Hot Bench from the Ninth Circuit Hears Appeal from Ruling Blocking Hospital–Physician Group Merger

On November 19, 2014, a panel of the United States Court of Appeals for the Ninth Circuit heard oral arguments in one of the most significant antitrust health care cases in years. The appellate decision could provide important judicial guidance on the interplay between the antitrust laws and aspects of health care policy reform embedded in the Affordable Care Act; a fresh look at how the often decisive issue of geographic market in health care antitrust cases is approached; and the allocation of burden of proof when defendants attempt to justify an arguably anticompetitive merger with efficiencies. While discerning the ultimate decision from the court’s questions and remarks at oral argument is an exercise fraught with danger, it was clear that the court was engaged, very familiar with the record, and pressed all counsel with pointed questions and hypotheticals.

The appeal arose from a decision by the U.S. District Court for the District of Idaho earlier this year upholding the Federal Trade Commission’s (FTC) and State of Idaho’s challenge under Section 7 of the Clayton Act to a hospital system’s acquisition of a physician practice group, and ordering divestiture as the remedy. FTC v. St. Luke’s Health System, Ltd. Particularly notable in the district court’s decision was its finding that while the transaction would likely achieve the beneficial objectives claimed by the parties, those objectives were deemed not merger specific and not substantial enough to overcome the considerable risk of anticompetitive price increases. The district court’s decision relied on a relevant geographic market definition limited to Nampa, Idaho, a small town near Boise, in which the hospital’s post-transaction market share for primary care physician services was nearly 80 percent.

The case involves the $16 million acquisition by St. Luke’s Health System, Ltd. (St. Luke’s) of Saltzer Medical Group PA (Saltzer), a physician multispecialty group consisting of fewer than 50 doctors, approximately two-thirds of whom provided primary care services in Nampa, Idaho. At the time of the acquisition, St. Luke’s operated an emergency clinic with outpatient services in Nampa. The transaction was consummated in December 2012, after the district court initially denied competing hospital St. Alphonsus Health System Inc.’s motion for an injunction blocking the deal. In 2013, the FTC and the Idaho Attorney General joined the suit to block the deal, and a full bench trial lasting nearly four weeks was held—the lengthy record for which was recently made public—where the district court ultimately found for the plaintiffs. In July 2014, St. Luke’s obtained a stay pending appeal from the Ninth Circuit of the district court’s order to divest Saltzer.

The Ninth Circuit’s three-judge panel actively engaged and challenged the advocates for all the parties during oral arguments. Defendants urged the Ninth Circuit to overturn the district court’s ruling, arguing that the lower court incorrectly found Nampa to be the relevant geographic market, failed to properly weight the procompetitive benefits for patient care resulting from the transaction, and inappropriately placed the burden of demonstrating that no less-restrictive means of achieving those same benefits existed.

Historically, in hospital-hospital merger cases where the government lost, the decisions largely turned on the relevant geographic market definition. Here, in a hospital–physician group merger case, the decision again significantly rested on the geographic market. Because the district court accepted the government’s definition limiting the relevant geographic market to Nampa (discussed in our prior alert), the acquisition was found to result in an 80 percent market share for primary care physician services. Thus, under United States v. Philadelphia Nat’l Bank, 374 U.S. 321 (1963), there was a presumption that the government had established a prima facie case under Section 7 of the Clayton Act. Although a fundamental piece of the case, a relatively small portion of the oral arguments was spent on this topic. Defendants argued that the district court erred on its geographic market findings, urging that the court should have looked to where consumers would turn, rather than payors, in the event of a price increase by St. Luke’s following the merger. The panel pushed back, questioning whether this issue was a question of fact, not law, and thus not reviewable except for an abuse of discretion.

The court, in its questioning of defendants’ and plaintiffs’ counsel focused largely on the tension between the goals of health care reform under the Affordable Care Act and the antitrust laws. Defendants contended that the district court did not give proper weight to the benefits that would be achieved by the transaction, and that it improperly placed the burden of demonstrating no less-restrictive means to achieve those goals on the hospital. In its decision, the district court said that it believed the transaction would have the intended effect to improve patient outcomes, but that there were other ways to achieve those results without the risk of increased costs. Defendants argued that it was unprecedented to have such benefits acknowledged by the court, and yet have that court still block the deal. Defendants went on to argue that because the burden on plaintiffs to establish a prima facie case under the Clayton Act is relatively low, that the burden to show that less-restrictive means of achieving the transaction’s benefits should be placed on plaintiffs. In contrast, the government argued that the purpose of the Clayton Act is to prevent the incipiency of antitrust harm, thus the burden on defendants should be high.

Defendants have also argued against the divestiture remedy imposed by the district court. As an alternative to divestiture, defendants proposed separate contracting with payors for St. Luke’s and Saltzer, or some form of a price cap or price monitoring. Defendants further argued that divestiture is only appropriate where it will restore competition, which they contended would not occur here because testimony indicated that Saltzer would cease to exist if divested. At least during oral argument, it did not appear that defendants were obtaining much traction with the court for these arguments.

The panel also appeared interested in the issue of ancillary hospital-based services. The panel noted that the district court did not make a finding that prices would increase for hospital-based ancillary services, and thus questioned whether that was sufficient basis to remand the decision, even if it agreed with the remainder of the district court’s findings.

The panel, consisting of circuit judges Richard Clifton, Andrew Hurwitz, and Milan Smith Jr., acknowledged repeatedly the importance of this case, allowing oral arguments to last for more than 90 minutes, more than double the time allocated to the case. The Ninth Circuit’s decision will set a major precedent in light of the increasingly common hospital–physician group transactions designed to achieve the cost-saving goals through coordinated care of the Affordable Care Act. This case has been closely watched by all sides, drawing multiple amicus briefs, including a joint filing from 16 states attorneys general supporting the FTC and Idaho AG. While we wait for the decision, this transaction also serves as an important reminder that deals well-below the Hart-Scott-Rodino (HSR) jurisdictional thresholds can face intense scrutiny and legal challenges, and that the antitrust enforcement agencies have a continued willingness to challenge consummated mergers.

A video of the entire oral argument is available at www.youtube.com/watch?v=PzygzjoM1P8.

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