Antitrust Scrutiny of Physician Practice Acquisitions Intensifies
This Briefing is brought to you by AHLA’s Antitrust Practice Group.
- March 25, 2020
- Todd Zigrang, MBA, MHA, FACHE, ASA , Health Capital Consultants , St. Louis, MO
- Jessica Bailey-Wheaton , Health Capital Consultants , St. Louis, MO
Physician services markets are becoming increasingly concentrated. Analysis by Carnegie Mellon reports that physicians in practices of ten or less dropped by almost 20 percentage points to 61% in 2014 relative to 20 years prior. Another study notes an acceleration in the rate of physician acquisitions, with the proportion of physicians in groups of nine or fewer dropping from 40% in 2013 to 35% in 2015, and the proportion of physicians in groups of 100 or more increasing from 30% to 35% during the same time period. Rapid consolidation is occurring for a number of reasons, including the implementation of new care delivery models, implementation of Accountable Care Organization and value-based care models, cuts in Medicare and Medicaid rates, and pricing incentives such as higher reimbursements for hospital-based services relative to those provided in physician offices.
Greater concentration has resulted in pricing concerns: Some researchers have found that physician-hospital integration results in increased prices, with costs 5.8% higher for patients treated by physicians in a hospital versus in physician-owned practices. Another study finds that acquisitions led to a 14% price increase, partly due to the exploitation of payment rules. As consolidation accelerates and empirical studies continue to correlate increases in concentration with increases in prices, enforcement action against proposed and consummated health care transactions in the physician space has intensified. This briefing presents recent examples of physician transactions that have received significant regulatory scrutiny, both at the state and federal level, and highlights some practical takeaways for organizations contemplating physician acquisitions in the future.
FTC’s Intervention in UnitedHealth Group’s Acquisition of DaVita
The Federal Trade Commission’s (FTC’s) intervention in UnitedHealth Group’s (UHG’s) acquisition of DaVita Medical Group (DMG) illustrates the agency’s willingness to intervene in physician transactions based on both horizontal and vertical theories of harm.
The FTC’s horizontal analysis focused on the overlap between UHG subsidiary, Optum, and DMG, two of the largest managed-care provider organizations (MCPOs) in the Las Vegas area. MCPOs employ or are affiliated with a large number of physicians and other providers, and they seek to lower health care costs through better coordination of patient care. The FTC’s horizontal theory of harm focused on the market for MCPO services, whereby the FTC alleged that the transaction would result in a highly concentrated market, with post-merger shares in excess of 80%.
The FTC’s vertical theory of harm focused on a theory of “raising rivals’ costs.” Based on this theory, the FTC alleged that UHG would be able to gain an anticompetitive advantage as a seller of insurance services through its control of MCPO services sold to rival Medicare Advantage (MA) insurance companies. Specifically, the FTC alleged that control of more than 80% of MCPO services in the Las Vegas market would allow UHG to compel other providers of MA insurance services to purchase MCPO services at elevated prices, or allow UHG to withhold MCPO services from its MA rivals altogether. The FTC alleged that as its rivals became less competitive, UHG would gain an unfair advantage in the sale of MA insurance services.
Ultimately, the parties reached a consent agreement with the FTC, agreeing to divest DaVita MCPO assets in the area to Intermountain, a competitor provider network. Additionally, for a period of ten years, UHG agreed to notify, and receive permission from, the FTC for any merger or affiliation with a health care provider in the Las Vegas service market.
The FTC’s reliance on vertical analytic tools alongside horizontal ones in this case should serve as a note of caution for other health care organizations seeking to acquire provider groups. While UHG is a provider of insurance services, similar theories of harm may apply in the context of hospital acquisitions of physician groups since physician services comprise an input into the provision of facility services to patients.
UHG and DaVita Reach Consent Judgment with Colorado
This case also provides an example of state regulators taking increasingly prominent roles in merger enforcement as they leverage their comprehensive knowledge of local markets and seek to pursue benefits extending beyond pricing for health care services. Here, the Colorado Attorney General alleged that UHG’s purchase of DaVita Medical Group in El Paso and Teller Counties (the Colorado Springs Area) threatened to weaken MCPO competition and prevent effective insurance competition. The state also took issue with UHG’s exclusive agreement with Centura Health, a large health care provider with two hospitals in Colorado Springs. The exclusivity prevented Centura Health hospitals from contracting with MA insurers other than UHG for inclusion in those MA insurers’ provider networks. The state’s complaint alleged that UHG’s acquisition, coupled with its exclusive agreement with Centura Health, effectively excluded other MA insurers from offering comprehensive in-network provider options. The complaint also claimed anticompetitive effects that would culminate in higher costs of care, reduced benefits, and fewer choices for MA beneficiaries.
In June 2019, the parties agreed to a consent decree to remedy the state’s concerns. UHG agreed to not enforce the provisions of its exclusive agreement with Centura Health and not to enter into similar arrangements with Centura Health prior to January 2024. DaVita also agreed to withhold issuing non-renewal letters (which would effectively terminate the insurance companies’ in-network access to the provider) to insurance companies with which DaVita has existing contracts in the Colorado Springs market.
UHG’s experiences in Nevada and Colorado indicate that the acquisition of provider networks and physician practices are being more intensely scrutinized, not just by federal, but also by state, regulators. As described below, such scrutiny applies not just to insurers’ acquisitions of physician practices but to acquisitions by hospital systems as well.
Sanford Health’s Abandoned Acquisition of Mid Dakota Clinic
In June 2017, the FTC filed a joint complaint with the Attorney General of North Dakota, seeking a temporary restraining order and preliminary injunction to stop Sanford Health, one of the largest health care systems in the nation, from acquiring Mid Dakota Clinic, a multispecialty physician practice. The complaint alleged that the acquisition would create post-transaction market shares of between 75% and 85% in the rural Bismarck and Mandan area of North Dakota for adult primary care, pediatric, and gynecologic services. The complaint also alleged that the merger would provide Sanford Health with 100% control of general surgery services in the same area.
The FTC alleged, based on the concentration thresholds established in the Horizontal Merger Guidelines, and on previous case law, that the merger was presumptively illegal. The FTC also challenged the parties’ “weakened competitor” defense, presenting evidence that Mid Dakota Clinic was financially stable and did not require the acquisition to survive. In addition, the FTC disputed the parties’ arguments that a competitor’s planned entry into the market would offset any anticompetitive effects, arguing that the merger would delay such entry and hamper the new entrant’s competitive prospects once in the market.
The court found the FTC’s arguments to be persuasive. It also rejected Sanford’s “powerful buyer defense,” whereby the parties argued that because Blue Cross and Blue Shield of North Dakota had a significant market presence, and despite their own size, the parties would be unable to raise their prices to the insurer. The parties’ arguments were premised on the bargaining clout of the dominant insurer as being sufficient to deny any attempt to increase prices. The court disagreed, finding that the pricing leverage that would have been gained from the transaction would be sufficient to allow the parties to negotiate and obtain higher prices.
The FTC also challenged Sanford’s claim that efficiencies tied to the transaction would outweigh the harm to competition, arguing that the cost savings to patients were unsubstantiated and that there was no evidence the savings, if any, would be passed through to consumers. Eventually, the parties failed to convince the court that the proposed efficiencies were cognizable and that they were sufficient to rebut the FTC’s presumption of illegality.
This case exemplifies a need for health care organizations seeking expansion to carefully evaluate current and future market conditions in the areas where they operate, and to meticulously document any potential benefits of the transaction, with evidence of pass-through to consumers. It also reveals that powerful-buyer defenses are precarious, even in areas where dominant insurers appear to be present.
State’s Challenge of CHI Franciscan’s Two Consummated Mergers
Independent of the FTC, the Washington Attorney General challenged two separate and consummated acquisitions between CHI Franciscan and two independent physician practices in the Kitsap peninsula region of Washington state. Specifically, the state alleged that the two transactions led to a substantial lessening of competition, due to: (1) the acquisition of a significant share of area orthopedists through the purchase of WestSound Orthopaedics in Kitsap County, WA (the acquisition), and (2) a price-fixing agreement (via a professional services agreement) with The Doctors Clinic, a multi-specialty physician practice competitor (the affiliation). The attorney general alleged the two transactions (the acquisition and affiliation) together reduced competition and violated antitrust law.
The state’s challenge to the acquisition was based on its allegation that CHI Franciscan had accumulated market power over a period of several years and numerous acquisitions that harmed competition in violation of Section 7 of the Clayton Act. CHI Franciscan argued that at the time of the acquisition, it only had one orthopedic surgeon such that the combination with seven orthopedists resulted in only a small change in concentration. The court agreed and granted summary judgement for the defendants on the Clayton Act claims.
However, the court denied summary judgment as to the state’s Section 1 claims under the Sherman Act, whereby the state alleged that the professional services agreement (PSA) between CHI Franciscan and The Doctors Clinic comprised price-fixing. The court ruled that the relevant question was whether the affiliation constituted a merger into a single entity. If so, there could not be a Section 1 claim. The state argued that the parties were separate entities because they intentionally kept the two practices separate, despite the PSA and related agreements. The defendants disputed the state’s claims, noting that they operated as a single entity with common decision making and common goals.
On the eve of a trial that would have resolved the Section 1 claims, the state chose to settle with CHI Franciscan. The settlement includes a payment of up to $2.5 million (to be distributed among service area competitors) and requires CHI Franciscan to divest its interest in an ambulatory surgery center (ASC), but largely left in place the purchase of WestSound Orthopaedics and the PSA with The Doctors Clinic.
This case is noteworthy because it indicates that state attorneys general are taking an independent interest in physician transactions within their jurisdictions that extends beyond prospective analyses of proposed mergers to consummated mergers. The settlement also indicates a willingness by state regulators to settle cases using conduct remedies rather that structural ones, which tend to be favored by the FTC.
The accelerating pace of health care transactions involving physician practices has been met with intensified antitrust scrutiny from both federal and state enforcers over the past few years. That scrutiny now extends to physician-group transactions and relies on both horizontal and vertical theories of harm. As the recent CHI Franciscan case demonstrates, challenges befall consummated transactions as well. This intensified scrutiny presents significant regulatory challenges for merging parties who need a clear articulation of the pro-competitive nature of their transactions to secure antitrust clearance.