Consolidation is top-of-mind for many leaders of provider practice groups and health systems. But, as recent headlines in healthcare make clear, leaders need to be aware of the significant antitrust risks that accompany efforts to achieve these combinations. Whether by merger or acquisition, joint venture, clinical integration, or some other form of alignment, consolidating or affiliating with other provider organizations carries the risk of an antitrust investigation and challenge by federal or state enforcers, and often both.
Antitrust laws are designed to preserve competition for the benefit of consumers. They prohibit consolidations and contracts that result in unreasonable restraints on competition. The federal agencies charged with enforcing antitrust laws are the Federal Trade Commission (FTC) and the Department of Justice (DOJ).
In healthcare, the FTC is usually responsible for antitrust review of healthcare providers, while DOJ examines the competitive aspects of the health insurance industry. DOJ is currently reviewing the proposed mergers of Aetna with Humana and Anthem with Cigna, for example. State regulators also have investigative and enforcement authority over antitrust matters, and private parties may bring lawsuits raising antitrust claims. Healthcare executives must be conscious of all these avenues of scrutiny.
FTC Is Watching
The FTC has been particularly busy of late in the healthcare field. An FTC representative said in 2012 that "the FTC is watching," and indeed that seems to be true. Fully half of the FTC's enforcement actions were in the healthcare sector from 2011 to 2015, with 24% in "Health Care–General," and 26% in "Health Care–Pharmaceuticals & Medical Devices." FTC Chairwoman Edith Ramirez confirmed on April 6 that the FTC "continued to devote significant resources to stopping anticompetitive healthcare provider consolidation in 2015."
One resource that federal law enforcers use is Section 7 of the Clayton Antitrust Act of 1914. It prohibits consolidations that may substantially lessen competition. A number of recent enforcement actions are based on this or similar laws. Many healthcare providers believe they can respond to these challenges by relying on expected improvements in patient care and the demands of the Affordable Care Act to justify consolidations, but these considerations have not usually prevailed. Instead, the result has been forced divestitures, substantial limitations on the parties' market conduct, or abandoned transactions.
In the most recent case, the FTC announced in late 2015 it had reached agreement to settle its challenge to the merger of Keystone Orthopedic Specialists LLC (Keystone) and Orthopaedic Associates of Reading Ltd. (Orthopaedic Associates). In January 2011, these two, along with four other independent orthopedic groups in Berks County, Pennsylvania, merged to form Keystone, joining in one group 19 of 25—or 76%—of the county's practicing orthopedists.
The FTC alleged that the merger eliminated competition and that health plans could not offer a commercially marketable network to Berks County residents without including Keystone. This gave Keystone substantial market power, which it used to raise the reimbursement rates it charged most health plans. In 2014, before the FTC began its investigation, six orthopedists left Keystone to start business as Orthopaedic Associates, but this did not deflect the FTC's challenge.
The consent order containing the settlement agreement imposes conditions to remain in effect for 10 years. This kind of order is known as a "conduct remedy." Keystone and Orthopaedic Associates may not:
Acquire any interest in one another or any other orthopedic practices in the county without FTC approval
Employ any orthopedist in the county without FTC approval
Jointly negotiate or refuse to deal with payers
Exchange payer contracting information with other orthopedists
On any payer request, they must terminate any existing payer contracts without penalty. Keystone and Orthopaedic must report to the FTC annually and provide the FTC access to their records, documents, and personnel. If not for the 2014 separation of Orthopaedic Associates from Keystone, the FTC noted that it likely would have required a divestiture to reduce the overall size and market power of the combined group.
Nationwide Actions
We can cite numerous other examples, starting with four cases in 2011 alone. Cases in Maine and Washington kept a pair of cardiology groups in each state from merging. In Pennsylvania, the state attorney general (AG) investigated the merger of five urology group practices controlling 84% of the market for that service in Harrisburg; a sweeping consent decree imposed significant restrictions on the merged practice's conduct. And, a federal court agreed with the FTC to stop a health system merger in Rockford, IL, in part on the effects the FTC believed the merger would have on primary care physician (PCP) services.
In 2012, Renown Health, a healthcare network in Reno, Nevada, purchased the only two cardiology groups in the area, resulting in it employing 88% of Reno's cardiologists. The physicians all signed noncompetes, preventing them from leaving Renown and joining competing practices. The FTC and Nevada AG filed complaints alleging these acquisitions eliminated competition for cardiology services. The FTC, the Nevada AG, and Renown settled, with Renown agreeing to release the physicians from their noncompetes until 10 joined competing practices. Renown's board conducted its own internal investigation into why these risky transactions occurred, resulting in the forced resignations of the CEO, general counsel, and two other senior executives.
Also in 2012, St. Luke's Health System of Boise, Idaho, attempted to merge with Saltzer Medical Group, the largest PCP provider group in nearby Nampa. St. Luke's already owned an emergency clinic in Nampa that employed 8 PCPs, while Saltzer had 16. A competing health system, St. Alphonsus, sued to stop the merger and was joined by the FTC and Idaho AG after the federal court preliminarily allowed the merger to proceed.
The enforcers alleged that the acquisition would give St. Luke's a 60% market share in the PCP services market and lead to anticompetitive conduct and high reimbursement rates for their services.
After trial in 2013, the court accepted St. Luke's contention that the merger would likely improve patient care, but patient benefits could not save a merger that presented a substantial risk of competitive harm. Instead, the high combined market share, along with internal emails showing St. Luke's planned to negotiate higher reimbursement rates after the merger, plus the absence of evidence of how the merger would enhance competition, led the court to conclude that the merger was likely anticompetitive, in violation of antitrust laws; the court ordered divestiture in its January 2014 ruling. The court of appeals affirmed the decision in 2015, and St. Luke's is now divesting its ownership of Salzer.
Forget It
Another development in 2015 involved Massachusetts' largest healthcare provider, Partners Healthcare System. It abandoned its proposed acquisition of two other state healthcare providers after a judge rejected the proposed consent judgment between Partners and the Massachusetts AG. The acquisitions would have added hundreds of physicians to Partners' existing network of more than 6,000 doctors. The consent judgment would have prohibited Partners from contracting with additional physician groups for a period of time and capped reimbursement rates through 2020, but would have allowed Partners to go through with the acquisitions.
The judge found that the settlement did not do enough to address competitive harm resulting from the acquisitions and suggested that a remedy requiring divesture of assets or blocking the proposed acquisitions would constitute a "cleaner remedy," addressing harms to competition the state raised.
Most recently, in March of this year, the Minnesota AG announced an antitrust review of the proposed merger of St. Cloud Medical Group and CentraCare, which operates hospitals and clinics, both of which are significant PCPs in the St. Cloud area, requesting that they postpone closing the transaction. Estimates are that, following the merger, the new entity would control 50–80% of the PCPs and clinics, potentially leading to harm to competition and anticompetitive conduct. At last report, that transaction was under review.
Lessons Learned
A number of lessons can be drawn from this series of cases. Here are a handful:
First. The FTC as well as state enforcers are indeed watching. Although typically not large enough to require premerger notification to the enforcement agencies, these transactions somehow wound up on the radar screen. How? As an example, a phone call from a disgruntled health plan may trigger an FTC investigation if the plan believes it is being, or fears it will be, subjected to heavy-handed negotiations and high reimbursement rates from the merged and enlarged group. Several measures will go a long way to head off such complaints:
Exercise caution
Have sound justifications for any increase in rates
Communicate well with contracting partners
Second. The number of physicians joining together in a group merger is not a determining factor. As the cases above show, relatively small-number mergers can still threaten harm to competition because of market share. Small is not a basis for comfort. Having a large number of competing practitioners remaining outside the merged group may be.
Third. Planning a merger for the sole purpose of increasing bargaining power is unwise and dangerous. Instead, always keep the procompetitive reasons for doing a deal in the forefront. Benefits to competition that can result from a well-planned combination could include:
Lowered costs of operations
Lowered prices to consumers and health plans
Increased access to services
Creation of new and innovative products and services
Increased quality.
Fourth. Bad documents can sink a merger. An enforcement action usually includes handing over the merging parties' emails for agency review. Documents that contradict the good reasons for a transaction, or reveal there are only anticompetitive reasons, have doomed many deals and run the risk of having that effect even when the author is speaking in jest or hyperbole. The humor is likely to be lost on the enforcers.
Recipe for Disaster
Finally, as shown by the fate of the Renown executives, failure to keep all stakeholders in the merging organizations informed all along the way is a recipe for disaster. Group leaders need to hire competent advisers and keep governing boards, management teams, and the practicing physicians themselves reasonably informed at all critical junctures.
R. Dale Grimes, J.D., is a member of Bass, Berry & Sims PLC and leader of its Antitrust and Trade Practices Group. He has more than 35 years of experience handling antitrust litigation, counseling on antitrust compliance, and advising on antitrust issues in business transactions, with a particular focus on healthcare clients. Clark Milner, an associate attorney at Bass, Berry & Sims PLC, contributed to this article.
The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.