On February 10, 2015, the Federal Trade Commission (FTC) achieved a historic victory when a U.S. Court of Appeals ruled that a hospital’s acquisition of a physician’s group – the transaction challenged by the FTC – ran afoul of federal antitrust laws, despite the likelihood that the acquisition would result in greater efficiencies and quality of care. This decision marks the first time that the FTC has litigated through trial a challenge to a physician acquisition. It also demonstrates that courts are unlikely to deviate from a traditional antitrust merger analysis even when a transaction arguably furthers the goals of high-profile legislation, such as the Affordable Care Act. According to the U.S. Department of Health and Human Services, integrating primary healthcare services is one of the aims of the Affordable Care Act. Nonetheless, the hospital, which had seemingly acted in accordance with the objectives of healthcare reform, was ordered to divest the physician group.

In the litigation at issue, the Ninth Circuit Court of Appeals (the Ninth Circuit) upheld a lower court’s ruling ordering divesture of St. Luke’s Health System’s acquisition of the Salter Medical Group, a physician group in Nampa, Idaho. St. Luke’s operates hospitals and employs physicians in various locations in and around the Boise, Idaho area. The litigation began in late 2012 when a rival health system that operates two hospitals and employs its own physicians filed suit to challenge St. Luke’s proposed acquisition of the 41-physician group. Soon after the case was filed, St. Luke’s completed the transaction. The FTC joined as a co-plaintiff in early 2013. The lower court held that the merger threatened to lessen the competition in the market for adult primary care physician services in Nampa, Idaho, in violation of the Clayton Act, 15 U.S.C. § 18. The Ninth Circuit agreed.

St. Luke’s argued that the proposed merger would result in improved patient care, and increased economic efficiencies. While conceding that the merger was intended to improve patient outcomes in accordance with the Affordable Care Act and “might well” do so, the Ninth Circuit nonetheless found it violative of § 7 of the Clayton Act, which bars mergers whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” According to the Court, “[i]t is not enough to show that the merger would allow St. Luke’s to better serve patients…The Clayton Act focuses on competition, and the claimed [economic] efficiencies therefore must show that the prediction of anti-competitive effects from the prima facie case is inaccurate.” The Appellate Court explained that “the job before [it was] not to determine the optimal future shape of the country’s healthcare system, but instead to determine whether [the St. Luke’s] merger violate[d] the Clayton Act.”

Though the Ninth Circuit expressed skepticism that an economic efficiencies defense could ever trump a showing that a transaction was anti-competitive on its face, it may be premature for healthcare providers to abandon the effort entirely. The key, however, is to highlight cost savings that a proposed deal would generate that would be passed along to insurers and others paying for services to counteract a finding that there was evidence that the merger would increase prices. In other words, if one is going to raise an efficiencies defense, the Ninth Circuit explained that the entity must demonstrate that the merger “enhances rather than hinders competition because of the increased efficiencies,” which must be “merger-specific” – i.e. not readily “achieved without the concomitant loss of a competitor.”

The St. Luke’s decision underscores the important antitrust considerations that must accompany the structuring of any merger or acquisition intended to further the goals of healthcare reform mandates. While an economic efficiencies defense may be viable to combat allegations of antitrust violations, healthcare systems must be cognizant of the effects on competition that may result from any proposed merger.

For any questions about this blog, please contact the author.