FTC Performs Balancing Act In Evaluating Health Care Provider Combinations

By Axel Bernabe

The FTC’s recent victory in unwinding the St. Luke’s Health System and Saltzer Medical Group merger in Idaho provides a cautionary note to hospitals and other health care providers contemplating mergers.

Mergers that threaten to give an entity market power to demand higher rates for health services to insurers are likely to be challenged.  In the St. Luke’s case, the FTC convinced the U.S. District Court for Idaho that St. Luke’s acquisition of Saltzer Medical Group violated Section 7 of the Clayton Act.  The court ordered “St. Luke’s to fully divest itself of Saltzer’s physicians and assets and take any further action needed to unwind the Acquisition.”

The FTC argued that St. Luke’s acquisition of Saltzer, the region’s largest independent, multi-specialty physician group, would have given the combined entity “far too great a market power when negotiating with insurance companies.”  There was little ambiguity in the FTC’s position, and the victory is a clear warning sign to competitors contemplating joint ventures.

Yet a less-noticed FTC staff advisory opinion, issued only one month before the complaint was filed in the St. Luke’s case, casts a long shadow on the apparent clarity of the St. Luke’s decision.  In the Norman Physician Hospital Organization (“Norman PHO”) letter, the FTC provides its view on Norman Regional Health System’s competitive collaboration with the Norman Physician Association in the formation of a “clinically integrated health care network” in Oklahoma.   The opinion contemplates the anticompetitive consequences of a joint venture— comparable to the St. Luke’s and Saltzer merger—between a hospital system and a physicians’ group.  Similar to Saltzer, the Norman Physician Association was no mom and pop shop—it included over 280 participating physicians, representing 38 medical specialties—clearly the dominant health care provider group in the market.

But the FTC’s treatment of the two transactions could not have been more different.  Each case involved the combination of the largest hospital system and provider group in a market and, most importantly, resulted in joint contracting with insurance companies.  Both transactions therefore effectively resulted in an “entity with the market power to demand higher rates for health services to insurers”—the result admonished in the St. Luke’s decision.  Despite these substantial similarities, the FTC challenged one combination and blessed the other.   Certainly one distinction was that the St. Luke’s transaction involved an outright merger of the two entities, whereas Norman PHO was limited to a “non-exclusive clinically integrated health care network.”  Mergers are traditionally treated to greater scrutiny than non-exclusive joint ventures.

The crucial difference, of course, was that in the Norman PHO venture the hospital and the providers had a “non-exclusive” relationship, meaning that should insurers not want to negotiate rates with the Norman PHO as a collective entity, they could always negotiate separately with the two health care entities.  This raises the fundamental question of whether, in practice, two competitors that are able to jointly negotiate higher prices will ever decide that it makes more sense to negotiate individually for what will likely be a lower rate.  Given the financial incentives for competitors to negotiate jointly, it seems likely that in most instances a non-exclusive integrated health care network will have just as great a price effect on provider rates as a full merger.

The FTC’s differing reactions to these two combinations raises the question of whether there truly is a distinction between a “merger aimed at increasing clinical efficiencies” and a “non-exclusive clinically integrated health care network.”  Certainly, one thing is clear.  A hospital and provider group contemplating a combination have everything to gain by stopping just short of a full merger and structuring a joint venture that will “generate significant efficiencies in the provision of physician services.”

It appears that a small—and arguably semantic—difference will go a long way in getting combining parties out of the cross-hairs of the FTC.

— Edited by Gary J. Malone