The U.S. Court of Appeals for the 9th Circuit issued a landmark ruling on February 20, 2015, affirming a district court's order blocking a merger between the St. Luke's Health System ("St. Luke's") and the Saltzer Medical Group ("Saltzer")—the largest independent multi-specialty physician group, including adult primary care, in Nampa, Idaho. See generally St. Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke's Health Sys., Ltd., 778 F.3d 775 (9th Cir. 2015). Of note, the 9th Circuit rejected using quality care improvements standing alone to defend a merger, reaffirmed the use of the Herfindahl-Hirschman Index ("HHI") when assessing health care market concentration, and established a challenging standard for defending future clinical provider ventures.
In 2012, St. Luke's and Saltzer agreed to merge. In November 2012, several private hospitals sought to enjoin the merger under Section 7 of the Clayton Act and Idaho state competition law. Id. at 781-82. The Federal Trade Commission and the State of Idaho filed a lawsuit in March 2013 seeking to block the merger, after which the district court consolidated the actions. Id. The district court—holding in favor of the plaintiffs—found that, although the merger was "genuinely intended to move toward a better health care system," the merger's anticompetitive effects due to large market share and the potential for reimbursement rate increases were not offset by the proffered merger-generated competitive efficiencies. Id. at 782.
The 9th Circuit affirmed on appeal. On market definition, although the parties agreed to a relevant product market for "adult primary care physician" services, they disagreed over the plaintiff's geographic restriction to Nampa. Id. at 784. However, the court—noting that insurers rather than the vast majority of consumers are direct purchasers and sellers of health care services—held that the district court was correct to focus on "the likely response of insurers to a hypothetical demand by all the PCPs in a particular market for a [small but significant non-transitory increase in price]," and ultimately found the relevant market to be Nampa. Id.
The 9th Circuit also agreed that the record amply supported a finding of anticompetitive effects. Id. at 787-88. Specifically, the court noted that, while the "extremely high HHI on its own establishes the prima facie case" (baseline value of 6,219 with an increase from the merger of 1,607), there was sufficient indication St. Luke's would ultimately raise prices, given the uncontested barriers to entry, internal St. Luke's communications that it would use its increased power to "pressur[e] payors," and the fact that St. Luke's had used its leverage in a prior acquisition to "force insurers to concede to their pricing proposal." Id. at 786-88.
Additionally, the 9th Circuit, while announcing its skepticism that an efficiency defense exists at all, acknowledged that other circuits and the FTC allow for it, and held that a party may defend a merger on the grounds that it will create a more efficient entity and increase competition. Id. at 788-790. However, the "extraordinary efficiencies" must offset the anticompetitive effects from the merger, and be merger-specific, such that the efficiencies cannot readily be achieved without the merger. Id. at 790-91.
Accordingly, the 9th Circuit rejected St. Luke's patient care improvement claims, including the intent of integrating the physician groups together with a single electronic medical system, building a risk-based service model, and improving the continuum of care. First, the court held that "[it] is not enough to show that the merger would allow St. Luke's to better serve patients. The Clayton Act focuses on competition, and the claimed efficiencies therefore must show that the prediction of anticompetitive effects from the prima facie case is inaccurate." Id. at 791. Second, the court agreed with the lower court that the identified efficiencies were aspirational, lacking clear evidence that St. Luke's could or had a plan to achieve them. Id. And, third, the court also agreed that the efficiencies were not merger-specific, in that there was no evidence that St. Luke's needed a core group of employed PCPs to transition to an integrated care model, and also that independent physicians on their own had shown the ability to adopt risk-based reimbursement programs, as well as gain access to electronic clinical tools. Id. at 791. Nonetheless, the court made clear that even if the benefits were merger-specific and achievable, they would still fail, because decreasing competition or creating monopolies are not excused "simply because the merged entity can improve its operations." Id. at 791-92.
The 9th Circuit then addressed the question of remedies. The court found in favor of the plaintiffs contention that divestiture was appropriate, because it is "the most important of antitrust remedies . . . and should always be in the forefront of a court's mind when a violation of § 7 has been found," and that the defendants had failed to prove that splitting up the merged entity would create a sufficient enough hardship to warrant an alternative approach. Id. at 792-93.
The 9th Circuit blocked the merger, but on Mar. 26, St. Luke's and Saltzer filed a petition for a panel rehearing and a rehearing en banc. The parties contended that the 9th Circuit made several substantial mistakes, most notably that: 1) The panel decision was inconsistent with the position of other circuits, the FTC, and even other opinions within the 9th Circuit that have recognized that quality improvements and related efficiencies can benefit competition and offset harms from transactions; 2) the panel used a flawed methodology for defining the geographic market, specifically focusing on insurer and consumer preferences for adult PCP services rather than where patients would go to receive care; and 3) the panel's opinion was internally inconsistent on the question of whether and how St. Luke's could use any increased leverage to raise prices for select services.
On Apr. 20, 2015, the Ninth Circuit denied the petition for panel rehearing and hearing en banc.
The 9th Circuit's opinion may be found here.
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