By Lori Lustrin
The promise of Obamacare is to provide better and cheaper health care to more Americans. Critical to these objectives is that the health care industry becomes significantly more efficient.
It is for this reason that the Affordable Care Act incentivizes creation of integrated health systems called accountable care organizations. ACOs are networks of health care providers (hospitals, physicians, specialists, nurse practitioners, home health care, etc.) that work collaboratively to service a group of at least 5,000 patients for a minimum of three years and agree to be held accountable to the patient and the third-party payer for providing comprehensive, quality services to its population. The theory is that by shifting financial responsibility to providers, unnecessary costs will be curbed and care will improve.
To achieve the synergies and scale the ACA encourages, hospitals started merging with competitors at unprecedented rates — both locally and across state lines. Enter the antitrust laws, which were enacted to promote fair competition and protect consumers from mergers and acquisitions that lessen competition. Indeed, just as soon as the ink dried on the ACA, the Federal Trade Commission and state attorney generals stepped up efforts to strike down anti-competitive mergers in the health care sector. This, in turn, has led many providers to feel conflicted between their desire to achieve economic efficiencies through mergers and consolidations and reluctance to risk antitrust liability.
But hope is not lost. Several recent court decisions and FTC investigations offer valuable insight and guidance as to how providers can achieve desired business results without running afoul of the antitrust laws.
The Rise of the ACO
Harold Miller, president and CEO of the Network for Regional Healthcare Improvement and executive director of the Center for Healthcare Quality & Payment Reform in Pittsburgh analogizes the benefits of ACOs to consumer technology. When it comes to health services, people buy their services piecemeal. “People want to buy individual circuit boards, not a whole TV. If we can show them that the TV works better, maybe they’ll buy it.”
It is estimated that the 32 pioneer ACOs saved $87.6 million in 2012, the first year of the program. By 2013 there were a total of 428 ACOs in 49 states. In 2014, four million Medicare beneficiaries were part of an ACO, and when combined with the private sector, ACOs serviced 14 percent of the U.S. population. And the Center for Medicare and Medicaid Services projects that ACO implementation is slated to result in federal savings of $470 million from 2012 to 2015.
So what is in it for providers? Financial incentives. Under traditional fee-for-service payment structures, providers are rewarded for providing more care, not better care. But under an ACO structure, providers are eligible for bonuses when they deliver care more efficiently — when they shared information, avoid unnecessary tests, and keep patients out of the hospital.
The health care industry’s response to the ACA’s integrated care message has been unmistakable. In 2009 (pre-Obamacare), 50 hospital acquisitions took place. That number more than doubled in 2012 to 105. 2013 was the year of the mega-merger, with Community Health Systems (Tennessee) acquiring Health Management Associates (Florida) for $7.6 billion, and Tenet Healthcare Corp. (Dallas) buying Vanguard Health Systems (Tennessee) for $4.3 billion. These were only the headliners; another 267 deals were announced in the third quarter of 2013 alone.
Antitrust Enforcement Efforts
Fundamentally, the goals of the ACA and the antitrust laws are one-and-the-same — promote and create a competitive health care marketplace yielding lower overall costs to end consumers. However, the health care industry’s approach to integration by consolidation in conjunction with the increasing importance of health care as part of the United States economy has predictably drawn greater governmental attention.
With health care mergers on the rise, federal and state regulators increased efforts to strike down anti-competitive health care transactions. As part of the effort to combat concentration of market power in health care, regulators have given increased scrutiny to hospital acquisitions of physician practices — transactions typically small enough to avoid Hart-Scott-Rodino reporting requirements.
In 2011, for example, the FTC along with the Washington state attorney general opened an investigation into Providence Health’s acquisition of two cardiology groups in Spokane, Wash. Shortly thereafter, the deal was abandoned.
Several other enforcement actions have been resolved via settlement. In 2012, the FTC together with the Nevada Attorney General charged Reno's Renown Health with Clayton Act violations after it acquired two cardiology practices, giving it an 88 percent market share for adult cardiology services in the Reno market. Renown Health settled the FTC’s charges by agreeing to release its cardiologists from contractual noncompete clauses.
In January 2014, the FTC filed a complaint alleging that Community Health Systems’ acquisition of Health Management Associates Inc. decreased competition in the market for general acute care services in certain South Carolina and Alabama markets. Under the settlement, Community Health was required to sell two hospitals in the geographic markets to FTC-approved buyers.
In October 2014, the FTC settled In re H.I.G. Bayside Debt & LBO Fund II LP, which involved allegations that Surgery Center Holdings’ $792 million purchase of Symbion Holdings Corp. would lessen competition in the market for provision of outpatient surgical services in Orange City, Florida. The settlement requires Symbion to divest ownership of an ambulatory surgical center in Orange City as a condition to the merger.
Providers less willing to compromise with regulators opted to litigate. This past year saw the conclusion of several highly anticipated cases involving FTC challenges to anti-competitive combinations in health care.
The St. Luke’s Case
The FTC, along with the Idaho Attorney General and two Boise-based health care providers, filed suit against St. Luke’s Health System, the largest of Boise’s three health care systems. The FTC alleged that St. Luke’s 2012 acquisition of Saltzer Medical Group — a 40-physician medical group and one of the largest independent multispecialty groups in Idaho — violated state and federal antitrust laws, and demanded that the transaction be unwound.
In January 2014, U.S. District Court Chief Judge B. Lynn Winmill agreed with the FTC and ordered St. Luke’s to divest itself of Saltzer. In a case that he characterized as “undoubtedly one of the most difficult” trials he had ever presided over, Judge Winmill found that the merger would result in significant anti-competitive effects because it would leave St. Luke’s with control of over 80 percent of adult primary care in the relevant geographic market. This, in turn, gave the system “significant bargaining leverage” over insurers that would have had little choice but to pay higher reimbursement rates, and would allow the system to charge higher prices for ancillary hospital-based services.
The Idaho court acknowledged that St. Luke’s clear intention was to “improve patient outcomes” and that it believed the merger “would have that effect if left intact.” Nevertheless, the court determined that the potential for abuses as a result of decreased competition was too great, and St. Luke’s could have achieved the same ends through other means such as co-management agreements, electronic data exchanges, and voluntary cooperation.
On Feb. 10, 2015, the Ninth Circuit Court of Appeals affirmed the trial court’s decision in favor of the FTC. The court found the FTC established a prima facie case that the merger “created an appreciable danger” of anti-competitive effects in the relevant market, and the defendants failed to rebut that case by showing that the proposed merger would create more efficiencies and increase competition.
The decision is particularly noteworthy because it demonstrates the federal judiciary’s willingness to undo a done deal.
ProMedica Health Systems v. FTC
Three months after the Idaho district court’s decision in St. Luke’s, the Sixth Circuit Court of Appeals issued an opinion ordering Ohio-based ProMedica Health Systems Inc. to unwind its acquisition of St. Luke’s Hospital in Lucas County, Ohio. It was the first case in 15 years where a United States circuit court of appeals reviewed an FTC decision of this kind, and represented what FTC Commissioner Julie Brill described as an “overwhelming victory for the Commission on all counts.”
Pre-merger, ProMedica enjoyed a 47 percent market share and charged prices roughly 32 percent higher than its next biggest competitor. If allowed to acquire St. Luke’s, ProMedica would control 58 percent of the market, reducing Lucas County’s competing health care systems from four to three.
The court determined that post-merger, ProMedica’s bargaining power would be too great, with insurers having no choice but to offer ProMedica/St. Luke in their plans. Unlike St. Luke’s in the Idaho case, ProMedica acknowledged that its acquisition could result in higher costs to patients and insurers. In fact, the court observed that “the [FTC’s] best witnesses were the merging parties themselves,” after discussing an email from the hospital CEO stating that the merger “had the greatest potential for higher hospital rates” and could “harm the community by forcing hospital rates on them.”
Rather, ProMedica’s primary defense was the “failing firm” argument — that St. Luke’s Hospital was in such dire financial straits pre-merger that it was not a meaningful competitor. The Sixth Circuit rejected the argument, calling it “the Hail Mary pass of presumptively doomed mergers” that is only successful in “rare cases.” The court further found that contrary to ProMedica’s contention, “St. Luke’s was “out of the red (albeit barely)” and that St. Luke’s CEO had said “we can run in the black if activity stays high.”
The FTC Weighs In
The perceived conflict between the stated policy of the ACA to promote coordination and efficiency in the health care industry and the government’s increased focus on consolidation transactions caused the FTC to publicly defend their enforcement efforts.
According to FTC Commissioner Brill, the ACA and the antitrust laws are not inconsistent, but in fact, are “aligned.” Calling complaints that the federal government is “speaking out of both sides of its month” “creative, but misguided,” Brill says the FTC serves as a necessary “watchdog against firms accumulating undue market power and engaging in anticompetitive conduct.”
Brill added that the “ACA is not a free pass” to avoid FTC regulation, and that “[a]ntitrust enforcement — including preventing firms from accumulating undue market power through mergers and acquisitions — is  just as crucial now as it was before the ACA in ensuring that our health care markets in the U.S. work well.”
In response to critics who contend the FTC is stifling pro-competitive consolidation, Brill states, “The ACA neither requires nor encourages providers to merge or otherwise consolidate, but rather encourages providers to create entities that coordinate the provision of patient care services.” Brill suggests that these coordinated efforts can be achieved by means short of merger — such as joint venture relationships.
Debroah L. Feinstein, director of the FTC’s Bureau of Competition, echoed Brill’s sentiments. And following the issuance of the Ninth Circuit’s opinion in St. Lukes, Director Feinstein called the decision “[another reminder that Section 7 is all about the future, and in this case, the future of competition for adult primary-care physician services in Nampa, Idaho looks brighter.”
All Eyes on Florida: Omni Healthcare v. Health First
In the wake of the precedent-setting rulings in St. Luke’s and ProMedica, the spotlight now shifts to the Middle District of Florida where Health First Inc. of Brevard County is defending a civil antitrust suit.
Following its 2012 acquisition of Melbourne Internal Medicine Associates (MIMA) — the largest physician practice group in the county — a group of physicians sued Health First, three of its subsidiaries, and two of its executives. The plaintiffs contend Health First enjoys an illegal monopoly over the relevant health care market because, with the exception on one competitor, Health First controls all of Southern Brevard’s hospitals, including Holmes RMC — the only facility in the market with Level II trauma, neonatal-intensive care, and helicopter ambulance capabilities.
The plaintiffs allege their practices are suffering from Health First’s growing influence and control in the area and contend Health First is improperly using its market power in several respects. According to the plaintiffs, Health First refuses to allow insurers to include Holmes RMC in their networks unless the insurer also includes Health First’s other less-desirable hospitals at high reimbursement rates. Additionally, the plaintiffs contend Health First engages in price-discrimination by granting its affiliated insurance company access to all of its facilities at low reimbursement rates. Plaintiffs also assert Health First engaged in an illegal group boycott by coercing physicians to join their organization or sign exclusive referral agreements. The alternative to not “playing ball” with Health First, says the plaintiffs, is revocation of hospital privileges and exclusion from Health First’s insurer’s network.
Health First moved to dismiss on several bases, including lack of antitrust standing. Health First argued the physicians were unfit antitrust plaintiffs because the alleged injury was to patients and insurers, not doctors.
Not surprisingly, on Jan. 22, 2015, United States District Judge Roy B. Dalton Jr. issued an order denying Health First’s motion. The court rejected Health First’s standing argument, finding that the defendants “incorrectly presume that antitrust plaintiffs must suffer the same injury as the consuming public; the two injuries can differ as long as the ‘coincide.’” The court also allowed claims to proceed against Health First’s former CEO and Holmes’ former president, who are alleged to have personally participated in the conspiracy.
Because the antitrust laws provide for treble damages, Health First faces exposure north of $100 million. Matthew Gerrell, Health First’s vice president of marketing and communications vowed the company would “vigorously defend” the lawsuit, which he characterized as a distraction that only will “drive up expenses, which in turn drives up costs” to patients.
In light of the economic incentives favoring consolidation and the simultaneous message from regulators that antitrust enforcement in health care will continue to be a priority, the courts will be the arbiters of where permissible health care synergy ends and antitrust liability begins. The Eleventh Circuit likely will be the next federal appellate court to weigh in on the issue if Health First is decided on the merits.
In the interim, given the recent flurry of FTC enforcement actions and the pronouncements from the Ninth and Sixth Circuits, health care providers considering strategic alliances should be cognizant of the antitrust concerns associated with consolidation.
Providers considering collaboration should review the FTC and the DOJ’s Statement of Antitrust Enforcement Policy regarding ACOs as well as the agencies’ Horizontal Merger Guidelines for guidance on how to structure antitrust-compliant deals.
The important takeaway is that providers should be creative and structure alliances that stop short of merger, such as non-exclusive joint ventures, clinical affiliations, management agreements, partnerships, and other cooperative arrangements that do not result in consolidation.
If merger is the preferred mechanism, the first red flag antitrust regulators look for is significant anti-competitive effects on the relevant market. As a result, transactions with large resulting market share (30 percent or more) are the more obvious targets. Deals that are slated to produce pro-competitive efficiencies such as reduced costs to patients, new services, and improved quality of care are less likely to attract regulatory attention. But providers should ensure that projected efficiencies are (i) merger-specific (i.e. not available using another organizational form); and (ii) concrete and verifiable — not theoretical, ambiguous or aspirational. Even then, anticipated efficiencies may not be enough to “cast doubt on the accuracy of the Government’s evidence as predictive of future anti-competitive effects.”
Where FTC investigation is a possibility, oftentimes the natural inclination is to stay mum and hope a consummated transaction falls under the commission’s radar — particularly where Hart-Scott-Rodino is not triggered. But that approach can be shortsighted. Parties should consider proactively reporting proposed transactions to the FTC, even when they are not required to do so. Allowing the FTC to join the conversation early in the process can often lead to better results. Indeed, it can be more beneficial to collaborate with the FTC to structure a procompetitive transaction (albeit with some compromises), than to incur the legal fees and costs associated with a prolonged investigation and a probable resulting divestiture.
St. Luke’s and ProMedica also teach that consolidating parties must maintain clear evidentiary records to support the stated goals of improved efficiencies and patient care.
Other byproducts are largely out of providers’ control. Health care organizations should expect to see increases in their D&O insurance rates, as the recent antitrust decisions have only “reinforce[ed] concerns” for carriers who were “already proceeding defensively.”
Above all, health care providers considering a merger or acquisition should consult with an attorney specializing in antitrust and government regulatory investigations as early as possible to identify risks and craft innovative solutions that allow providers to create the efficiencies the ACA demands while minimizing potential antitrust exposure.
This article is reprinted with permission from Law360.