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Merger of Hospital and Physician Group Barred by State and Federal Antitrust Law

Farmers_and_Merchants_Bank_Building_2_(Nampa,_Idaho).jpgA federal court ruled in late January 2014 that the acquisition of a physician group by a large hospital system violated § 7 of the Clayton Antitrust Act, 15 U.S.C. § 18, as it left the hospital in control of a substantial majority of the physicians in a relatively small market. Two lawsuits, Saint Alphonsus Medical Center, et al v. St. Luke’s Health System, Ltd., No. 1:12-cv-00560, and Federal Trade Commission, et al v. St. Luke’s Health System, Ltd. et al, No. 1:13-cv-00116, were combined in the U.S. District Court for the District of Idaho. The case is reportedly the first antitrust lawsuit brought by the Federal Trade Commission (FTC) challenging the merger of a hospital and a medical group.

In its Findings of Fact and Conclusions of Law, the court addressed the high cost of healthcare in the U.S. and its relatively low quality as compared to other nations. It noted that St. Luke’s, which operates a statewide hospital system, identified a need to integrate primary care physicians and specialists in order to focus more on patient health. To this end, St. Luke’s began buying independent physician groups in order to create integrated medical teams with compensation based on patient outcomes.

St. Luke’s acquired a physician group, the Saltzer Medical Group, in Nampa, Idaho. After the merger, eighty percent of the primary care physicians in Nampa, a town of about 83,000 people, worked for St. Luke’s. St. Alphonsus Medical Center and other medical groups in the area filed an antitrust lawsuit against St. Luke’s in 2012. The FTC and the state of Idaho filed a similar suit in 2013. They alleged that the merger of St. Luke’s and Saltzer made St. Luke’s the overwhelmingly dominant primary care provider in the Nampa area, which would give it substantial leverage to bargain with health insurance companies and, ultimately, drive up costs.

The combined lawsuits went to trial before the court in October 2013, and the court issued its rulings in January. In its Findings of Fact, the court concluded that the merger had an anticompetitive effect on the Nampa market. It applied the Herfindahl-Hirschman Index (HHI), a measure of market concentration that consists of the sum of the squares of the market share of each competitor in a market. If two companies each have fifty percent of a market, the HHI would be 5,000 (502 + 502 = 5,000). The more competitors a market has, and the more equally market share is distributed, the closer the HHI gets to zero. HHI of 2,500 or above is presumed to be anticompetitive by the FTC. Nampa’s post-merger HHI was 6,219.

The court held that, while rising costs were not necessarily the intention behind the merger, the dominance of St. Luke’s over the Nampa market made it likely that it would be able to negotiate higher insurance reimbursement rates and rates for ancillary services like x-rays and ultrasounds. Those increased costs would then most likely be passed on to consumers. This led the court to issue a permanent injunction of the merger under federal and state antitrust law.

If you or your business has a contract dispute or other legal matter, you should consult with a skilled business and commercial lawyer. James G. Schwartz has represented businesses in the Bay Area for the past 38 years. To schedule a free and confidential consultation to to discuss your case, please contact us today online or at (925) 463-1073.

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Photo credit: By Visitor7 (Own work) [CC-BY-SA-3.0], via Wikimedia Commons.