United States: Despite Presence Of "Power Buyer," FTC Obtains Preliminary Injunction Of Proposed Physician Acquisition In North Dakota

Last Updated: December 21 2017
Article by Bruce D. Sokler and Farrah Short

While antitrust enforcement of hospital mergers is well-established, physician acquisitions have only recently and increasingly seen antitrust scrutiny. Last week, in a 69-page opinion, a federal district court granted the Federal Trade Commission’s (“FTC”) request for a preliminary injunction against Sanford Health’s proposed acquisition of Mid Dakota Clinic, a large multispecialty group, pending the FTC’s administrative trial on the merits scheduled for January. FTC v. Sanford Health, et al., Case. No. 1:17-cv-00133 (D. N.D. Dec. 15, 2017). The district court’s decision came after a four-day evidentiary hearing that involved 16 witnesses and more than 1,600 exhibits. Notably, the FTC asserted that the proposed acquisition would substantially lessen competition in four distinct physician service lines in the Bismarck-Mandan area of North Dakota. The merging parties had asserted, inter alia, that the presence of a powerful buyer — Blue Cross Blue Shield of North Dakota (“BCBSND”) — would preclude any anticompetitive effects that might otherwise result from the proposed transaction. The merging parties have already filed a Notice of Appeal. 

Following an eight-month investigation of the proposed transaction, the FTC and the North Dakota Attorney General sued to block the merger in June, alleging that the parties are each other’s main competitors and that the merger would result in high shares in the markets for adult primary care physician (“PCP”) services, pediatric services, obstetrics and gynecology (“OB/GYN”) services, and general surgery physician services in Bismarck-Mandan in violation of Section 7 of the Clayton Act. Determination of a Section 7 violation rests with the FTC, however, district courts may grant a preliminary injunction if it would be in the public interest after weighing the equities and considering the FTC’s likelihood of success.

Sanford Health operates more than 40 hospitals and 250 clinics, and employs more than 1,300 physicians in nine states. In the Bismarck area, it operates a 217-bed hospital and employs 160 physicians and 100 other health care providers. Mid Dakota is a multispecialty physician group that operates six clinics in Bismarck and employs 61 physicians and 19 advanced practice practitioners. Catholic Health Initiative (“CHI”), with whom Mid Dakota had a close referral relationship, operates the only other acute care hospital in the Bismarck-Mandan area.

Two-Stage Competition

The district court accepted a framework of two-stage health care competition for its analysis: first, competition among health care providers to be included as “in-network” providers in commercial health insurer plans; and second, competition among in-network health care providers to attract patients. In the first stage of competition, health care providers and commercial insurers negotiate reimbursement rates and terms. Experts for the merging parties and the government agreed that the transaction would result in increased bargaining leverage for the merged entity in the first stage of competition. In the second stage, where competition is generally focused on non-monetary factors, both parties agreed that competition among providers improves the quality of service.

Relevant Market Definition

The parties diverged over the proper definition of the relevant market, and whether the dominance of BCBSND should be considered in defining the market, or only as a defense. The government alleged four distinct relevant product markets based on specialty. The district court noted that this market definition was supported by evidence from representatives of the three primary commercial insurers in the Bismarck-Mandan area who all agreed that a plan must include adult PCPs, pediatricians, OB/GYN physicians, and general surgeons to be marketable. The government identified Bismarck-Manden as the relevant geographic market based on the Hypothetical Monopolist Test (“HMT”). The HMT is an iterative process that first identifies a candidate market and then asks whether a hypothetical monopolist could profitably impose a small but significant nontransitory increase in price (“SSNIP”) (typically 5%) over a particular product or service. The government established that commercial health insurers would accept a SSNIP rather than market a plan in the area that did not include PCP, pediatrician, OB/GYN, or general surgeon services. Moreover, the Bismarck-Manden area encompasses the four counties which Sanford Health and Mid Dakota each consider their primary geographic market.

Defendants contended that the government’s market definition was erroneous because it did not adequately consider the realities of the North Dakota insurance market in which BCBSND has all the bargaining power. The district court disagreed, holding that BCBSND’s dominance should be considered as a defense rather than as part of the market definition calculus.

Under the government’s market definition, the merged entity would provide 85.7% of adult PCP services, 98.6% of the pediatrician services, 84.6% of the OB/GYN services, and 100% of the general surgeon services in the Bismarck-Mandan area. The post-merger level of market concentration as measured by the Herfindahl-Hirschman Index (“HHI”) would be highly concentrated in each market, with a change in HHI for each of the four service lines exceeding the Horizontal Merger Guidelines’ threshold for a presumption of enhanced market power.

The court found anticompetitive effects flowing from the merger in both stages of health care competition. The acquisition would eliminate competition between the parties for favorable inclusion in a payor’s network. Since all the physicians would be under the same corporate umbrella, it would also eliminate the competition among physicians to obtain patients in the second stage of competition.

Defenses

The court followed the burden-shifting approach that has been used in many other merger cases. Once the government had met its prima facie case, the defendants could bring forth its defenses and efficiency arguments.

Here, the merging parties significantly relied on a “powerful buyer” defense, arguing that the merged entity could not negotiate higher reimbursement rates against the dominant North Dakota payer, BCBSND. The government countered that the powerful buyer defense is limited to situations where either a buyer is able to use its leverage to sponsor entry or vertically integrate, or where there are alternative suppliers post merger where the buyer is able to obtain lower prices. The district court found that those situations were not present here. Instead, it noted that although BCBSND has a statewide share of 55-65% of the commercial health insurance market, its market share has declined in the last several years. Significantly, evidence showed that BCBSND does not consider CHI a viable alternative to either Sanford Health or Mid Dakota, and, most importantly, that BCBSND could not construct a marketable health plan in the Bismarck-Mandan area without the merged entity. As a consequence, if Sanford Health were to request a rate increase post merger, BCBSND “would have to choose between agreeing to the increase or no longer offering health plans in the Bismarck-Mandan area.”

The district court also addressed in detail the potential efficiencies and synergies of the proposed transaction, which Sanford Health and Mid Dakota contended would counter any anticompetitive effects of the proposed transaction. The merging parties pointed to a document titled “Stronger Together: Synergy” which they described as a summary of merger-specific synergies that would result from the transaction. However, the district court discounted the relevance of the document because it was primarily written by counsel. Defendants also commissioned Deloitte to quantify the claimed efficiencies in clinical care, ancillary services, and non-clinical areas. Although the district court acknowledged some efficiencies, it nonetheless found that such efficiencies were not sufficient to overcome the anticompetitive effects of the transaction that would result in a near-monopoly.

The defendants also argued that CHI would be motivated to introduce new competition into these physician service lines; the district court, however, found that defendants had not established that entry or expansion by CHI would be timely, likely, or sufficient to counteract the near-monopoly that would result from the proposed transaction. Nor did defendants provide evidence that Mid Dakota was financially troubled or that it would imminently depart from the market if the merger is not consummated.

Particularly if upheld on appeal, this case would provide an important validation to the FTC’s continued and increased health care antitrust enforcement focus on physician acquisitions. An administrative trial on the merits is currently scheduled to begin on January 17, 2018. However, it is likely to be postponed pending the appeal to the Eighth Circuit that Sanford Health and Mid Dakota have filed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Bruce D. Sokler
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions