Healthcare providers, and particularly those who have a significant market share in a market with few competitors, should take note of this week’s highly anticipated decision by the United States Court of Appeals for the Ninth Circuit in St. Alphonsus Medical Center – Nampa v. St. Luke’s Health System, No. 14-35173 (9th Cir.),1 in which a federal appellate court upheld a lower court’s order unwinding the merger of a hospital system and a large physician group practice. St. Luke’s, a health system that operates an emergency clinic in Nampa, Idaho, and a hospital in nearby Boise, merged with Saltzer Medical Group, the largest adult primary care physician (“PCP”) provider group in the Nampa market in 2012. Before the merger, St. Luke’s already employed eight PCPs in Nampa, while Saltzer had sixteen PCPs. St. Alphonsus, the only hospital in Nampa, which employed nine PCPs, sued to break up the merger on the grounds that it would violate Section 7 of the Clayton Act by allegedly having anticompetitive effects in the adult PCP market in Nampa. The Federal Trade Commission and the Idaho attorney general soon joined the suit. After a lengthy trial, the federal district court in Idaho ruled that while the merger was intended to, and likely would result in, improved patient care, it would also be anticompetitive. Therefore, the court ordered divestiture.

The Ninth Circuit affirmed the trial court’s decision, echoing the court’s findings about the merger’s potential for improving patient care but also its threat of anticompetitive harm on the Nampa adult PCP market. So, in the first case to address directly the collision between laws for the protection of competition and combinations for the implementation of healthcare reform, the court stated that benefits to patients will not save a merger that presents a substantial risk of anticompetitive effects under a traditional antitrust analysis. In other words, the court found that even if the merger made business sense in light of healthcare reform and would result in improved care, such considerations do not factor into the antitrust analysis.

In finding that the merger created a substantial risk of anticompetitive effects, the court emphasized the post-merger entity’s high market share and the likelihood that it would use that share to negotiate higher PCP reimbursement rates with health plans and insurers. To measure the effect of the merger on the market, the Court used economic evidence of St. Luke’s high share of the market for PCP services and the small number of competitors in the Nampa market area. The court found that the market share of the post-merger entity and the market share gained from the merger were high enough to indicate a presumptively anticompetitive merger. In addition, the court relied on pre-merger emails between executives of the merging entities to show that they likely planned to use their increased market share to negotiate higher reimbursement rates for PCP services. These emails included statements regarding “pressur[ing] payors for new directed agreement” and noting that “the clout of the entire network” could be used to negotiate better terms. Thus, another cautionary tale about the damaging impact poorly worded emails often have in litigation.

St. Luke’s defense included an attempt to show that the merger would result in procompetitive efficiencies because the combined entity would be able to move toward an integrated care system and risk-based reimbursement. But the court was not convinced. While not rejecting the notion that efficiencies could save an otherwise anticompetitive merger, the court deemed it necessary that such efficiencies must make the combined entity more competitive and must be “extraordinary” in a case involving a market with few competitors, like Nampa. The court added that a defendant must also show that the efficiencies relied on for this defense are only attainable through a merger.

The court determined that St. Luke’s evidence regarding post-merger efficiencies, which showed that the merger would benefit patients, was insufficient. While consolidation might improve patient care, the court stated that improved patient care was not an efficiency that could be used to defend against antitrust claims because antitrust law is concerned with the competitive effects of a merger. So, to win on an efficiencies defense, St. Luke’s needed to present evidence that the merger would create efficiencies that increase competition or decrease costs to rebut a claim that the merger will be anticompetitive. According to the court, that proof was missing.

The Bottom Line

St. Luke’s could seek a further appeal to the United States Supreme Court, but it is unknown whether the Court would take the case. For now, providers, particularly those with high market shares and few competitors, will have to confront the significant challenge presented by this decision when considering a proposed consolidation with another provider. Providers must recognize that, at least for the Ninth Circuit, providing improved patient care will not excuse a merger that fails a traditional antitrust analysis because it has a likelihood of anticompetitive effects. Instead, in weighing the pros and cons of a potential strategic merger, providers should consider carefully whether the merger can be supported by increased competitiveness resulting in lower prices, decreased costs, increased access to service, or new and innovative products, rather than predictions of improved patient care alone.