Acquisition of Medical Group by Hospital Violates Antitrust Law, Court Holds

I_Like_a_Little_Competition.jpgA hospital system’s purchase of a physician group violates state and federal antitrust law, according to a federal court’s ruling in two combined cases, Saint Alphonsus Medical Center, et al v. St. Luke’s Health System, Ltd., No. 1:12-cv-00560, and Federal Trade Commission, et al v. St. Luke’s Health System, Ltd., et al, No. 1:13-cv-00116, findings of fact (D. Id., Jan. 24, 2014). State and federal regulators, as well as several competing medical groups, filed suit against the hospital system for alleged anticompetitive practices. The plaintiffs claimed that the acquisition of the physician group gave the hospital substantial dominance over a relatively small market, which was likely to drive up prices for consumers. The court agreed and entered a permanent injunction barring the merger.

St. Luke’s, which operates a statewide system of hospitals in Idaho, began purchasing independent medical practices in order to “assemble a team committed to practicing integrated medicine.” Id. at 2. The court actually praised St. Luke’s for its efforts to create a model of healthcare based on patient outcomes, rather than one that focuses on increasing revenue through expensive medical procedures. St. Luke’s purchased Saltzer Medical Group, a physician group located in Nampa, Idaho. After the merger, St. Luke’s employed approximately eighty percent of the primary care physicians in Nampa, a town of approximately 83,000 people.

Several other medical groups, the Federal Trade Commission (FTC), and the state of Idaho filed suit against St. Luke’s under federal and state antitrust law. They alleged that the market dominance enjoyed by St. Luke’s after the merger would give it enough leverage to negotiate higher rates of reimbursement with health insurance plans and to set higher rates for ancillary medical services, such as x-rays. These costs would eventually be passed on to consumers, raising the cost of healthcare for everyone in the Nampa market. After a bench trial, the court agreed with the plaintiffs and ruled in their favor.

The best measure of how the merger allowed St. Luke’s to dominate the Nampa market might be the Herfindahl-Hirschman Index (HHI), which is calculated by squaring the market share of each business in a given market and taking the sum of those squares. If three firms had market shares of sixty, thirty, and ten percent, the HHI would be 4,600 (602 + 302 + 102 = 4,600). Ten businesses with market shares of ten percent each would have an HHI of 1,000 (102 × 10 = 1,000). The HHI of a market with one business holding a monopoly would be 10,000. The FTC presumes that HHI of 2,500 or greater is anticompetitive. The post-acquisition HHI in Nampa, the court found, was 6,219.

The court ruled that the acquisition of Saltzer by St. Luke’s violates § 7 of the Clayton Antitrust Act, 15 U.S.C. § 18, and the Idaho Competition Act. It acknowledged that the intentions behind the merger may have been good, but held that it was likely to have an anticompetitive effect on the Nampa primary care market. It ordered the acquisition unwound and issued a permanent injunction.

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Photo credit: By Art Young [Public domain], via Wikimedia Commons.