CHA News Article

Ninth Circuit Confirms Hospital-Physician Practice Merger Must be Unwound

Last week, the Ninth Circuit Court of Appeals upheld a judgment by an Idaho district court that the 2012 merger of St. Luke’s Health System with Saltzer Medical Group violated Section 7 of the Clayton Act, which bars mergers that may substantially lessen competition or tend to create a monopoly. The court also upheld the district court’s order that St. Luke’s must divest itself of the physician group.

At the time of merger, Saltzer Medical Group was the largest independent multi-specialty physician group in Idaho. Its merger with St. Luke’s resulted in the combined entity employing 24 primary care physicians in the town of Nampa, Idaho. The next-largest provider employed nine, followed by a few smaller and solo practices. The Ninth Circuit’s decision, although creating no new legal principles, is nonetheless significant for California providers contemplating similar transactions.

First, the court upheld the use of a very small geographic market when evaluating the potential anticompetitive effects of the merger, limiting it to the city of Nampa — which has a population of 85,000 — even though one-third of Nampa residents traveled 20 miles to Boise for their PCPs. The use of a small geographic market increases the likely impact of a challenged transaction on that market.

Second, the court expressed substantial skepticism about whether a Clayton Act Section 7 claim could ever be defeated by an “efficiencies” defense — evidence that the merged entity would be able to operate sufficiently more efficiently, thereby improving competition. Specifically, the court rejected St. Luke’s argument that the merger would benefit patients by expanding access to electronic health records and resulting in greater continuity of care. According to the court, “It is not enough to show that the merger would allow St. Luke’s to better serve patients.  … [T]he claimed efficiencies therefore must show that the prediction of anticompetitive effects … is inaccurate.” Further, the court found that the claimed efficiencies were not specific to the merger but might be achieved through other means.

The court’s decision provides a cautionary warning to providers contemplating a merger: integration cannot be an end in itself but must increase providers’ ability to compete in the patient care market.