Archives For St. Luke’s

The Ninth Circuit botched its efficiencies analysis in the FTC v St Lukes antitrust case

Geoffrey Manne —  8 April 2015

Earlier this week the International Center for Law & Economics, along with a group of prominent professors and scholars of law and economics, filed an amicus brief with the Ninth Circuit seeking rehearing en banc of the court’s FTC, et al. v. St Luke’s case.

ICLE, joined by the Medicaid Defense Fund, also filed an amicus brief with the Ninth Circuit panel that originally heard the case.

The case involves the purchase by St. Luke’s Hospital of the Saltzer Medical Group, a multi-specialty physician group in Nampa, Idaho. The FTC and the State of Idaho sought to permanently enjoin the transaction under the Clayton Act, arguing that

[T]he combination of St. Luke’s and Saltzer would give it the market power to demand higher rates for health care services provided by primary care physicians (PCPs) in Nampa, Idaho and surrounding areas, ultimately leading to higher costs for health care consumers.

The district court agreed and its decision was affirmed by the Ninth Circuit panel.

Unfortunately, in affirming the district court’s decision, the Ninth Circuit made several errors in its treatment of the efficiencies offered by St. Luke’s in defense of the merger. Most importantly:

  • The court refused to recognize St. Luke’s proffered quality efficiencies, stating that “[i]t is not enough to show that the merger would allow St. Luke’s to better serve patients.”
  • The panel also applied the “less restrictive alternative” analysis in such a way that any theoretically possible alternative to a merger would discount those claimed efficiencies.
  • Finally, the Ninth Circuit panel imposed a much higher burden of proof for St. Luke’s to prove efficiencies than it did for the FTC to make out its prima facie case.

As we note in our brief:

If permitted to stand, the Panel’s decision will signal to market participants that the efficiencies defense is essentially unavailable in the Ninth Circuit, especially if those efficiencies go towards improving quality. Companies contemplating a merger designed to make each party more efficient will be unable to rely on an efficiencies defense and will therefore abandon transactions that promote consumer welfare lest they fall victim to the sort of reasoning employed by the panel in this case.

The following excerpts from the brief elaborate on the errors committed by the court and highlight their significance, particularly in the health care context:

The Panel implied that only price effects can be cognizable efficiencies, noting that the District Court “did not find that the merger would increase competition or decrease prices.” But price divorced from product characteristics is an irrelevant concept. The relevant concept is quality-adjusted price, and a showing that a merger would result in higher product quality at the same price would certainly establish cognizable efficiencies.

* * *

By placing the ultimate burden of proving efficiencies on the defendants and by applying a narrow, impractical view of merger specificity, the Panel has wrongfully denied application of known procompetitive efficiencies. In fact, under the Panel’s ruling, it will be nearly impossible for merging parties to disprove all alternatives when the burden is on the merging party to address any and every untested, theoretical less-restrictive structural alternative.

* * *

Significantly, the Panel failed to consider the proffered significant advantages that health care acquisitions may have over contractual alternatives or how these advantages impact the feasibility of contracting as a less restrictive alternative. In a complex integration of assets, “the costs of contracting will generally increase more than the costs of vertical integration.” (Benjamin Klein, Robert G. Crawford, and Armen A. Alchian, Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J. L. & ECON. 297, 298 (1978)). In health care in particular, complexity is a given. Health care is characterized by dramatically imperfect information, and myriad specialized and differentiated products whose attributes are often difficult to measure. Realigning incentives through contract is imperfect and often unsuccessful. Moreover, the health care market is one of the most fickle, plagued by constantly changing market conditions arising from technological evolution, ever-changing regulations, and heterogeneous (and shifting) consumer demand. Such uncertainty frequently creates too many contingencies for parties to address in either writing or enforcing contracts, making acquisition a more appropriate substitute.

* * *

Sound antitrust policy and law do not permit the theoretical to triumph over the practical. One can always envision ways that firms could function to achieve potential efficiencies…. But this approach would harm consumers and fail to further the aims of the antitrust laws.

* * *

The Panel’s approach to efficiencies in this case demonstrates a problematic asymmetry in merger analysis. As FTC Commissioner Wright has cautioned:

Merger analysis is by its nature a predictive enterprise. Thinking rigorously about probabilistic assessment of competitive harms is an appropriate approach from an economic perspective. However, there is some reason for concern that the approach applied to efficiencies is deterministic in practice. In other words, there is a potentially dangerous asymmetry from a consumer welfare perspective of an approach that embraces probabilistic prediction, estimation, presumption, and simulation of anticompetitive effects on the one hand but requires efficiencies to be proven on the other. (Dissenting Statement of Commissioner Joshua D. Wright at 5, In the Matter of Ardagh Group S.A., and Saint-Gobain Containers, Inc., and Compagnie de Saint-Gobain)

* * *

In this case, the Panel effectively presumed competitive harm and then imposed unduly high evidentiary burdens on the merging parties to demonstrate actual procompetitive effects. The differential treatment and evidentiary burdens placed on St. Luke’s to prove competitive benefits is “unjustified and counterproductive.” (Daniel A. Crane, Rethinking Merger Efficiencies, 110 MICH. L. REV. 347, 390 (2011)). Such asymmetry between the government’s and St. Luke’s burdens is “inconsistent with a merger policy designed to promote consumer welfare.” (Dissenting Statement of Commissioner Joshua D. Wright at 7, In the Matter of Ardagh Group S.A., and Saint-Gobain Containers, Inc., and Compagnie de Saint-Gobain).

* * *

In reaching its decision, the Panel dismissed these very sorts of procompetitive and quality-enhancing efficiencies associated with the merger that were recognized by the district court. Instead, the Panel simply decided that it would not consider the “laudable goal” of improving health care as a procompetitive efficiency in the St. Luke’s case – or in any other health care provider merger moving forward. The Panel stated that “[i]t is not enough to show that the merger would allow St. Luke’s to better serve patients.” Such a broad, blanket conclusion can serve only to harm consumers.

* * *

By creating a barrier to considering quality-enhancing efficiencies associated with better care, the approach taken by the Panel will deter future provider realignment and create a “chilling” effect on vital provider integration and collaboration. If the Panel’s decision is upheld, providers will be considerably less likely to engage in realignment aimed at improving care and lowering long-term costs. As a result, both patients and payors will suffer in the form of higher costs and lower quality of care. This can’t be – and isn’t – the outcome to which appropriate antitrust law and policy aspires.

The scholars joining ICLE on the brief are:

  • George Bittlingmayer, Wagnon Distinguished Professor of Finance and Otto Distinguished Professor of Austrian Economics, University of Kansas
  • Henry Butler, George Mason University Foundation Professor of Law and Executive Director of the Law & Economics Center, George Mason University
  • Daniel A. Crane, Associate Dean for Faculty and Research and Professor of Law, University of Michigan
  • Harold Demsetz, UCLA Emeritus Chair Professor of Business Economics, University of California, Los Angeles
  • Bernard Ganglmair, Assistant Professor, University of Texas at Dallas
  • Gus Hurwitz, Assistant Professor of Law, University of Nebraska-Lincoln
  • Keith Hylton, William Fairfield Warren Distinguished Professor of Law, Boston University
  • Thom Lambert, Wall Chair in Corporate Law and Governance, University of Missouri
  • John Lopatka, A. Robert Noll Distinguished Professor of Law, Pennsylvania State University
  • Geoffrey Manne, Founder and Executive Director of the International Center for Law and Economics and Senior Fellow at TechFreedom
  • Stephen Margolis, Alumni Distinguished Undergraduate Professor, North Carolina State University
  • Fred McChesney, de la Cruz-Mentschikoff Endowed Chair in Law and Economics, University of Miami
  • Tom Morgan, Oppenheim Professor Emeritus of Antitrust and Trade Regulation Law, George Washington University
  • David Olson, Associate Professor of Law, Boston College
  • Paul H. Rubin, Samuel Candler Dobbs Professor of Economics, Emory University
  • D. Daniel Sokol, Professor of Law, University of Florida
  • Mike Sykuta, Associate Professor and Director of the Contracting and Organizations Research Institute, University of Missouri

The amicus brief is available here.

In Antitrust & Competition, Federal Trade Commission, Health Care, International Center for Law & Economics, Law & Economics, Merger Guidelines, Mergers & Acquisitions , , , , , , , , , , , , , , , , , , , ,
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Spicy Documents Serve up a Paltry Antitrust Meal

David Balto —  13 November 2014

There is always a temptation for antitrust agencies and plaintiffs to center a case around so-called “hot” documents — typically company documents with a snippet or sound-bites extracted, some times out of context. Some practitioners argue that “[h]ot document can be crucial to the outcome of any antitrust matter.” Although “hot” documents can help catch the interest of the public, a busy judge or an unsophisticated jury, they often can lead to misleading results. But more times than not, antitrust cases are resolved on economics and what John Adams called “hard facts,” not snippets from emails or other corporate documents. Antitrust case books are littered with cases that initially looked promising based on some supposed hot documents, but ultimately failed because the foundations of a sound antitrust case were missing.

As discussed below this is especially true for a recent case brought by the FTC, FTC v. St. Luke’s, currently pending before the Ninth Circuit Court of Appeals, in which the FTC at each pleading stage has consistently relied on “hot” documents to make its case.

The crafting and prosecution of civil antitrust cases by federal regulators is a delicate balancing act. Regulators must adhere to well-defined principles of antitrust enforcement, and on the other hand appeal to the interests of a busy judge. The simple way of doing this is using snippets of documents to attempt to show the defendants knew they were violating the law.

After all, if federal regulators merely had to properly define geographic and relevant product markets, show a coherent model of anticompetitive harm, and demonstrate that any anticipated harm would outweigh any procompetitive benefits, where is the fun in that? The reality is that antitrust cases typically rely on economic analysis, not snippets of hot documents. Antitrust regulators routinely include internal company documents in their cases to supplement the dry mechanical nature of antitrust analysis. However, in isolation, these documents can create competitive concerns when they simply do not exist.

With this in mind, it is vital that antitrust regulators do not build an entire case around what seem to be inflammatory documents. Quotes from executives, internal memoranda about competitors, and customer presentations are the icing on the cake after a proper antitrust analysis. As the International Center for Law and Economics’ Geoff Manne once explained,

[t]he problem is that these documents are easily misunderstood, and thus, while the economic significance of such documents is often quite limited, their persuasive value is quite substantial.

Herein lies the problem illustrated by the Federal Trade Commission’s use of provocative documents in its suit against the vertical acquisition of Saltzer Medical Group, an independent physician group comprised of 41 doctors, by St. Luke’s Health System. The FTC seeks to stop the acquisition involving these two Idaho based health care providers, a $16 million transaction, and a number comparatively small to other health care mergers investigated by the antitrust agencies. The transaction would give St. Luke’s a total of 24 primary care physicians operating in and around Nampa, Idaho.

In St. Luke’s the FTC used “hot” documents in each stage of its pleadings, from its complaint through its merits brief on appeal. Some of the statements pulled from executives’ emails, notes and memoranda seem inflammatory suggesting St. Luke’s intended to increase prices and to control market share all in order to further its strength relative to payer contracting. These statements however have little grounding in the reality of health care competition.

The reliance by the FTC on these so-called hot documents is problematic for several reasons. First, the selective quoting of internal documents paints the intention of the merger solely to increase profit for St. Luke’s at the expense of payers, when the reality is that the merger is premised on the integration of health care services and the move from the traditional fee-for-service model to a patient-centric model. St Luke’s intention of incorporating primary care into its system is in-line with the goals of the Affordable Care Act to promote over all well-being through integration. The District Court in this case recognized that the purpose of the merger was “primarily to improve patient outcomes.” And, in fact, underserved and uninsured patients are already benefitting from the transaction.

Second, the selective quoting suggested a narrow geographic market, and therefore an artificially high level of concentration in Nampa, Idaho. The suggestion contradicts reality, that nearly one-third of Nampa residents seek primary care physician services outside of Nampa. The geographic market advanced by the FTC is not a proper market, regardless of whether selected documents appear to support it. Without a properly defined geographic market, it is impossible to determine market share and therefore prove a violation of the Clayton Antitrust Act.

The DOJ Antitrust Division and the FTC have acknowledged that markets can not properly be defined solely on spicy documents. Writing in their 2006 commentary on the Horizontal Merger Guidelines, the agencies noted that

[t]he Agencies are careful, however, not to assume that a ‘market’ identified for business purposes is the same as a relevant market defined in the context of a merger analysis. … It is unremarkable that ‘markets’ in common business usage do not always coincide with ‘markets’ in an antitrust context, inasmuch as the terms are used for different purposes.

Third, even if St. Luke’s had the intention of increasing prices, just because one wants to do something such as raise prices above a competitive level or scale back research and development expenses — even if it genuinely believes it is able — does not mean that it can. Merger analysis is not a question of mens rea (or subjective intent). Rather, the analysis must show that such behavior will be likely as a result of diminished competition. Regulators must not look at evidence of this subjective intent and then conclude that the behavior must be possible and that a merger is therefore likely to substantially lessen competition. This would be the tail wagging the dog. Instead, regulators must first determine whether, as a matter of economic principle, a merger is likely to have a particular effect. Then, once the analytical tests have been run, documents can support these theories. But without sound support for the underlying theories, documents (however condemning) cannot bring the case across the goal line.

Certainly, documents suggesting intent to raise prices should bring an antitrust plaintiff across the goal line? Not so, as Seventh Circuit Judge Frank Easterbrook has explained:

Almost all evidence bearing on “intent” tends to show both greed and desire to succeed and glee at a rival’s predicament. … [B]ut drive to succeed lies at the core of a rivalrous economy. Firms need not like their competitors; they need not cheer them on to success; a desire to extinguish one’s rivals is entirely consistent with, often is the motive behind competition.

As Harvard Law Professor Phil Areeda observed, relying on documents describing intent is inherently risky because

(1) the businessperson often uses a colorful and combative vocabulary far removed from the lawyer’s linguistic niceties, and (2) juries and judges may fail to distinguish a lawful competitive intent from a predatory state of mind. (7 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law § 1506 (2d ed. 2003).)

So-called “hot” documents may help guide merger analysis, but served up as a main course make a paltry meal. Merger cases rise or fall on hard facts and economics, and next week we will see if the Ninth Circuit recognizes this as both St. Luke’s and the FTC argue their cases.

In Antitrust & Competition, Antitrust Division, Federal Trade Commission, Google, Health Care, International Center for Law & Economics, Justice Department, Merger Guidelines, Mergers & Acquisitions, Platforms , , , , , ,
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Antitrust Enforcement in Reverse: Getting Efficiencies Backwards

David Balto —  11 September 2014

A century ago Congress enacted the Clayton Act, which prohibits acquisitions that may substantially lessen competition. For years, the antitrust enforcement Agencies looked at only one part of the ledger – the potential for price increases. Agencies didn’t take into account the potential efficiencies in cost savings, better products, services, and innovation. One of the major reforms of the Clinton Administration was to fully incorporate efficiencies in merger analysis, helping to develop sound enforcement standards for the 21st Century.

But the current approach of the Federal Trade Commission (“FTC”), especially in hospital mergers, appears to be taking a major step backwards by failing to fully consider efficiencies and arguing for legal thresholds inconsistent with sound competition policy. The FTC’s approach used primarily in hospital mergers seems uniquely misguided since there is a tremendous need for smart hospital consolidation to help bend the cost curve and improve healthcare delivery.

The FTC’s backwards analysis of efficiencies is juxtaposed in two recent hospital-physician alliances.

As I discussed in my last post, no one would doubt the need for greater integration between hospitals and physicians – the debate during the enactment of the Affordable Care Act (“ACA”) detailed how the current siloed approach to healthcare is the worst of all worlds, leading to escalating costs and inferior care. In FTC v. St. Luke’s Health System, Ltd., the FTC challenged Boise-based St. Luke’s acquisition of a physician practice in neighboring Nampa, Idaho.

In the case, St. Luke’s presented a compelling case for efficiencies.

As noted by the St. Luke’s court, one of the leading factors in rising healthcare costs is the use of the ineffective fee-for-service system. In their attempt to control costs and abandon fee-for-service payment, the merging parties effectively demonstrated to the court that the combined entity would offer a high level of coordinated and patient-centered care. Therefore, along with integrating electronic records and increasing access for under-privileged patients, the merged entity can also successfully manage population health and offer risk-based payment initiatives to all employed physicians. Indeed, the transaction consummated several months ago has already shown significant cost savings and consumer benefits especially for underserved patients. The court recognized

[t]he Acquisition was intended by St. Luke’s and Saltzer primarily to improve patient outcomes. The Court believes that it would have that effect if left intact.

(Appellants’ Reply Brief at 22, FTC v. St. Luke’s Health Sys., No 14-35173 (9th Cir. Sept. 2, 2014).)

But the court gave no weight to the efficiencies primarily because the FTC set forward the wrong legal roadmap.

Under the FTC’s current roadmap for efficiencies, the FTC may prove antitrust harm via predication and presumption while defendants are required to decisively prove countervailing procompetitive efficiencies. Such asymmetric burdens of proof greatly favor the FTC and eliminate a court’s ability to properly analyze the procompetitive nature of efficiencies against the supposed antitrust harm.

Moreover, the FTC basically claims that any efficiencies can only be considered “merger-specific” if the parties are able to demonstrate there are no less anticompetitive means to achieve them. It is not enough that they result directly from the merger.

In the case of St. Luke’s, the court determined the defendants’ efficiencies would “improve the quality of medical care” in Nampa, Idaho, but were not merger-specific. The court relied on the FTC’s experts to find that efficiencies such as “elimination of fee-for-service reimbursement” and the movement “to risk-based reimbursement” were not merger-specific, because other entities had potentially achieved similar efficiencies within different provider “structures.” The FTC and their experts did not indicate the success of these other models nor dispute that St. Luke’s would achieve their stated efficiencies. Instead, the mere possibility of potential, alternative structures was enough to overcome merger efficiencies purposed to “move the focus of health care back to the patient.” (The case is currently on appeal and hopefully the Ninth Circuit can correct the lower court’s error).

In contrast to the St. Luke’s case is the recent FTC advisory letter to the Norman Physician Hospital Organization (“Norman PHO”). The Norman PHO proposed a competitive collaboration serving to integrate care between the Norman Physician Association’s 280 physicians and Norman Regional Health System, the largest health system in Norman, Oklahoma. In its analysis of the Norman PHO, the FTC found that the groups could not “quantify… the likely overall efficiency benefits of its proposed program” nor “provide direct evidence of actual efficiencies or competitive effects.” Furthermore, such an arrangement had the potential to “exercise market power.” Nonetheless, the FTC permitted the collaboration. Its decision was instead decided on the basis of Norman PHO’s non-exclusive physician contracting provisions.

It seems difficult if not impossible to reconcile the FTC’s approaches in Boise and Norman. In Norman the FTC relied on only theoretical efficiencies to permit an alliance with significant market power. The FTC was more than willing to accept Norman PHO’s “potential to… generate significant efficiencies.” Such an even-handed approach concerning efficiencies was not applied in analyzing efficiencies in St. Luke’s merger.

The starting point for understanding the FTC’s misguided analysis of efficiencies in St. Luke’s and other merger cases stems from the 2010 Horizontal Merger Guidelines (“Guidelines”).

A recent dissent by FTC Commissioner Joshua Wright outlines the problem – there are asymmetric burdens placed on the plaintiff and defendant. Using the Guidelines, FTC’s merger analysis

embraces probabilistic prediction, estimation, presumption, and simulation of anticompetitive effects on the one hand but requires efficiencies to be proven on the other.

Relying on the structural presumption established in United States v. Philadelphia Nat’l Bank, the FTC need only illustrate that a merger will substantially lessen competition, typically demonstrated through a showing of undue concentration in a relevant market, not actual anticompetitive effects. If this low burden is met, the burden is then shifted to the defendants to rebut the presumption of competitive harm.

As part of their defense, defendants must then prove that any proposed efficiencies are cognizable, meaning “merger-specific,” and have been “verified and do not arise from anticompetitive reductions in output or service.” Furthermore, merging parties must demonstrate “by reasonable means the likelihood and magnitude of each asserted efficiency, how and when each would be achieved…, how each would enhance the merged firm’s ability and incentive to compete, and why each would be merger-specific.”

As stated in a recent speech by FTC Commissioner Joshua Wright,

the critical lesson of the modern economic approach to mergers is that post-merger changes in pricing incentives and competitive effects are what matter.

The FTC’s merger policy “has long been dominated by a focus on only one side of the ledger—anticompetitive effects.” In other words the defendants must demonstrate efficiencies with certainty, while the government can condemn a merger based on a prediction. This asymmetric enforcement policy favors the FTC while requiring defendants meet stringent, unyielding standards.

As the ICLE amicus brief in St. Luke’s discusses, not satisfied with the asymmetric advantage, the plaintiffs in St. Luke’s attempt to “guild the lily” by claiming that efficiencies can only be considered in cases where there is a presumption of competitive harm, perhaps based solely on “first order” evidence, such as increased market shares. Of course, nothing in the law, Guidelines, or sound competition policy limits the defense in that fashion.

The court should consider efficiencies regardless of the level of economic harm. The question is whether the efficiencies will outweigh that harm. As Geoff recently pointed out:

There is no economic basis for demanding more proof of claimed efficiencies than of claimed anticompetitive harms. And the Guidelines since 1997 were (ostensibly) drafted in part precisely to ensure that efficiencies were appropriately considered by the agencies (and the courts) in their enforcement decisions.

With presumptions that strongly benefit the FTC, it is clear that efficiencies are often overlooked or ignored. From 1997-2007, FTC’s Bureau of Competition staff deliberated on a total of 342 efficiencies claims. Of the 342 efficiency claims, only 29 were accepted by FTC staff whereas 109 were rejected and 204 received “no decision.” The most common concerns among FTC staff were that stated efficiencies were not verifiable or were not merger specific.

Both “concerns” come directly from the Guidelines requiring plaintiffs provide significant and oftentimes impossible foresight and information to overcome evidentiary burdens. As former FTC Chairman Tim Muris observed

too often, the [FTC] found no cognizable efficiencies when anticompetitive effects were determined to be likely and seemed to recognize efficiency only when no adverse effects were predicted.

Thus, in situations in which the FTC believes the dominant issue is market concentration, plaintiffs’ attempts to demonstrate procompetitive reasoning are outright dismissed.

The FTC’s efficiency arguments are also not grounded in legal precedent. Courts have recognized that asymmetric burdens are inconsistent with the intent of the Act. As then D.C. Circuit Judge Clarence Thomas observed,

[i]mposing a heavy burden of production on a defendant would be particularly anomalous where … it is easy to establish a prima facie case.

Courts have recognized that efficiencies can be “speculative” or be “based on a prediction backed by sound business judgment.” And in Sherman Act cases the law places the burden on the plaintiff to demonstrate that there are less restrictive alternatives to a potentially illegal restraint – unlike the requirement applied by the FTC that the defendant prove there are no less restrictive alternatives to a merger to achieve efficiencies.

The FTC and the courts should deem worthy efficiencies wherein there is a reasonable likelihood that procompetitive effects will take place post-merger. Furthermore, the courts should not look at efficiencies inside a vacuum. In healthcare, policies and laws, such as the effects of the ACA, must be taken into account. The ACA promotes coordination among providers and incentivizes entities that can move away from fee-for-service payment. In the past, courts relying on the role of health policy in merger analysis have found that efficiencies leading to integrated medicine and “better medical care” are relevant.

In St. Luke’s the court observed that “the existing law seemed to hinder innovation and resist creative solutions” and that “flexibility and experimentation” are “two virtues that are not emphasized in the antitrust law.” Undoubtedly, the current approach to efficiencies makes it near impossible for providers to demonstrate efficiencies.

As Commissioner Wright has observed, these asymmetric evidentiary burdens

do not make economic sense and are inconsistent with a merger policy designed to promote consumer welfare.

In the context of St. Luke’s and other healthcare provider mergers, appropriate efficiency analysis is a keystone of determining a merger’s total effects. Dismissal of efficiencies on the basis of a rigid, incorrect legal procedural structure is not aligned with current economic thinking or a sound approach to incorporate competition analysis into the drive for healthcare reform. It is time for the FTC to set efficiency analysis in the right direction.

In Antitrust & Competition, Constitutional Law, Federal Trade Commission, Health Care, Merger Guidelines, Mergers & Acquisitions, Supreme Court , , , , , , ,
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Swimming Against the Tide: The FTC’s Misguided Antagonism to Health Care Integration

David Balto —  26 August 2014

There is a consensus in America that we need to control health care costs and improve the delivery of health care. After a long debate on health care reform and careful scrutiny of health care markets, there seems to be agreement that the unintegrated, “siloed approach” to health care is inefficient, costly, and contrary to the goal of improving care. But some antitrust enforcers — most notably the FTC — are standing in the way.

Enlightened health care providers are responding to this consensus by entering into transactions that will lead to greater clinical and financial integration, facilitating a movement from volume-based to value-based delivery of care. Any many aspects of the Affordable Care Act encourage this path to integration. Yet when the market seeks to address these critical concerns about our health care system, the FTC and some state Attorneys General take positions diametrically opposed to sound national health care policy as adopted by Congress and implemented by the Department of Health and Human Services.

To be sure, not all state antitrust enforcers stand in the way of health care reform. For example, many states including New York, Pennsylvania and Massachusetts, seem to be willing to permit hospital mergers even in concentrated markets with an agreement for continued regulation. At the same time, however, the FTC has been aggressively challenging integration, taking the stance that hospital mergers will raise prices by giving those hospitals greater leverage in negotiations.

The distance between HHS and the FTC in DC is about 6 blocks, but in healthcare policy they seem to be are miles apart.

The FTC’s skepticism about integration is an old story. As I have discussed previously, during the last decade the agency challenged more than 30 physician collaborations even though those cases lacked any evidence that the collaborations led to higher prices. And, when physicians asked for advice on collaborations, it took the Commission on average more than 436 days to respond to those requests (about as long as it took Congress to debate and enact the Affordable Care Act).

The FTC is on a recent winning streak in challenging hospital mergers. But those were primarily simple cases with direct competition between hospitals in the same market with very high levels of concentration. The courts did not struggle long in these cases, because the competitive harm appeared straightforward.

Far more controversial is when a hospital acquires a physician practice. This type of vertical integration seems precisely what the advocates for health care reform are crying out for. The lack of integration between physicians and hospitals is a core to the problems in health care delivery. But the antitrust law is entirely solicitous of these types of vertical mergers. There has not been a vertical merger successfully challenged in the courts since 1980 – the days of reruns of the TV show Dr. Kildare. And even the supposedly pro-enforcement Obama Administration has not gone to court to challenge a vertical merger, and the Obama FTC has not even secured a merger consent under a vertical theory.

The case in which the FTC has decided to “bet the house” is its challenge to St. Luke’s Health System’s acquisition of Saltzer Medical Group in Nampa, Idaho.

St. Luke’s operates the largest hospital in Boise, and Saltzer is the largest physician practice in Nampa, roughly 20-miles away. But rather than recognizing that this was a vertical affiliation designed to integrate care and to promote a transition to a system in which the provider takes the risk of overutilization, the FTC characterized the transaction as purely horizontal – no different from the merger of two hospitals. In that manner, the FTC sought to paint concentration levels it designed to assure victory.

But back to the reasons why integration is essential. It is undisputed that provider integration is the key to improving American health care. Americans pay substantially more than any other industrialized nation for health care services, 17.2 percent of gross domestic product. Furthermore, these higher costs are not associated with better overall care or greater access for patients. As noted during the debate on the Affordable Care Act, the American health care system’s higher costs and lower quality and access are mostly associated with the usage of a fee-for-service system that pays for each individual medical service, and the “siloed approach” to medicine in which providers work autonomously and do not coordinate to improve patient outcomes.

In order to lower health care costs and improve care, many providers have sought to transform health care into a value-based, patient-centered approach. To institute such a health care initiative, medical staff, physicians, and hospitals must clinically integrate and align their financial incentives. Integrated providers utilize financial risk, share electronic records and data, and implement quality measures in order to provide the best patient care.

The most effective means of ensuring full-scale integration is through a tight affiliation, most often achieved through a merger. Unlike contractual arrangements that are costly, time-sensitive, and complicated by an outdated health care regulatory structure, integrated affiliations ensure that entities can effectively combine and promote structural change throughout the newly formed organization.

For nearly five weeks of trial in Boise St. Luke’s and the FTC fought these conflicting visions of integration and health care policy. Ultimately, the court decided the supposed Nampa primary care physician market posited by the FTC would become far more concentrated, and the merger would substantially lessen competition for “Adult Primary Care Services” by raising prices in Nampa. As such, the district court ordered an immediate divestiture.

Rarely, however, has an antitrust court expressed such anguish at its decision. The district court readily “applauded [St. Luke’s] for its efforts to improve the delivery of healthcare.” It acknowledged the positive impact the merger would have on health care within the region. The court further noted that Saltzer had attempted to coordinate with other providers via loose affiliations but had failed to reap any benefits. Due to Saltzer’s lack of integration, Saltzer physicians had limited “the number of Medicaid or uninsured patients they could accept.”

According to the district court, the combination of St. Luke’s and Saltzer would “improve the quality of medical care.” Along with utilizing the same electronic medical records system and giving the Saltzer physicians access to sophisticated quality metrics designed to improve their practices, the parties would improve care by abandoning fee-for-service payment for all employed physicians and institute population health management reimbursing the physicians via risk-based payment initiatives.

As noted by the district court, these stated efficiencies would improve patient outcomes “if left intact.” Along with improving coordination and quality of care, the merger, as noted by an amicus brief submitted by the International Center for Law & Economics and the Medicaid Defense Fund to the Ninth Circuit, has also already expanded access to Medicaid and uninsured patients by ensuring previously constrained Saltzer physicians can offer services to the most needy.

The court ultimately was not persuaded by the demonstrated procompetitive benefits. Instead, the district court relied on the FTC’s misguided arguments and determined that the stated efficiencies were not “merger-specific,” because such efficiencies could potentially be achieved via other organizational structures. The district court did not analyze the potential success of substitute structures in achieving the stated efficiencies; instead, it relied on the mere existence of alternative provider structures. As a result, as ICLE and the Medicaid Defense Fund point out:

By placing the ultimate burden of proving efficiencies on the Appellants and applying a narrow, impractical view of merger specificity, the court has wrongfully denied application of known procompetitive efficiencies. In fact, under the court’s ruling, it will be nearly impossible for merging parties to disprove all alternatives when the burden is on the merging party to oppose untested, theoretical less restrictive structural alternatives.

Notably, the district court’s divestiture order has been stayed by the Ninth Circuit. The appeal on the merits is expected to be heard some time this autumn. Along with reviewing the relevant geographic market and usage of divestiture as a remedy, the Ninth Circuit will also analyze the lower court’s analysis of the merger’s procompetitive efficiencies. For now, the stay order is a limited victory for underserved patients and the merging defendants. While such a ruling is not determinative of the Ninth Circuit’s decision on the merits, it does demonstrate that the merging parties have at least a reasonable possibility of success.

As one might imagine, the Ninth Circuit decision is of great importance to the antitrust and health care reform community. If the district court’s ruling is upheld, it could provide a deterrent to health care providers from further integrating via mergers, a precedent antithetical to the very goals of health care reform. However, if the Ninth Circuit finds the merger does not substantially lessen competition, then precompetitive vertical integration is less likely to be derailed by misapplication of the antitrust laws. The importance and impact of such a decision on American patients cannot be understated.

In Antitrust & Competition, Federal Trade Commission, Health Care, International Center for Law & Economics, Merger Guidelines, Mergers & Acquisitions , , , , ,
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