Antitrust Law Daily Wrap Up, ANTITRUST NEWS: States file amicus brief supporting option demand model for analyzing impact of St. Luke’s merger, (Aug 22, 2014)

By Linda O’Brien, J.D., LL.M.

The Attorneys General of 16 states have filed an amicus brief with the U.S. Court of Appeals for the Ninth Circuit, in support of the district court’s application of the option demand model to assess the market impact of St. Luke’s Health Care System acquisition of Saltzer Medical Group in reaching its decision to hold the merger unlawful. (FTC v. St. Luke’s Health Care System, Case No. 14-35173).

The Ninth Circuit will hear an appeal of St. Luke’s—the largest health care system in Idaho—from the district court decision ordering the health care system to divest Saltzer, to divest Saltzer Medical Group—the state's largest independent, multi-specialty physician practice—after concluding that St. Luke’s 2012 acquisition of Saltzer violated Section 7 of the Clayton Act and the Idaho Competition Act.

In the brief, the state AGs discuss the need to contain costs in order to deliver affordable, high quality health care, and the ability of large health care providers to exercise market power to raise prices charged to payors as a condition for their inclusion in payors’ networks. A key component of an escalation of health care costs has been the growth of large health care provider systems with market power. Studies have shown that large health care provider systems possessing market power can acquire the upper hand with insurers in negotiating their compensation for inclusion in the networks marketed to employers, leading to higher premiums.

Two principal economic approaches have been used to determine the scope of geographic markets in health care mergers involving hospitals or hospitals and physician groups: (1) the Elzinga-Hogarty (E-H) test and (2) the option demand model. In this case, St. Luke’s expert applied the E-H test, which purports to delineate a market’s boundaries by estimating patient inflows and outflows from a proposed geographic market to determine whether enough patients would go elsewhere in response to a price increase such that an increase would not be feasible.

The brief noted that the option demand model focuses on the alteration of bargaining strength between a payor and hospital provider as a result of the acquisition. This model better reflects the economic realities of the local markets and was used in the findings of fact and conclusions of law by the district court, according to the brief. The AGs stated that, in light of their own experience, the anticompetitive effects arising from hospital acquisitions of physician groups are exacerbated by physician referrals that funnel patients to the acquiring hospital and away from competitors.

In response to St. Luke’s contention that the merger was justified, the brief stated that the merger should not receive special immunity from antitrust laws due to the requirements of the Affordable Care Act in order to realize clinical integration goals, when less restrictive alternatives are available. One example is integrated joint venture organizations involving payors, physician groups, and hospitals, currently being set up in the States, which potentially promise improvements in the delivery of quality health care at a lower cost.

The brief concluded by stating that the Affordable Care Act and the nonprofit role of a health care provider in providing charity care do not provide immunity for an anticompetitive merger. The ability of nonprofits to engage in charity care involving Medicare, Medicaid, and uninsured patients does not depend on acquiring market power and charging monopoly prices to those who are commercially insured. Thus, the AGs submitted that the district court decision be affirmed.

News: Antitrust