Andrea Agathoklis Murino, Wilson Sonsini Goodrich & Rosati*
On February 10, the United States Court of Appeals for the Ninth Circuit affirmed a lower court ruling blocking the merger of St. Luke’s Health Systems, Ltd. (St. Luke’s) and Saltzer Medical Group (Saltzer), and handed the Federal Trade Commission (FTC) yet another victory in its efforts to halt consolidation in the healthcare sector. This opinion is instructive both because of what it reveals on the macro-level about merger review today, and for what it may portend in future healthcare consolidation cases.
In 2012, St. Luke’s, one of Idaho’s largest hospital systems, purchased Saltzer, the largest multi-specialty physician group in the state. Subsequent to that, a group of competitor hospitals filed a complaint to block the transaction as a violation of the Clayton Act. They argued the transaction would result in a substantial lessening of competition in the markets for primary care physician services, general acute-care inpatient services, general pediatric physician services, and outpatient surgery services. The private hospitals sought an injunction to prevent closing but that request was denied, though the lawsuit continued. In March 2013, the FTC and Attorney General of the State of Idaho (Idaho AG) filed their own complaint, arguing a more limited theory of harm in violation of the Clayton Act in the market for adult primary care physician (PCP) services only. The competitor hospitals’ complaint was consolidated with the FTC/Idaho AG’s and a 19 day bench trial ensued.
Finding, inter alia, that the combined entity would have a “huge market share,” which would enable the merged parties to raise reimbursement rates in an already highly concentrated market, the District Court ordered the transaction unwound. St. Luke’s and Salzer argued, and indeed the District Court judge agreed, that the goal of the acquisition was to improve the delivery of health care in Nampa, Idaho. But the District Court cautioned, “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.” St. Luke’s and Saltzer appealed.
The Ninth Circuit upheld the District Court decision in almost every way, finding that the transaction did violate the Clayton Act. In essence, the Ninth Circuit agreed with the District Court that the “huge market share” of the post-merger entity created the risk of anticompetitive price increases in the Nampa adult PCP market, and that the post-merger efficiencies that St. Luke’s argued would result, would not be sufficient to improve competition and therefore defeat the anticipated price increases. As a result, divestiture was an appropriate remedy and the transaction should be unwound.
Three Macro Merger Lessons
While this was a healthcare merger, there are at least three over-arching lessons that can be applied to any industry.
- The Efficiencies Defense will be Regarded Skeptically. Claims of efficiencies are at the heart of most mergers. The theory reflects that together, the merged entities can lower costs to compete more nimbly. Thus, more efficient competition will lead to lower prices, improved quality, and new or enhanced products/services. While most agree with the theory, the degree of proof required to prove it is a hotly contested topic in antitrust circles. In Luke’s, the Ninth Circuit began its examination of the efficiencies defense with a stark reminder that the Supreme Court has never approved an efficiencies defense. They bluntly added “[w]e remain skeptical about the efficiencies defense in general and about its scope in particular.” Their skepticism seems grounded in their belief that one cannot reliably predict future efficiencies, especially in a merger review paradigm that already relies on predictions regarding the competitive effects of the proposed transaction. The court cites Judges Posner and Bork for similar sentiments. And even if some efficiencies could be shown, the court held that there must be proof that the efficiencies will, in fact, lead to lower prices. That’s a high bar and one St. Luke’s failed to pass. The court didn’t foreclose entirely the possibility that efficiencies could resuscitate an otherwise anticompetitive merger but they did entrench several large hurdles which made it nearly impossible for St. Luke’s, and potentially for other, future defendants, to jump over.
- Traditional Burden Shifting Lives. The Ninth Circuit adopted a very traditional burden-shifting approach in examining this transaction. The FTC/StateAG/competitor hospital plaintiffs bore the initial burden of showing that the transaction violated the antitrust laws. This is called the prima facie Having demonstrated as much, it was then up to the Defendants to rebut the prima facie case through their efficiencies defense. Some high-level enforcement officials, scholars, and antitrust practitioners have argued for a relaxed or modified burden-shifting paradigm. Well, the ease with which the Ninth Circuit adopted the traditional burden-shifting paradigm suggests those kinds of arguments will not travel very far in the Ninth Circuit.
- Document Drafting Matters (still!). As with all litigation, during the discovery process the parties exchange an inordinate volume of documents and data. These ordinary-course business documents, which often reveal the true thinking of executives in the throes of competition, have become ever important to federal courts as they consider Clayton Act challenges. This merger was no exception. The Ninth Circuit noted that “[p]re-acquisition internal correspondence indicated that the merged companies would use this increased bargaining power to raise prices.” They specifically highlighted “[a]n email between St. Luke’s executives [that] discussed ‘pressur[ing] payors for new directed agreements,’ and an exchange between Saltzer executives stat[ing] that ‘[i]f our negotiations w/Luke’s go to fruition,’ then the ‘clout of the entire network’ could be used to negotiate favorable terms with insurers.’” Without these documents—prepared separate and apart from the transaction—it may have been harder for the court to presume anticompetitive results. With these documents, it was no large leap.
Two Micro Healthcare Consolidation Lessons
In addition to the general lessons above, there are several healthcare-specific lessons which can be drawn from this case.
- The ACA is Not an Excuse or the Clayton Act is Alive and Well. In this era of the Affordable Care Act (ACA), some have argued that the ACA’s push to more coordinated healthcare means there must be more consolidated This opinion holds otherwise. In fact, the Ninth Circuit specifically put aside the question of whether it needed to address “the optimal future shape of the country’s health care system,” and focused only on whether there was a violation of the Clayton Act. The District Court found, and the Ninth Circuit agreed, that patient outcomes may have improved as a result of the deal, but that was not enough to overcome the Clayton Act’s prohibitions. Notably, the court stated that many of the so-called integrative efficiency plans could be achieved without the transaction. For example, they cited independent physicians who adopted risk-based reimbursement, and accessed electronic medical record management systems, even without being part of a large system. This suggests that coordinated healthcare should never be confused with permitting consolidations in healthcare.
- Insurers’ Opinions Matter. Many of us do not pay for healthcare directly. This opinion confirms that, in examining the effects of healthcare consolidation, the predictions on prices that insurers will pay and their opinions on the transaction, will carry heavy weight. Here, the FTC and the other plaintiffs persuaded the court that insurers needed local, Nampa-area PCPs to market viable healthcare plans, and that if the transaction were permitted to stand, the market power of the new entity would restrict competition for PCPs, causing prices to go up. “For example, Blue Cross of Idaho has PCPs in every zip code in which it has customers, and the executive director of the Idaho Physicians network testified that it could not market a health care network in Nampa that did not include Nampa PCPs.” This stood in contrast to certain evidence St. Luke’s produced showing many traveled from Nampa to Boise for care.
As with any case, the long-term repercussions will take time to be fully absorbed. But there is no doubt that this opinion also provides fresh guidance to those considering any merger or acquisition, and especially those considering acquisitions in the healthcare arena.
*The opinions reflected herein are the authors alone.