Hospital-Physician Integration, Antitrust and Anesthesia Groups

The Affordable Care Act, which last week was the object of a fiftieth attempt at repeal in Congress, is moving the healthcare system toward greater integration of providers.  Classic antitrust law, however, aims to increase competition and the number of competitors.  The conflict between the two values finds it most recent expression in the January 24, 2014 decision in the St. Luke’s antitrust litigation in Boise. 

The U.S. District Court for the District of Idaho ruled that St. Luke’s Health System, Ltd. must unwind its acquisition of the 40-physician multispecialty Saltzer Medical Group, after finding that the deal violated federal and state antitrust laws—despite its determination that the integration of the physicians with the hospital system was intended primarily to improve patient outcomes.

The Federal Trade Commission (FTC) and the Idaho Attorney General filed their joint complaint in March 2013, alleging that St. Luke’s acquisition of Saltzer was in violation of Section 7 of the federal Clayton Act (which proscribes activity the effect of which may be substantially to lessen competition) and of the Idaho Competition Act.  Several Boise area private health care providers, including St. Alphonsus Medical Center and Treasure Valley Hospital, had previously filed an antitrust lawsuit challenging the acquisition.

According to the joint complaint, the “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 court agreed.  The combined entity would include 80 percent of the PCPs in Nampa, and its size “and the sterling reputations of Saltzer and St. Luke’s, make it the dominant provider in the Nampa area for primary care, and give it significant bargaining leverage over health insurance plans.”

The court’s emphasis on the combined entity’s market power, i.e., its ability to raise fees through both size and reputation, is key.  Although the addition of the Saltzer Medical Group would expand St. Luke’s primary care offerings, the forced divestiture is a warning to any set of providers whose consolidation would create a dominant position in whatever the “relevant product market,” to use antitrust terminology, might be.  The specialty of the providers is not dispositive.  If a merger of two anesthesia groups, or a new exclusive arrangement between a health system and one or more anesthesia groups were likely to diminish competition and increase concentration in the market for anesthesia services so that the merged providers could command higher prices, the St. Luke’s case could be an obstacle.

Other take-away messages for anesthesia and pain groups include the following:

1. The efficiencies and quality improvements of integration do not trump the public interest in preserving competition among providers, at least not if it appears that there might be other ways to achieve the enhancements than through merger or acquisition, by contracting, for example.
2. Risk-based contracting and value-based payments, desirable though they are, do not require that the health system employ the physicians.  Neither do the benefits of “team-based medicine” depend on an employment relationship.
3. By giving other, independent physicians access to the hospital’s electronic health record system, St. Luke’s demonstrated its own belief that the efficiencies of shared technologies could be achieved without employment.
4. The relevant geographic market matters as much as does the relevant product market—and providers’ actions don’t control the definition of either (although their attorneys might).  The St. Luke’s court found that sixty-eight percent of Nampa residents received their primary care from providers located in Nampa, while only 15 percent of Nampa residents obtained their primary care in Boise, so Nampa was its own market—where the new entity would have more power than had a larger regional market been accepted.
5. The market is also defined by the health plans serving the residents.  The court noted that “a health plan could not successfully offer a network of PCP services to Nampa residents that only included Boise PCPs.”  If the merger or acquisition leaves health plans with essentially only one provider with whom to contract, an antitrust challenge may be successful, since that sole provider will have the power to impose price increases.  Moreover, “The Acquisition is not only a merger of the first and second largest providers for primary care services but is also a merger of each of those providers’ closest substitutes.”
6. The Saltzer acquisition was the latest in a series of consolidations that had substantially raised margins.  Between January 2007 and January 2012, St. Luke’s had acquired 49 physician clinics and at least 28 physician practices.  In 2007 it received an average amount of payment from Blue Cross of Idaho as compared to other facilities in the state, and St. Luke’s had just one hospital in the top five highest paid in Idaho.  By 2012, St. Luke’s had three of the top five highest paid hospitals, and its top hospital was receiving payments 21 percent higher than the average Idaho hospital.
7. A major purpose of the Saltzer acquisition was “to improve quality and reduce costs by moving toward value-based or risk-based care and away from fee-for-service (FFS) care—“ but there was also evidence of St. Luke’s intent to enhance its bargaining power vis-à-vis health plans.  An e-mail between senior management contained a plan that included a “Price Increase ($ Unknown)” and under that heading  a bullet point stating: “Pressure Payors for new/directed agreements.”  The court concluded that “The point being made in the e-mail was that St. Luke’s should use its bargaining leverage to increase reimbursements from health plans.”
8. It appeared that St. Luke’s planned to raise compensation rates for its physicians by 30 percent in connection with the acquisition.  The health system also was considering the increased payments it would obtain by charging hospital-based rates for office visits and lab and imaging services billed by the Saltzer medical group.

Not unexpectedly, St. Luke’s has appealed the trial court’s decision and sought a stay of the order to divest the Saltzer acquisition pending review by the Ninth Circuit Court of Appeals.  Whatever the Ninth Circuit decides in this case, hospitals are apt to continue seeking to align themselves with physician groups, and the FTC is likely to continue scrutinizing hospital acquisitions of physician practices.  (St. Luke’s was the first such transaction to be taken through trial, but in the recent past the FTC has settled complaints about other hospital buyouts, including a cardiology group in Nevada and outpatient medical clinics in Virginia, before trial.)  The ramifications for Accountable Care Organizations (ACOs)—a topic on which the Justice Department, FTC and CMS—held joint public hearings in 2013—remain worrisome.

Unlike primary care physicians and surgical specialists, anesthesiologists do not control patients’ access to services.  There are other reasons why the rate of consolidation, including employment by hospitals, is still accelerating in our field, and some of those reasons may appear sufficiently anti-competitive to trigger litigation.  Market power can be good—and it can be risky.  Interested readers should keep an eye on further developments in St. Luke’s and at the FTC.