1. BEIJING BOSTON BRUSSELS CHICAGO DALLAS GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.
Healthcare Mergers After St. Luke’s
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2. The Defendants
• St. Luke’s
⁻ Not-for-profit health care system
⁻ Largest private employer in Idaho
⁻ Numerous hospitals and clinics, including 8
primary care physicians (PCPs) in Nampa
• Saltzer Medical Group
⁻ Largest independent multi-specialty physician
group in Idaho
⁻ Approximately 40 doctors, including 16 PCPs
and 8 pediatricians practicing in Nampa

3. Basic Terms of the Transaction
• On December 31, 2012, St. Luke’s acquired
Saltzer assets
• Saltzer doctors entered into 5-year Professional
Services Agreement (PSA)
• No restriction on where Saltzer doctors can refer
patients
• Below HSR reportability thresholds

4. The Plaintiffs
• Federal Trade Commission
• State of Idaho
• St. Alphonsus Health System
• Treasure Valley Hospital

5. The Lawsuits
• Prior to the closing, in November 2012, St. Al’s and TVH
sued to block the transaction.
– In December 2012, court denied preliminary injunction
and set the case for trial.
• In March 2013, the FTC and the State of Idaho filed a
separate lawsuit seeking to unwind the transaction.
• Cases consolidated.
• Four-week trial in September/October 2013
• On January 24, 2014, Court issued a decision ruling that
the transaction would have anticompetitive effects in the
market for adult PCP services and ordered St. Luke’s to
divest Saltzer.
• On February 10, 2015, the Ninth Circuit affirmed.

6. The Government Plaintiffs’ Theory
• Market alleged
⁻ Adult PCP services sold to commercially-insured patients in
Nampa area (does not include OB/GYN and pediatricians).
⁻ Combined entity has nearly 80 percent market share.
• “Horizontal” theory
⁻ Acquisition substantially increases concentration in a highly
concentrated market, creating a strong presumption of
anticompetitive effects
⁻ Acquisition enhances market power by combining the two
largest providers of Adult PCP Services in Nampa,
eliminating each provider’s closest competitor
⁻ Acquisition will increase healthcare costs to Idaho
consumers

7. The Private Plaintiffs’ Theory
• Alleged same product markets as government
plaintiffs, plus:
⁻ General pediatric physician services in Nampa area
⁻ General acute care inpatient services in Ada and Canyon
counties
⁻ Outpatient surgery services in Ada and Canyon counties
• “Vertical” theories

8. The Defense’s Theory
• Geographic market is far broader than Nampa area
• Transaction is unlikely to have horizontal
anticompetitive effects regardless of the market
definition
• Private plaintiffs failed to demonstrate
anticompetitive foreclosure
• Transaction will create efficiencies that outweigh any
anti-competitive effects
• Other providers will enter or expand in the market

9. Decision
• Only addressed adult PCP product market
• Nampa was a relevant geographic market
• Transaction will substantially increase bargaining leverage
with health plans, which will result in increased
reimbursement rates that insurers will pass on to
consumers through higher premiums
• Better quality care doesn’t offset price increases
• Efficiencies are not merger-specific
• Transaction “may substantially lessen competition”
• Divestiture was appropriate remedy

10. Key Players: Payors
• Prices are set through negotiations between
providers and health plans.
• Payors are often significant witnesses for
enforcement agencies.

11. Geographic Market
• Geographic market was fiercely contested
• Court relied on wide range of evidence in
applying “SSNIP” test, including:
• Court found that hypothetical monopolist of
Nampa PCPs would “have the leverage with
health plan networks to profitably impose a
SSNIP,” meaning Nampa is appropriate
geographic market
• Ninth Circuit found “no clear error”

12. Market Share: Does it Matter?
• “Under the Horizontal Merger Guidelines, markets with an HHI
above 2500 are considered ‘highly concentrated’ and mergers
‘resulting in highly concentrated markets that involve an increase
in the HHI of more than 200 points will be presumed to be likely
to enhance market power’”
⁻ United States v. H & R Block, Inc., 833 F. Supp. 2d 36, 71-72
(D.D.C. 2011) (quoting Horizontal Merger Guidelines, § 5.3)
(emphasis added). See also, e.g., California v. Am. Stores
Co., 872 F.2d 837, 842 (9th Cir. 1989); FTC v. Univ. Health,
Inc., 938 F.2d 1206, 1211 n.12 (11th Cir. 1991); FTC v. OSF
Healthcare Sys., 852 F. Supp. 2d 1069, 1079-80 (N. D. Ill.
2012)
• “Sufficiently large HHI figures establish the FTC’s prima facie
case that a merger is anti-competitive”
⁻ FTC v. H.J. Heinz Co., 246 F.3d 708, 716 (D.C. Cir. 2001)
(emphasis added)

13. Consumer Response
• Competitive effects analysis requires considering
what consumers would do in response to a price
increase.
• Court concluded that patients would be unlikely
to switch in response to a price increase.

14. Other Evidence of Anticompetitive Effects
• “Statistics concerning market share and concentration,
while of great significance, are not conclusive indicators of
anticompetitive effects.”
• District court findings:
– Market share: In Nampa geographic market, Court
found that Acquisition results in HHI of 6,219 with
an increase of 1,607 points, far exceeding
thresholds for presumptively anticompetitive
merger
– Ability to negotiate higher PCP rates: Bigger means
more negotiating leverage with payers
– Ability to charge more ancillary services at higher
hospital billing rates

15. Ancillary Services Finding
• District court found that the merger would allow
St. Luke’s to demand higher fees for ancillary
services.
• Ninth Circuit found the evidence lacking.

16. Defendants’ Arguments Regarding
Procompetitive Benefits
• Improved coordination of care
• Reduced utilization
• Improved access to care for Medicaid/uninsured
patients
• Improved community outreach

17. Is There an Efficiencies Defense?
• Ninth Circuit “remains skeptical about the
efficiencies defense in general and about its
scope in particular”
• Court “assumes” that defendant can rebut a
prima facie case with evidence that the
proposed merger will create a more efficient
combined entity and thus increase competition –
but sets a very high bar.

18. Merger Specificity
• Plaintiffs argued that efficiencies could be achieved without
employment of physicians
• Court acknowledged that looser affiliations were not as
successful:
⁻ “Saltzer had long had the goal of moving toward
integrated patient care and risk-based
reimbursement. After unsuccessfully attempting
several informal affiliations, including one with St.
Luke’s, Saltzer sought a formal partnership with a
large health care system.”
9th Cir. Op. at 8

19. 9th Circuit on Merger Specificity
• Not enough to conclude that the merger would “allow St.
Luke’s to better serve patients” or be likely to “improve
the delivery of health care.”
• No empirical evidence that Saltzer PCPs were necessary
for St. Luke’s to achieve its goals. (But what about
Saltzer?)
• Shared electronic records were not merger-specific
“because data analytics tools are available to independent
physicians.”
• Even if efficiencies were merger-specific, the defense
would fail. Providing better service to patients is “a
laudable goal . . .but the Clayton Act does not excuse
mergers that lessen competition . . . Simply because the
merged entity can improve its operations.”

20. Remedy
• Divestiture is “customary” and “preferred” form of
relief in § 7 cases, particularly when the government
is a plaintiff
• Important to consider whether divested entity could
survive as an independent entity
⁻ District court concluded that Saltzer would survive
• No abuse of discretion in choosing divestiture over
conduct remedy
⁻ Divestiture is simple. Conduct remedies are hard
to administer.

21. Takeaways
• Even “vertical” integration may have horizontal aspects.
– But viability of vertical theories is still up in the air. Only
vertical aspect was rejected by 9th Circuit
• Market definition is key because market share/concentration can
be determinative
• Skepticism of quality arguments
– When is quality and integration evidence properly viewed
as a “claimed efficiency” versus a “procompetitive effect”
• Unclear how merger specificity can be proven
• Are higher prices for higher quality evidence of “anticompetitive
effects?”
• HSR reportability thresholds are not a safe harbor
• No “ACA” defense.

22. Takeaways (cont’d)
• Evidence of patient price sensitivity / narrow
network products
• Good intentions are not enough
– “[T]he district court believed that the merger was
intended to improve patient outcomes and might
well do so.”
– “The district court expressly noted the troubled
state of the U.S. health care system, found that
St. Luke’s and Saltzer genuinely intended to
move toward a better health care system, and
expressed its belief that the merger would
‘improve patient outcomes’ if left intact.