February 26, 2015 Practice Points

Improving Patient Care Does Not Justify a Merger Under the Antitrust Laws, Says the Ninth Circuit

Healthcare providers frequently consolidate to cut costs and improve patient care by sharing administrative costs such as billing and electronic recordkeeping, eliminating excess capacity, better coordinating care, and investing in new facilities and services.

by Mitchell D. Raup, Herbert F. Allen, and Gregory M. Bentz

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

Antitrust enforcers generally regard cost savings and quality improvements as procompetitive benefits relevant for determining the likely effects of a merger on consumers. But what if a merger improves patient care while also creating market power leading to higher prices? How (if at all) should courts balance better patient care against higher prices? In Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke's Health System Ltd., No. 14-35173 (9th Cir. Feb. 10, 2015), the Ninth Circuit answered that no such balancing is allowed and that if a merger creates market power that may lead to higher prices, it violates antitrust law regardless of the benefits to patients.

The St. Luke's case focused on the market for adult primary care physician (PCP) services in Nampa, Idaho, a suburb of Boise with 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, including sixteen PCPs in Nampa. Because St. Luke's already had nine PCPs there, the transaction gave St. Luke's 80% of the PCPs in Nampa.

In November 2012, Saint Alphonsus, the only hospital in Nampa, sued to enjoin the merger. The FTC and State of Idaho joined the litigation, 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's defended based on the transaction's benefits to patients, arguing 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 costs." Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke's Health System Ltd., No. 1-cv-00560, at 3 (D. Idaho Jan. 24, 2014). 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.

On appeal, the Ninth Circuit affirmed, agreeing that the defendant's claimed efficiencies were not merger-specific. Although the court could have resolved the case on this basis alone, it went further, noting that 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." Id. at 29. Indeed, "[i]t is not enough to show that the merger would allow St. Luke's to better serve its patients." Id. at 28.

The court based its skepticism of the efficiency defense on the difficulty of predicting and quantifying merger efficiencies, stating: "It is difficult enough … to predict whether a merger will have future anticompetitive effects without also adding to the judicial balance a prediction of future efficiencies." Id. at 25.

Efficiencies are not to be totally disregarded, however. According to the Ninth Circuit, efficiencies would figure into the analysis 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." Id. at 26. 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.

The case is an important reminder that despite the Affordable Care Act's emphasis on integrating patient care to lower costs and improve quality, courts remain skeptical of transactions that achieve these goals through mergers that reduce competition. Because regulators and courts focus on pre- and post-merger market shares to predict anticompetitive effects, the outcome of many healthcare merger challenges will continue to hinge on market definition. While parties should remain diligent about documenting the cost reductions and quality improvements that will flow from a transaction, they must also be prepared to show that these benefits will lead to a lower total cost of care.

Keywords: litigation, antitrust, Clayton Act, commercial and business, healthcare, hospitals, market power, market share, merger

Mitchell D. Raup and Herbert F. Allen are with Polsinelli in Washington, D.C. Gregory M. Bentz is with the firm's Kansas City, Missouri, office.


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