Reprinted with permission by the Nassau County Bar Association.
Controlling the cost of health care has become a top, albeit divisive, domestic priority for the United States. National spending on health care increased from 9.5 percent of GDP in 1985 to 16.4 percent in 2011, and is expected to rise to about 22 percent of GDP by 2038.1
With the intention of addressing this problem, the Patient Protection and Affordable Care Act, or ACA,2 encourages collaboration, coordination and integration among health care providers to achieve lower costs and increased efficiencies in health care delivery. In New York and throughout the country, hospitals, health care providers and other organizations are accordingly consolidating. Antitrust Concerns in Health Care Reform.
Antitrust Concerns in Health Care Reform
The primary vehicle for integrating health care delivery systems under the ACA is Accountable Care Organizations.3 ACOs are groups of doctors, hospitals, and other health care providers who come together voluntarily to render coordinated care to their patients. ACOs can provide a full spectrum of services to patients, including inpatient hospital care, outpatient preventative care, and ambulatory surgery services. The formation of ACOs has been incentivized by the federal government through financial rewards for offering higher quality care and improved patient outcomes through programs such as the Medicare Shared Savings Program.4 Another trend in the health care industry, consistent with the general theme of consolidation behind the ACA, has been a marked increase in hospital and health system acquisitions of private medical groups. Facing overall reductions in reimbursement and increased operating costs, many physician groups have chosen to sell their practices to hospitals and health systems, opting for the physicians to become employed by the hospitals rather than owners of their own independent medical practices. Whether as a result of ACO formation or hospital acquisitions of medical practices, there are legitimate concerns that this trend toward consolidation may in fact lead to higher, rather than lower, health care costs (at least in the short-term). Some believe that if health care reforms lead to more integrated hospital and physician groups, with increased market power in negotiations, an unintended consequence will be higher reimbursement rates paid by commercial insurance companies and, consequently, an increase in premiums paid by purchasers of such insurance. Moreover, depending on the circumstances, some of the business combinations forming in the health care markets may potentially violate decades of established federal and state antitrust law designed to promote fair competition for the benefit of consumers. Just last year, the Secretary of the United States Department of Health and Human Services, Kathleen Sebelius, was quoted as saying that certain aspects of the ACA are in “constant tension” with antitrust laws.5 Similarly, noted antitrust attorney and former Federal Trade Commission policy director David Balto, explained: Two ideas, which at times conflict, have gained acceptance with respect to health care markets: (1) market consolidation has led, in some markets, to anti-competitive developments that could result in the lack of consumer choice and may raise prices for consumers; and (2) the transition to a system of care that is more efficient and higher-quality requires increased levels of coordination among providers, payers, and, in many cases employers.6 Antitrust Enforcement in Health Care In April 2011, the FTC issued a public statement that it would “aggressively enforce the antitrust laws to ensure that consolidation among health care providers will not increase health care costs in local communities across the United States.”7 Recognizing the conflict between antitrust enforcement and certain provisions of the ACA, in October 2011, the FTC and the Department of Justice developed a Final Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Saving Program detailing how they would enforce antitrust laws with respect to ACOs.8 Physician group acquisitions, however, have not been afforded the same level of detailed guidance from the FTC and, over the past several years, the FTC has been actively investigating such acquisitions (even those that are non-reportable under the thresholds set forth in the Hart-Scott-Rodino Act.9 In August 2012, the FTC entered into its first settlement of an investigation into a physician group acquisition, and the only antitrust consent decree by any federal or state agency applying the “structural” remedy of a partial divestiture of physicians.10 That merger involved the acquisition of two cardiology groups in Reno, Nevada by Renown Health, the largest provider of acute care hospital services in northern Nevada, and would have resulted in Renown’s employment of 88 percent of the cardiologists in the Reno, Nevada area. The St. Luke’s Decision More recently, a much publicized federal court decision illustrated that despite the potential “quality of care” benefits of consolidation and integration among health care providers, the federal courts will continue to apply antitrust law scrutiny to health care mergers and acquisitions. On January 24, 2014, at the conclusion of a bench trial, Chief Judge B. Lynn Winmill, in Boise, Idaho, concluded that the St. Luke’s Health System violated Section 7 of the Clayton Antitrust Act11 and Idaho’s Competition Act12 when it purchased Idaho’s largest independent physicians’ practice, Saltzer Medical Group, comprised of 40 physicians.13 Two of St. Luke’s competitors sued to prevent the acquisition, leading to the FTC and the Idaho attorney general commencing their own lawsuits against St. Luke’s. The plaintiffs argued that the acquisition of Saltzer gave St. Luke’s an unfair and illegal marketplace advantage by dominating primary medical care in Canyon County. They further argued that following the acquisition, St. Luke’s greater bargaining leverage with commercial health plans would result in higher prices for primary care services, which would ultimately be passed on by the insurance plans to subscribers. After the trial, much of which occurred behind closed doors, several newspapers sought to have the sealed portions of the court’s decision made public. Ultimately, Judge Winmill unsealed the full decision revealing that, following the merger collections for the same medical services provided by Saltzer prior to the merger were expected to dramatically increase. For example, prior to the transaction Saltzer performed many routine ancillary services, such as laboratory and diagnostic imaging, as well as therapy services and specialized facility services and minor outpatient surgeries, at its own facilities.14 St. Luke’s determined it could increase commercial reimbursements by insisting that health plans pay higher “hospital-based” rates for those routine ancillary services, even when they were performed in the same physical location as before the acquisition.”15 Blue Cross of Idaho estimated that its costs for these ancillary services would increase by 30 to 35 percent.16 “St. Luke’s own analysis projected that it could gain an extra $750,000 through hospital-based billing from Saltzer from commercial payers for lab work and $900,000 extra for diagnostic imaging.”17 Furthermore, a consultant hired by St. Luke’s to conduct due diligence prior to the transaction prepared an analysis showing how office/outpatient visits could be billed for higher amounts if the visit was “hospitalbased” rather than Saltzer-based.18 Primarily based on these findings of fact, and a quite narrow determination of the geographic and product markets, Judge Winmill issued a permanent injunction against the acquisition, concluding that: (i) following the acquisition St. Luke’s would employ 80 percent of the primary care physicians in Nampa, Idaho, (ii) this would enable St. Luke’s to negotiate higher reimbursement rates with commercial health care plans; and (iii) the higher rates would be passed onto consumers. Notably, Judge Winmill also went out of his way to commend St. Luke’s, stating that fixing health care “will require a major shift away from our fragmented delivery system and toward a more integrated system. … St. Luke’s saw this major shift coming some time ago. And they are to be complimented on their foresight and vision.”19 The Judge further noted, “the Acquisition was intended by St. Luke’s and Saltzer primarily to improve patient outcomes. The court is convinced that it would have that effect if left intact, and St. Luke’s is to be applauded for its efforts to improve the delivery of health care in the Treasure Valley.”20 However, the Judge concluded that “The [Clayton] Act does not give the court discretion to set it aside to conduct a health care experiment”21 and that the “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.”22 Thus, recent events show that while consolidation in the health care markets across the country (and here in New York) are moving at a rapid clip as a result of market forces and the ACA, health care antitrust enforcement is alive and well. The courts will continue to scrutinize health care industry mergers, including acquisitions of physician practices by hospitals and health systems.
1. Congress of the United States, Congressional Budget Office, “2013 Long-Term Budget Outlook” (September 2013).
2. Public Law 111-148.
4. 42 U.S. Code § 1395jjj.
6. Balto, David, “Antitrust: The Problem and Solution for Health Care,” US News and World Report, Apr. 12, 2013.
7. Richard Feinstein, Statement on the Abandonment of Providence Health & Services of its Plan to Acquire Spokane Cardiology and Heart Clinics Northwest in Spokane, Washington, D.C. (Apr. 8, 2011), available at http://www.ftc.gov.
10. http://www.ftc.gov/enforcement/cases-proceedings/1110101/ renown-health-matter.
11. 15 U.S.C. § 18.
12. Idaho Competition Act, Idaho Code § 48-106.
13. Findings of Fact and Conclusions of Law, FTC v. St. Luke’s Health System, Ltd., No. 1;13-CV-00116-BLW (D. Idaho Jan. 24, 2014), available at www.ftc.gov.
14. Id. Findings of Fact ¶ 124.
15. Id. Findings of Fact ¶ 123.
16. Id. Findings of Fact ¶ 125.
17. Id. Findings of Fact ¶ 126.
18. Id. Findings of Fact ¶ 128.
19. Id. at 2.
20. Id. at 3.
21. Id. Conclusions of Law ¶ 77.
22. Id. at 3.