Ninth Circuit Upholds Divestiture in Idaho Primary Care Provider Merger Case (St. Alphonsus Medical Center-Nampa v. St. Luke’s Health System)

Feb 11 2015
Commentaries

On February 10, 2015, a panel of the Ninth Circuit unanimously handed the Federal Trade Commission another merger litigation victory.  The appeals court affirmed the district court’s ruling in St. Alphonsus Medical Center-Nampa Inc. v. St. Luke’s Health System, Ltd. enjoining St. Luke’s acquisition of Saltzer Medical Group, a rival primary care physician provider in Nampa, Idaho.  The appeals court agreed that the acquisition was anticompetitive and upheld the district court’s order requiring St. Luke’s to divest Saltzer instead of imposing a conduct remedy.

 

Background

Two healthcare providers in Nampa challenged St. Luke’s acquisition of Saltzer in November 2012. The district court denied their motion for a preliminary injunction and allowed the acquisition to go forward, with the divestiture of Saltzer. In March 2013, the FTC and the State of Idaho filed a complaint seeking to unwind the merger. The trial judge consolidated the two cases. Following a nineteen-day bench trial, the district judge found that the merger “creates a substantial risk of anticompetitive price increases” in the market for adult primary care physician providers in Nampa. The court rejected St. Luke’s efficiencies defense and ordered the divestiture of Saltzer.

 

Market Definition

Reviewing the district court’s market definition for clear error, the Ninth Circuit affirmed that the relevant market is adult primary care physician providers in Nampa. The parties agreed that primary care physicians are the relevant market, but St. Luke’s disputed the finding that Nampa is the relevant geographic market. The court noted that “the vast majority of health care consumers are not direct purchasers of health care—the consumers purchase health insurance and the insurance companies negotiate directly with the providers.” In light of this market reality, the court evaluated whether insurers would consider providers outside of Nampa to be a substitute for those in Nampa. The court, in upholding the district court’s geographic market definition, cited testimony stating that “Nampa residents strongly prefer access to local physician care providers.” Accordingly, it found that “insurers generally need local [physician care providers] to market a health care plan, and that this is true in particular in the Nampa market.”

 

Anticompetitive Effects

The court held that the plaintiffs had established a prima facie violation of Section 7. It stated that “[a] prima facie case can be established simply by showing high market share” but added that “plaintiffs in § 7 cases generally present other evidence as part of the prima facie case.” Applying the Horizontal Merger Guidelines, “the district court calculated the post-merger HHI in the Nampa [primary care physician provider] market as 6,219, and the increase as 1,607.” Per the market concentration thresholds in the Merger Guidelines, the merger is presumptively anticompetitive. Furthermore, executives at St. Luke’s and Saltzer had predicted in internal correspondences that they would be able to raise prices to insurers following the merger.

The Ninth Circuit, however, ruled that the district court’s finding that the merger would raise prices in the market for ancillary services, such as x-rays and diagnostic testing, was not supported by the record. The district court had failed to make “findings about St. Luke’s market power in the ancillary services market.” And in the absence of this finding, the court could not conclude that St. Luke’s would increase its market power in ancillary services post-merger.

 

Efficiencies

The court examined St. Luke’s efficiencies defense and found that it failed to rebut the presumption of illegality. It expressed general skepticism toward the efficiencies defense in merger cases, citing two Supreme Court decisions from the 1960s that rejected this defense. Furthermore, even in the four circuits that have arguably recognized an efficiencies defense, no merger defendant has successfully invoked it to overcome a prima facie case. Nonetheless, assuming that an efficiencies defense is available, the court stated that “proof of ‘extraordinary efficiencies’ is required to offset the anticompetitive concerns in highly concentrated markets.”

Applying this important standard, it rejected St. Luke’s argument that the merger would allow a team of employed physicians to use electronic medical records. This efficiency was deemed to be not merger-specific because electronic medical records could be employed by independent physicians without the merger. Even if this efficiency were merger-specific, the court concluded that “the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations.”

 

Remedy

The Ninth Circuit reviewed the district court’s divestiture decree for abuse of discretion and upheld this remedy. It noted that “the customary form of relief in § 7 cases is divestiture” and, quoting the Supreme Court, stated that divestiture “should always be in the forefront of a court’s mind when a violation of § 7 has been found.” St. Luke’s argument that divestiture was infeasible was rejected for being unsupported by the evidentiary record and also being inconsistent with its position at the preliminary injunction phase of the district court proceedings.

The Ninth Circuit also held that the district court did not err by choosing divestiture instead of St. Luke’s proposed conduct remedy, which would have established separate bargaining groups to negotiate with insurers.  In contrast to divestitures that are “simple, relatively easy to administer, and sure,” the court stated that “conduct remedies risk excessive government entanglement in the market.”

The Ninth Circuit’s skepticism of conduct remedies in merger cases in general, and rejection of separate bargaining groups as a remedy in particular, echoes the position urged by the American Antitrust Institute and adopted by Massachusetts Superior Court Judge Janet Sanders recently in Commonwealth v. Partners Healthcare System, Inc.  In rejecting the proposed conduct remedy in the hospital merger settlement between the former Massachusetts Attorney General and Partners Healthcare, Judge Sanders wrote that implementing the proposed price cap and contracting remedies would require the court “to familiarize itself with the inner workings of the health care market” and that it “lacks both the institutional competence and the judicial resources to fulfill that role.”  AAI’s commentary on Judge Sanders’ ruling is available here.

Contact Diana Moss, Richard Brunell, or Sandeep Vaheesan for further information.