Ninth Circuit Upholds Ruling for FTC in Hospital Merger Challenge

The Ninth Circuit upheld a district court’s ruling ordering St. Luke’s Health System to unwind its purchase of the Saltzer Medical Group.  The decision is another victory for the Federal Trade Commission (FTC) in its renewed focus on potential competition concerns in health care.

The FTC originally sued to block St. Luke’s acquisition of the physician practice group in the U.S. District Court for the District of Idaho, claiming the transaction would result in undue concentration in the market for adult primary care physician services.  That market power allegedly would allow St. Luke’s to obtain higher reimbursements from health plans, which may in turn pass the price increases to consumers and employers.

At the time of the acquisition, which closed on December 31, 2012, St. Luke’s operated eight hospitals and emergency clinics in Idaho and employed or was affiliated with several hundred physicians, including approximately 450 in the geographic market at issue.  Saltzer employed 41 physicians as an independent practice.  The transaction gave the combined entity 80 percent of the primary care physicians in the market.

St. Luke’s based its defense on the value of integrated delivery systems, a core principle of the Affordable Care Act.  The hospital system pointed to numerous studies pointing to improved patient care at a lower cost through integrated delivery systems.  St. Luke’s also provided an efficiencies argument that focused on benefits to consumers through a move away from the current fee-for-service reimbursement system to a risk-based capitation system.

The district court, however, sided with the FTC, marking the first time the FTC has successfully challenged such a transaction in court.  The district court agreed that patient care may be improved by the transaction but concluded that it also violated the antitrust laws, specifically Section 7 of the Clayton Act.  The combined entity’s dominant market position could lead to higher reimbursement rates from health insurance plans and higher rates for ancillary services.  These increased costs might then be passed on to the consumer.  The court thus ordered the immediate unwinding of the transaction and a permanent injunction against the acquisition.

The Ninth Circuit found no error in the district court’s conclusions and affirmed the judgment.  The ruling again underscores the tension between the Affordable Care Act’s push for integrated care and the competition concerns presented by such vertical integration.  The case also emphasizes the FTC’s willingness to scrutinize all health care transactions, regardless of size.  St. Luke’s purchased Saltzer for approximately $25 million, well below the thresholds for premerger notification under the Hart-Scott-Rodino Act.  Medical systems contemplating future transactions must bear the FTC’s close review in mind, no matter the size of the deal.

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