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BEIJING BOSTON BRUSSELS CHICAGO DALLAS GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGH...
The Defendants
• St. Luke’s
⁻ Not-for-profit health care system
⁻ Largest private employer in Idaho
⁻ Numerous hospitals a...
Basic Terms of the Transaction
• On December 31, 2012, St. Luke’s acquired
Saltzer assets
• Saltzer doctors entered into 5...
The Plaintiffs
• Federal Trade Commission
• State of Idaho
• St. Alphonsus Health System
• Treasure Valley Hospital
The Lawsuits
• Prior to the closing, in November 2012, St. Al’s and TVH
sued to block the transaction.
– In December 2012,...
The Government Plaintiffs’ Theory
• Market alleged
⁻ Adult PCP services sold to commercially-insured patients in
Nampa are...
The Private Plaintiffs’ Theory
• Alleged same product markets as government
plaintiffs, plus:
⁻ General pediatric physicia...
The Defense’s Theory
• Geographic market is far broader than Nampa area
• Transaction is unlikely to have horizontal
antic...
Decision
• Only addressed adult PCP product market
• Nampa was a relevant geographic market
• Transaction will substantial...
Key Players: Payors
• Prices are set through negotiations between
providers and health plans.
• Payors are often significa...
Geographic Market
• Geographic market was fiercely contested
• Court relied on wide range of evidence in
applying “SSNIP” ...
Market Share: Does it Matter?
• “Under the Horizontal Merger Guidelines, markets with an HHI
above 2500 are considered ‘hi...
Consumer Response
• Competitive effects analysis requires considering
what consumers would do in response to a price
incre...
Other Evidence of Anticompetitive Effects
• “Statistics concerning market share and concentration,
while of great signific...
Ancillary Services Finding
• District court found that the merger would allow
St. Luke’s to demand higher fees for ancilla...
Defendants’ Arguments Regarding
Procompetitive Benefits
• Improved coordination of care
• Reduced utilization
• Improved a...
Is There an Efficiencies Defense?
• Ninth Circuit “remains skeptical about the
efficiencies defense in general and about i...
Merger Specificity
• Plaintiffs argued that efficiencies could be achieved without
employment of physicians
• Court acknow...
9th Circuit on Merger Specificity
• Not enough to conclude that the merger would “allow St.
Luke’s to better serve patient...
Remedy
• Divestiture is “customary” and “preferred” form of
relief in § 7 cases, particularly when the government
is a pla...
Takeaways
• Even “vertical” integration may have horizontal aspects.
– But viability of vertical theories is still up in t...
Takeaways (cont’d)
• Evidence of patient price sensitivity / narrow
network products
• Good intentions are not enough
– “[...
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206211016_1

  1. 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 What’s Next? Global Life Sciences Webinar Series
  2. 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. 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. 4. The Plaintiffs • Federal Trade Commission • State of Idaho • St. Alphonsus Health System • Treasure Valley Hospital
  5. 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. 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. 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. 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. 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. 10. Key Players: Payors • Prices are set through negotiations between providers and health plans. • Payors are often significant witnesses for enforcement agencies.
  11. 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. 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. 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. 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. 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. 16. Defendants’ Arguments Regarding Procompetitive Benefits • Improved coordination of care • Reduced utilization • Improved access to care for Medicaid/uninsured patients • Improved community outreach
  17. 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. 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. 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. 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. 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. 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.

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