• In Highly-Anticipated Decision, Ninth Circuit Affirms That Hospital-Physician Group Merger in St. Luke’s Violated Section 7 And Casts Serious Doubt on Viability of Efficiencies Defense
  • February 24, 2015 | Authors: Helen Cho Eckert; David R. Garcia
  • Law Firms: Sheppard, Mullin, Richter & Hampton LLP - Los Angeles Office ; Sheppard, Mullin, Richter & Hampton LLP - Los Angeles Office
  • On February 10, 2015, the Ninth Circuit issued its highly-anticipated decision at the intersection of health care and antitrust, affirming the lower court’s finding that a hospital-physician group merger completed nearly three years ago violated Section 7 of the Clayton Act. St. Alphonsus Med. Ctr. - Nampa Inc. v. St. Luke’s Health Sys., Ltd., No. 14-35173 (9th Cir. Feb. 10, 2015) (“St. Luke’s”). The significance of St. Luke’s cannot be overstated. It is the first challenge of a hospital-physician group merger by the Federal Trade Commission that proceeded to trial. And, the Ninth Circuit’s opinion includes significant judicial guidance for future health care mergers, casting serious doubt on the viability of a “post-merger efficiencies defense” to a prima facie case of a Section 7 violation and declaring that proof of “extraordinary efficiencies” that are “merger-specific” is required to successfully offset anticompetitive concerns in highly concentrated markets.

    St. Luke’s was the result of a 2012 acquisition by St. Luke’s Health Systems (a not-for-profit health care system which operated an emergency clinic in Nampa, the second-largest city in Idaho) of Saltzer Medical Group, P.A. (the largest multi-specialty physician group in Idaho) (“Saltzer”). Saltzer was also the largest primary care physician (“PCP”) provider in Nampa, with 16 PCPs. While the acquisition resulted in a combined share of 80% of the PCPs in Nampa, it did not require Saltzer physicians to refer patients to St. Luke’s Boise hospital, nor to use St. Luke’s facilities for ancillary services.

    Following on the heels of a private antitrust suit brought by competing hospitals, the FTC and the State of Idaho joined in challenging the merger, alleging anticompetitive effects in the Nampa PCP market. A five-week bench trial culminated in the district court’s holding that while the merger was intended primarily to improve patient outcomes and “St. Luke’s is to be applauded for its efforts to improve the delivery of health care,” the same effects could have been achieved in other ways, and the high post-merger market share could not be overcome. St. Alphonsus Med. Ctr. - Nampa Inc. v. St. Luke’s Health Sys., Ltd., 2014 WL 407446 (D. Id. Jan 24, 2014).

    Reviewing the district court’s findings of fact for clear error and its conclusions of law de novo, the Ninth Circuit affirmed the district court’s findings that: (1) Nampa was the relevant geographic market; (2) plaintiffs easily established a prima facie case of anticompetitive effects resulting from the merger; (3) claimed post-merger efficiencies were not merger-specific and would not have had a positive effect on competition; and (4) divestiture was the proper remedy.

    Relevant Market

    First, while St. Luke’s agreed that adult PCPs was the relevant product market, it appealed the district court’s finding that Nampa was the relevant geographic market. The Ninth Circuit found no clear error with the lower court’s reliance on the SSNIP - “small but significant nontransitory increase in price” - test and its finding that a hypothetical Nampa PCP monopolist could profitably impose a SSNIP on insurers. In so doing, the Ninth Circuit explicitly approved of the notion that in the health care context, insurers (not the individual consumers) are the buyers of health care, and thus, the focus was properly on how insurers would respond to a hypothetical SSNIP. The Ninth Circuit also cited to testimony that Nampa residents strongly preferred local PCPs and that insurers could not market a health care network in Nampa that did not include local PCPs, as well as evidence that because consumers pay only a small percentage of health care costs out of pocket and choose PCPs on non-price factors, a SSNIP would not change their behavior.

    As with other merger challenges, the relevant market definition (here, the relevant geographic market definition) was the most significant disputed issue between the parties. Once the scope of the relevant market was decided in St. Luke’s, the high post-merger concentration that flowed from that market definition made a finding of prima facie anticompetitive effects (and arguably, even the ultimate finding of a Section 7 violation) a foregone conclusion.

    Prima Facie Case of Anticompetitive Effects

    Second, the Ninth Circuit held that the “extremely high” post-merger Herfindahl-Hirschman Index (HHI) - which St. Luke’s did not dispute - on its own easily established plaintiffs’ prima facie case. The Ninth Circuit also affirmed the lower court’s finding that St. Luke’s would likely use its post-merger power to negotiate higher-reimbursement rates from insurers. The Ninth Circuit specifically cited to two pre-merger internal emails referencing post-merger leverage to negotiate more favorable terms with insurers, as well as St. Luke’s use of its leverage from an earlier acquisition in Twin Falls to force insurers to accept higher rates there. St. Luke’s reliance on but two internal emails is yet another example of the enormous impact such contemporaneous business documents may have in antitrust merger analyses.

    The Ninth Circuit further agreed with the lower court’s finding that high entry barriers eliminated the possibility of new competition from outsiders ameliorating the effects of reduced competition from the merger.

    The Ninth Circuit, however, disagreed with the lower court’s finding that St. Luke’s increased leverage with respect to PCP services would allow for higher ancillary service fees. It found fault with the lower court’s failure to separately analyze the ancillary services market, explaining that evidence that merely stated St. Luke’s hopes to “increase revenue” from ancillary services did not demonstrate that it planned to do so specifically by raising prices. Similarly, there was no evidence that following the merger, PCPs would inappropriately label in-house services as hospital-based (given higher reimbursements for ancillary services performed at hospitals) or force patients to travel to a hospital for services that could be provided in-house.

    St. Luke’s thus reinforces the fact that competitive concerns with high market share of a hospital-physician group do not automatically result in competitive concerns with respect to ancillary services provided by that hospital. Instead, a separate antitrust analysis of that market - one ancillary service at a time - is necessary.

    Post-Merger Efficiencies Offered to Rebut Prima Facie Case

    Third, and perhaps most significant, the Ninth Circuit expressed deep skepticism that proof of post-merger efficiencies can ever rebut a prima facie case of a violation of Section 7 of the Clayton Act. In doing so, the court noted language from the Supreme Court casting doubt on such a defense, and the fact that of the circuits that have acknowledged the possibility of such a defense (the Sixth, D.C., Eighth and Eleventh), none had actually held that claimed efficiencies rebutted a prima face case. Ultimately, the Ninth Circuit assumed the availability of an efficiencies defense, but made clear that: (i) such a defense must “clearly demonstrate” enhanced competition; (ii) proof of “extraordinary efficiencies” is required to offset anticompetitive concerns in highly concentrated markets; (iii) the claimed efficiencies must also be “merger-specific,” i.e., cannot readily be achieved without the concomitant loss of a competitor; and (iv) claimed efficiencies must be verifiable and not merely speculative.

    Applying these principles to the facts, the Ninth Circuit found St. Luke’s quality-based efficiency - i.e., better serving patients by providing physicians with access to an electronic medical records system - legally insufficient. The Ninth Circuit agreed with the lower court that the claimed efficiencies were not merger-specific, and even assuming that they were, they were still insufficient:

    At most, the district court concluded that St. Luke’s might provide better service to patients after the merger. That is a laudable goal, but the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations.

    The Ninth Circuit further noted the lack of any evidence that the merger would increase competition or decrease prices (in fact, quite the contrary), and there was no proof, other than St. Luke’s stated desire, that the merger would likely lead to integrated health care or a new reimbursement system.

    The Ninth Circuit’s conclusion that “It is not enough to show that the merger would allow St. Luke’s to better serve patients” can be broadly construed to have significant ramifications throughout the health care industry. It is unclear, however, why the Ninth Circuit failed to consider whether lowering the total cost of care through improved patient outcomes and preventative care may rebut a prima facie case. Indeed, courts in other circuits, for example, Fed. Trade Comm. v. H.J. Heinz Co., 246 F.3d 708, 720-22 (D.C. Cir. 2001), have credited the general notion that lower costs may constitute post-merger efficiencies.

    Divestiture

    Finally, the Ninth Circuit rejected St. Luke’s challenge to divestiture as the proper remedy. In so doing, the court noted that divestiture was the customary form of relief, Saltzer would likely be a viable competitor post-divestiture, and St. Luke’s suggested conduct remedy entailed too much judicial oversight.

    St. Luke’s will undoubtedly have significant ramifications, particularly in the current environment of rapid health care consolidation in the age of the Affordable Care Act. Most significantly, St. Luke’s represents an increase in the uncertainty and risk of relying on post-merger efficiencies to justify the merger, and underscores the importance of clear and convincing evidence of efficiencies which are concrete and merger-specific.