro-competitive effects of the merger. St. Luke’s tried to defend the merger based on the predicted future efficiencies the merger would engender. The "efficiencies defense," in and of itself, is of questionable merit in some circles, and the Ninth Circuit "remained skeptical about it… in general and about its scope in particular."

In reviewing St. Luke’s proffered efficiencies, the Court noted that the proof had to be "verifiable, not merely speculative" and that the District Court properly rejected each of St. Luke’s arguments about future efficiencies. For example, the Court noted "[i]t is not enough to show the merger would allow St. Luke’s to better serve patients" especially because it was clear that the merger would cause prices to increase. It also found that many of the argued efficiencies (e.g., shared electronic records) were not merger-specific efficiencies because such tools are available generally to independent physicians. Finally, the Ninth Circuit said "even if we assume that the claimed efficiencies were merger-specific, the defense would nonetheless fail" because "at most, St. Luke’s might provide better service to patients after the merger." Further, "the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because" the combined entities might improve operations. Such a goal is "laudable" but it does not defeat the anticompetitive nature of the combination.

As to the remedy of divestiture, the Ninth Circuit noted that the remedial goal has to be to restore competition without being punitive. St. Luke’s argued that divestiture would not restore competition, that it eliminated the merger’s procompetitive benefits and that a "proposed conduct" remedy was preferable. The premise of St. Luke’s argument was that a divested Saltzer could not effectively compete, meaning divestiture would not restore adult PCP competition in Nampa, Idaho. The District Court rejected that contention. In addition, the "proposed conduct" remedy (forming separate bargaining groups to negotiate with insurers) risked "excessive government entanglement" in the market, while divestiture was "simple, relatively easy to administer, and sure."

The Ninth Circuit concluded that the District Court’s reasoning was sound, and it did not abuse its discretion in imposing divestiture.

Outlook

Given the ever-growing vertical and horizontal consolidations occurring in health care markets, and the changing face of health care delivery models, it is absolutely critical to remember that there will always be a competition-antitrust concern in any transaction, whether or not subject to Hart-Scott-Rodino protocols. Here, a relatively small product (adult PCP services) and geographic (Nampa, Idaho) market, pre- and post-merger, were evaluated in accordance with federal (and mirroring state) antitrust law and guidelines, and without influence from external industry concerns.

The Ninth Circuit’s decision makes it clear that despite the current debate over "the optimal future shape of the country’s health care system," the Clayton Act and relevant merger guidelines remain in place as the first line of defense in insuring that health care markets remain competitive. Courts will act to protect that competition, as they always have, and merging parties are cautioned to be prepared to face these stiff challenges with compelling pro-competition facts and opinions, particularly where very discrete market definition leads to very significant increases in the HHI. Prima facie cases of anticompetitive outcomes are difficult to defeat, and small transactions run the same risk, depending on the facts, as large transactions do.

The Ninth Circuit’s holding demonstrates that hospitals and super groups engaged in the stampede to roll up medical practices are exposed to risk and must take a more measured approach to each acquisition, assessing such factors as the product and geographic markets, the effect on competition, and whether the acquisition will actually result in tangible efficiencies. The cost of unwinding a transaction via divestiture is a stiff penalty, and the risk of damages in a later case may be an even stiffer penalty.

1. The HHI, or Hirschman-Herfindal Index, takes the sum of the market shares of each company in a market, in the aggregate, both before and after the merger in question. Substantial increases in the HHI indicate a highly concentrated market and are prima facie evidence of an anticompetitive market as a result of a merger.