Antitrust and hospital acquisitions of physician practices

Increased Federal Trade Commission scrutiny regarding hospital acquisitions of physician practices culminated in the first-ever antitrust enforcement action of its kind earlier this year. In January, a federal judge sided with the FTC, ruling that Boise, Idaho-based St. Luke's Health System violated federal antitrust laws with its 2012 acquisition of Saltzer Medical Group, a 40-physician multi-specialty practice in Nampa, Idaho. According to the prosecuting attorneys, the acquisition would have increased St. Luke's share of the local primary care patient market to 80 percent.

Federal antitrust law tension with PPACA incentives
The Patient Protection and Affordable Care Act includes incentives to create large, integrated health systems. In broad terms, these incentives conflict with federal antitrust laws that restrict mergers and acquisitions that have the potential to decrease competition. A large, integrated health system may be able to provide better and less expensive patient care for governmental payers, but it also has more negotiating power with commercial payers, creating potential for abuse. U.S. District Judge B. Lynn Winmill admitted that the primary purpose of St. Luke's acquisition of Saltzer may have been to improve patient outcomes and decrease costs through clinical integration, but he maintained the potential for abuse as a result of diminished competition was too great to allow the merger.

Safe harbor recommendations
In 2011, the Department of Justice and FTC issued a revised policy statement outlining safe harbor recommendations for healthcare industry transactions specifically related to accountable care organizations. These guidelines appear to be the best antitrust guidance released to date concerning healthcare transactions in general. The statement indicates that arrangements resulting in less than 30 percent of local "primary service area" market share for "common services" will not be challenged absent extraordinary circumstances. Higher market shares in rural areas may also fall within the safety zone. The statement also indicated that arrangements resulting in greater than 50 percent market share require mandatory review, although this provision has since been removed.

Calculating market share for antitrust purposes
The first step in assessing antitrust risk for mergers and acquisitions is measuring post-merger market share. This exercise consists of the following:

1. Defining "primary service area"
2. Defining "common services"
3. Measuring market share utilizing an appropriate metric

Avoiding antitrust scrutiny
In the event that a contemplated hospital/physician practice merger results in market share greater than 30 percent, it is imperative that the impacted parties consider the following:

• Explore other options: In the St. Luke's case, Judge Winmill found that mergers are not necessary to achieve clinical integration. Other options include the following:
  • Clinically integrated networks
  • Co-management agreements
  • Medical directorships
  • Electronic data exchanges
  • Voluntary cooperation
    
    
• Consider voluntary review: Expedited voluntary review by the FTC is significantly less expensive and less risky than investigation.
  
  
• Avoid anticompetitive practices post-transaction: Antitrust risk mitigation should continue even after a merger has been consummated, as the FTC has a history of challenging transactions retrospectively. This is particularly true in instances where there is evidence that the combined entity has exercised newfound pricing power. In a 2007 ruling regarding FTC vs. Evanston Northwestern Healthcare, Chief Administrative Law Judge Stephen J. McGuire agreed with the FTC's complaint that ENH violated federal antitrust law based primarily on the evidence that the hospital raised prices shortly after acquiring Highland Park Hospital in 2000:"[W]e find that the merger enabled ENH to exercise market power, and that ENH used this market power to increase its average net prices for acute inpatient hospital services by a substantial amount…"¹

Will Hamilton is a manager within the valuation service line at Pershing Yoakley & Associates. His experience includes the valuation of a variety of business interests, assets, and services, including physician practices, hospitals, ASCs, imaging centers, home health and hospice agencies, physical therapy practices, IRFs, pharmacies, DME and healthcare technology companies. He also has experience valuing intangible assets including non-compete agreements, rights of first refusal, certificates of need, trade names and trademarks, medical records and workforce-in-place. For 30 years, PYA has been providing independent and objective valuation and other consulting services to a large number of hospitals, physician practices, and other healthcare organizations across the U.S.

¹ Majoras, Deborah Platt. Opinion of the Commission in the Matter of Evanston Northwestern Healthcare Corporation. Retrieved from http://www.ftc.gov/sites/default/files/documents/cases/2007/08/070806opinion.pdf

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FTC blocks the ProMedica-St. Luke's merger: 5 things to know
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FTC director: Antitrust law does not stand in way of the PPACA