David Kully is a Partner for Holland & Knight's Washington, D.C. office.

Jerome Hoffman is a Partner for Holland & Knight's Jacksonville office

As the trend of acquisitions of physician practices and mergers of hospitals continues, so does antitrust scrutiny of these deals. There was activity this week in three different proposed transactions that caught the attention of antitrust authorities.

North Dakota

On June 23, 2017, the FTC and the North Dakota Attorney General jointly sued to block the merger of two physician practices, Sanford Bismarck and Mid-Dakota Clinic, P.C., the largest physician groups in Bismarck and Mandan, North Dakota. The FTC and the State of North Dakota allege that the two groups have a combined share (based on physician headcount) of at least 75 percent of each of the markets for adult primary care physician services, pediatric services, and obstetrics and gynecology services, and 100 percent of the market for general surgery physician services in the Bismarck-Mandan area. Sanford also operates a 217-bed acute-care hospital and a health plan, Sanford Health Plan, that sells healthcare insurance in North Dakota and three other states. The complaint alleges that the merger of the two groups would eliminate competition between them and significantly increase the level of concentration in each service market.  It also alleges that insurers would find it "very difficult" to market an insurance plan to employers in the Bismarck-Mandan area that did not provide access to the services of at least one of the merging parties. As a result, according to the complaint, the merger would increase the physician practices' bargaining leverage over insurers and result in higher prices and lower-quality services.

The defendants' principal defense is that the strength of Blue Cross in the state will offset any power obtained by the physician groups through the merger and prevent any anticompetitive effects. They also allege that the merger will produce "substantial merger-specific efficiencies that far outweigh any alleged anticompetitive effects and, as a result, will benefit consumers."

The preliminary injunction hearing in federal court in North Dakota began on October 30. The court has not indicated when it will rule. In the meantime, Sanford has moved for a 60-day postponement of a hearing before an FTC administrative law judge on the merits of the transaction, which is scheduled to begin on November 28.

Washington State

The Washington Attorney General on August 31, 2017, sued in federal court in Washington State to undo two separate transactions between CHI Franciscan, a large (and growing) owner of hospitals and physician group practices and two physician practice groups, WestSound Orthopaedics and The Doctor's Clinic, with which it previously competed in Kitsap County (across Puget Sound from Seattle). CHI Franciscan and the physician groups completed each of the transactions in 2016.  The WestSound transaction entailed the direct acquisition of the assets of WestSound's orthopedics practice; the transaction with The Doctor's Clinic allegedly entailed a per se illegal price-fixing agreement through which CHI Franciscan "neutralize[d] a key competitor" by committing to negotiating jointly with insurers.

According to CHI Franciscan, WestSound and The Doctors Clinic each faced financial distress and separately approached CHI Franciscan seeking its assistance to be able to continue to serve patients in the Kitsap County community. CHI Franciscan also sought to negotiate with the Washington AG to address his concerns and avoid the disruption to the local health care community of an antitrust lawsuit, but claims that the AG rejected its attempts to negotiate.

On October 30, CHI Franciscan filed a motion to dismiss the claim that the second transaction was subject to per se condemnation under Section 1 of the Sherman Act, arguing that the complaint mischaracterizes the nature of the agreement.

Separately, on September 5, the Washington AG sued CHI Franciscan over allegations that it illegally withheld charity care from tens of thousands of low-income patients of St. Joseph's Hospital in Tacoma.

Southwest Virginia

In February 2016, the two largest hospital systems in Southwest Virginia submitted to the Commonwealth of Virginia an application to allow them to establish a "Cooperative Agreement" to jointly provide hospital services.  Under a Virginia statute enacted in 2015, approval by Commonwealth authorities would provide antitrust immunity to the hospitals. The FTC, which reviews mergers of hospitals and physician practices, shared its concerns about the proposal in a September 2016 submission, observing that it "presents substantial risk of serious competitive and consumer harm in the form of higher healthcare costs, lower quality, reduced innovation, and reduced access to care." The FTC also urged the Commonwealth to consider that "competition among health systems – not consolidation – results in the greatest price constraint and quality benefits for consumers."

After a lengthy review and the negotiation of commitments by the hospital systems to keep all existing hospitals open for at least five years and to limit price increases (among other commitments), the Commonwealth on October 30 approved the proposal.

On November 1, the FTC issued a public notice encouraging research and inviting comment on the impact on "prices, quality, access, and innovation for healthcare services" of procedures like Virginia's that have been used to allow hospital mergers that would likely have violated the antitrust laws if not immunized. The FTC could not challenge the "Cooperative Agreement" as it was reviewed and approved by the Commonwealth pursuant to state law and was thus immune from antitrust challenge under the "state action" doctrine.

Acquisitions and affiliation arrangements among physician groups, hospitals, health insurers, and other providers will likely continue as major shifts in government reimbursement systems and other forces place pressure on providers to consolidate. As these three cases show, federal and state antitrust enforcement authorities have a keen interest in these arrangements, and that interest is unlikely to diminish going forward.

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