System ordered to divest physician group or risk antitrust
In a first-of-its-kind ruling that should make risk managers worry, a federal district court judge has ordered a hospital to divest itself of a physician group practice because the judge says the deal created an unfair dominance in the market and violates antitrust laws.
The largest health system in Idaho, St. Luke's Health System based in Boise, had acquired the state's largest independent medical group, Saltzer Medical Group (SMG) in Nampa, as part of the system's efforts to create an accountable care organization (ACO). The plan might have worked too well, creating such a dominant force in the community that the court said no and ordered St. Luke's to unwind the deal. (The full ruling can be found online at http://tinyurl.com/stlukesdeal.)
The ruling sends a clear message that hospitals' acquisitions of physician group practices are not immune from antitrust scrutiny, says Jason Greis, JD, partner with the law firm of McGuireWoods in Chicago. As the trend toward hospital acquisition of physician practices continues, risk managers should carefully assess potential deals for antitrust violations, Greis suggests. (See the story on p. 42 for more on the ruling.)
Prior to this recent ruling, the Federal Trade Commission (FTC) had not challenged a hospitalphysician group merger case in federal court, and so providers had no way to predict how courts would address such a challenge. This case suggests that the FTC staff are emboldened by recent victories in challenging hospital system mergers and now will be more likely to go after hospitals acquiring physician practices, Greis says.
Interestingly, the purchase price was not at issue in this case. St. Luke's paid about $28 million to acquire the physician practice. That amount is well below the $75.9 million threshold that requires a report to the FTC under the Hart-Scott-Rodino Antitrust Improvements Act. That purchase price might have led the administrators at St. Luke's to dismiss concerns about antitrust, Greis says.
"One of the lessons here is that antitrust can occur even with these smaller transactions, which physician practice acquisitions tend to be," he says. "Hospitals typically don't worry about the antitrust implications of their actions until they get to the Hart-Scott-Rodino threshold. This case says you also have to be cognizant of your market dominance in the geographic area."
St. Luke's cited the potential benefits to the community. Even the judge who ruled against the hospital applauded its efforts to improve the delivery of healthcare and agreed with the hospital that the acquisition would improve patient care. The FTC, the Idaho attorney general, and two of St. Luke's competitors argued that the transaction violated federal antitrust law and would increase healthcare costs to insurers and consumers. (See the story on p. 42 for advice on avoiding such violations.)
In siding with the plan's critics, the judge pointed out that the deal would include 80% of the primary care physicians in Nampa and the combined organization would be dominant in that market. The judge also concluded that, because the ACO would dominate the local market, the plan would lead to St. Luke's charging higher reimbursement rates from health insurance plans and increase the use of its ancillary services. The FTC cited St. Luke's previous acquisitions of hospitals and 30 physician group practices in the Magic Valley region of Idaho, which led to higher charges to insurers.
St. Luke's CEO David C. Pate issued a statement expressing disappointment in the ruling and suggested that ACOs and other facets of the Patient Protection and Affordable Care Act (PPACA) might be impossible to achieve if courts rule in this manner.
Greis notes that the antitrust risk is becoming more of a concern for hospitals and health systems because they are rapidly acquiring other providers in response to demand for ACOs and other healthcare reform initiatives. Such acquisitions typically promise increased referrals and revenue for the hospital or health system, and that benefit is fine up to a point, Greis says.
The tricky part is knowing how much you can benefit before crossing the line into antitrust, he explains. Greis suggests that a good rule of thumb is when 50% of the physicians in the community are employed or affiliated in some way with the hospital. At that threshold, you should look very carefully at the risk of antitrust.
"Hospital systems that are more successful in recruiting could see a problem if they are snapping up physician groups left, right, and center," Greis says. "If they have been the market dominance player and then they buy up all the dominant physician groups, their competitor could say that's just not fair. This ultimately comes down to issues of fairness for consumers and commercial payers."
- Jason S. Greis, JD, Partner, McGuireWoods, Chicago. Telephone: (312) 849-8217. Email: firstname.lastname@example.org.