HARRIS MEYER July 06, 2019 01:00 AM
Recent actions by antitrust enforcers and courts
to block or regulate purchases of physician practices by hospitals and insurers
may signal increasing scrutiny for such deals as policymakers intensify their
focus on boosting competition to reduce healthcare prices.
Last month, the Federal Trade Commission announced a settlement with UnitedHealth Group and
DaVita unwinding United’s acquisition of DaVita Medical
Group’s Las Vegas operations.
At the same time, Colorado Attorney General Phil
Weiser separately reached a deal imposing conditions on UnitedHealth’s
acquisition of DaVita’s physician groups in Colorado Springs.
Also in June, the 8th U.S. Circuit Court of
Appeals upheld a District Court rulingblocking Sanford Health’s
proposed 2015 acquisition of the multispecialty Mid Dakota Clinic in the
Bismarck, N.D., area. That antitrust case originally was filed by the FTC
and North Dakota Attorney General Wayne Stenehjem in 2017.
And in May, Washington Attorney General Bob
Ferguson settled an antitrust lawsuit with CHI Franciscan setting conditions on the health system’s 2016
affiliation with the Doctors Clinic, a multispecialty group, and its purchase
of WestSound Orthopaedics, both in Kitsap County. CHI Franciscan will pay up to
$2.5 million, distributed to other healthcare organizations to increase access
to care.
The cases represent the most significant
antitrust developments involving physician acquisitions since federal and state
antitrust enforcers won a 9th U.S. Circuit Court of Appeals ruling in 2015
upholding a lower-court decision forcing Idaho’s St. Luke’s Health
System to unwind its 2012 acquisition of Saltzer Medical Group.
The agreements with UnitedHealth in Nevada and
Colorado show a new willingness by federal and state antitrust enforcers to use
seldom-cited vertical merger theory. Under that theory, acquisitions of
physician groups by insurers or hospitals may foreclose competition by making
it more difficult or costly for rivals to obtain physician services.
“I am concerned about the state of
consolidation,” Weiser said in an interview. “Healthcare costs in Colorado have
risen at an alarming rate. Protecting competition needs to be a central part of
our strategy to provide affordable and quality healthcare.”
These recent antitrust actions come as concerns
mount over the growing consolidation of hospitals and physician practices and
the impact on pricesand total health spending. Sixty-five
percent of metropolitan statistical areas are highly concentrated for
specialist physicians, while 39% are highly concentrated for primary-care
doctors, according to Martin Gaynor, a health economist at Carnegie Mellon
University.
Hospital acquisitions of physician practices
have led to higher prices and health spending, researchers have found. Average
outpatient physician prices in 2014 ranged from 35% to 63% higher, depending on
physician specialty, in highly concentrated California markets compared with
less-concentrated markets, according to a 2018 study by researchers at the University of
California at Berkeley. The link between physician market concentration and
prices is similar across the country, experts say.
That’s why some elected officials and antitrust
attorneys say it’s past time to step up oversight of physician practice
acquisitions by hospitals, insurers and private-equity firms. These deals
traditionally have received less scrutiny than hospital and insurance mergers,
partly because they are smaller transactions that federal and state antitrust
enforcement agencies may not have known about beforehand.
The recent cases suggest state attorneys general
may play a growing role in policing physician acquisition deals by hospitals
and insurers, given that they are in a better position than the feds to find
out about brewing local deals. Most of the growth in physician group size has
come from piecemeal acquisitions of small group practices,
a Health Affairs study found last year.
Washington and at least two other states have
passed laws requiring healthcare providers to give state officials advance notice before finalizing a merger or
acquisition. That gives state AGs another advantage over the FTC, which under
federal rules only must receive advance notice of deals exceeding $78.2 million
in value. Few physician acquisitions meet that threshold.
Others worry, however, that the absence of clear federal guidelines for challenging
vertical mergers between hospitals and physicians has made the FTC and the
courts overly cautious, and that it now may be too late because many physician
markets are already highly concentrated. In March, the FTC and the Justice Department said they were working
on new vertical merger guidelines, which were last updated in 1984.
“The horse may be out of the barn in a number of
markets where there have been very large acquisitions of physician practices,”
said Tim Greaney, a visiting professor at the University of California Hastings
College of Law. “It’s not clear what you can do about that.”
But hospitals, insurers and other physician
aggregators argue that making it harder to buy physician groups would hamper
their ability to establish cost-saving, high-quality delivery models
emphasizing care coordination.
That’s how Sanford Bismarck President Dr. Michael
LeBeau responded to last month’s 8th Circuit ruling against his organization’s
merger with Mid Dakota Clinic. “Sanford continues to believe that combining
with Mid Dakota Clinic would lead to the enhanced provision of and access to
healthcare for patients in central and western North Dakota,” he said in a
written statement.
Researchers have raised
doubts, however, about whether hospital acquisitions of medical practices
have truly achieved efficiencies and cost savings, and whether any cost savings
have been passed on to payers and patients.
Going forward, hospitals, insurers and other
healthcare organizations need to prepare themselves for an era of closer state
and federal examination of physician acquisition deals, antitrust experts
agree. That also may apply to private-equity firms, which have accelerated their investment in physician groups and
have sought to build market power in particular specialties.
The FTC did not respond to requests for an
interview.
Healthcare organizations pursuing physician
deals must be ready to cite circumstances where competition continues to thrive
following a merger. But that may not be easy, conceded Lisa Gingerich, an
antitrust attorney at Michael Best & Friedrich.
“The challenge now is there has been so much
consolidation that it’s harder and harder to find those circumstances,” she
said.
Scaling back integration in Nevada and Colorado
The UnitedHealth Group-DaVita case may present
the clearest warning shot to organizations contemplating large physician
acquisitions, attracting both federal and state attention.
The FTC argued that the proposed acquisition by United’s
OptumCare of DaVita’s HealthCare Partners of Nevada would result in a
near-monopoly controlling more than 80% of the market for services delivered by
managed-care provider organizations to Medicare Advantage plans.
The merger would be both horizontal—combining
OptumCare’s and DaVita’s competing physician groups—and vertical, as it would
combine a Medicare Advantage insurer and a physician group. That, the FTC said,
would increase costs and decrease competition on quality, services and
amenities by forcing rival Medicare Advantage plans to pay more for physician
services.
Under the FTC settlement, UnitedHealth agreed to
sell DaVita’s Nevada medical group to Intermountain Healthcare, which offers a
Medicare Advantage product in Las Vegas through its SelectHealth insurance arm.
“I am concerned about
the state of consolidation. Healthcare costs in Colorado have risen at an
alarming rate. Protecting competition needs to be a central part of our
strategy to provide affordable and quality healthcare.”
Phil Weiser, Colorado attorney general
Colorado’s terms
Meanwhile, under a separate consent judgment
with Attorney General Phil Weiser in Colorado, UnitedHealth will lift its
exclusive contract with Centura Health for at least 31/2 years, expanding the
provider network available to other Medicare Advantage plans. In addition,
DaVita Medical Group’s agreement with Humana, United’s main competitor in
Colorado Springs, will be extended through at least 2020.
All four FTC commissioners approved the
enforcement action in Nevada. But the two Republican-appointed commissioners
and the two Democratic-appointed commissioners disagreed on whether to ask a
judge to block United’s acquisition of DaVita’s medical group in Colorado, a
purely vertical merger. The 2-2 split meant no federal action was taken.
The Democratic commissioners. Rebecca Kelly
Slaughter and Rohit Chopra, said the merger would harm competition and consumers, and welcomed the
Colorado attorney general’s remedial conditions. “We hope all state attorneys
general actively enforce the antitrust laws to protect their residents from
harmful mergers and anticompetitive practices,” they wrote.
But the Republican commissioners, Noah Joshua
Phillips and Christine Wilson, opposed action in Colorado on the grounds that the law
on vertical mergers is “relatively underdeveloped” and that there was mixed evidence
on whether the Colorado merger was pro- or anti-competitive.
Weiser said his office had to intervene to
protect the ability of Humana and other Medicare Advantage insurers to compete
with United by having access to physicians and hospitals. “State attorneys
general will be a critical part of protecting competition, both because we’re
close to our citizens and because of a lack of action by the federal
government,” he said.
To other observers, the Nevada and Colorado
agreements were notable because they invoked seldom-used vertical merger
theory, which the FTC has been reluctant to use because it generally saw
vertical mergers as helping reduce costs and increase competition.
“This shows that in the proper case, the FTC
won’t hesitate to pursue vertical theory to reverse the course of” a physician
group acquisition, said Douglas Ross, a veteran antitrust attorney at Davis
Wright Tremaine in Seattle.
A muddier outcome in Washington state
Washington Attorney General Bob Ferguson’s
settlement of his antitrust case against CHI Franciscan was less definitive
than the outcomes in the other recent cases.
He had accused the hospital system of
engineering the purchase of WestSound Orthopaedics and the affiliation with the
Doctors Clinic to capture a large share of orthopedists and other physicians in
Kitsap County, fix prices at a higher level, and shift more services to its
Harrison Medical Center in Bremerton. But the settlement left in place CHI
Franciscan’s purchase of WestSound and its tight professional services
agreement with the Doctors Clinic, while placing relatively modest conditions
on joint contracting by the hospital system and the clinic.
Ferguson’s bargaining position was weakened by a
federal District Court decision in March granting CHI Franciscan’s motion to
summarily dismiss his allegation that the acquisition of WestSound reduced
competition and violated antitrust law. That may be the first time since the
1990s that a defendant won summary judgment on a horizontal merger claim in an
antitrust case, one expert said.
In addition, the judge required the parties to
go to trial on whether the transaction between CHI Franciscan and the Doctors
Clinic was a true merger, as the two organizations claimed, or whether they
remained two competing provider groups. If Ferguson lost on that issue, his
antitrust case would be dead because a merged entity cannot be cited for
price-fixing.
The attorney general settled that claim with CHI
Franciscan and the clinic by requiring a $2.5 million payment to other
healthcare providers and expanding the types of value-based contracts they
could participate in. But the two sides differed sharply in their
characterization of the settlement.
“This was a matter where we identified
anticompetitive effects and ongoing harm to consumers and saw a need to act
quickly,” said Jonathan Mark, senior assistant attorney general in Washington.
“We believe the remedies in the consent decree are sufficient to address the
anticompetitive effects we alleged.”
For its part, CHI Franciscan said there never
was any court judgment or admission that it engaged in anticompetitive conduct,
noting that the settlement preserved its deals with WestSound and the Doctors
Clinic. It was particularly important for hospitals all over the country that
Ferguson failed to establish that a professional services agreement with a
physician group constituted price-fixing, an attorney for the hospital system
said.
“The AG lost this lawsuit and is now twisting
the facts to match his baseless allegations,” said Cary Evans, the hospital
system’s vice president for government affairs. “Had we not affiliated, the
closing of the Doctors Clinic and WestSound would have resulted in less choice,
decreased access, and high costs for residents.”
A classic example in North Dakota
The outcome in the North Dakota case was more
conventional than the others.
There, the 8th U.S. Circuit Court of Appeals
affirmed the District Court’s preliminary injunction blocking Sanford Health’s
acquisition of Mid Dakota Clinic as a horizontal merger.
That was fairly predictable because of the huge
physician market share Sanford—whose physician group competed with the
clinic—would capture if it completed the deal, experts said.
Sanford would control 99.8% of general surgeon
services, 98.6% of pediatric services, 85.7% of adult primary-care services,
and 84.6% of OB-GYN services in the Bismarck-Mandan market, the 8th Circuit
panel found.
The appeals court also upheld the lower court’s
finding that a competitor, Catholic Health Initiatives’ St. Alexius Health,
would not be able to enter the market quickly after the merger, at least partly
because it faced difficulty recruiting physicians in the Bismarck-Mandan area.
“That case really seemed like a no-brainer to
me,” said Tim Greaney, a visiting professor at the University of California
Hastings College of Law.
A key takeaway was the 8th Circuit’s rejection
of Sanford’s “powerful buyer” defense. Sanford had argued that Blue Cross and
Blue Shield of North Dakota, the state’s dominant insurer, had enough market
power to resist any price increases sought by the newly merged entity.
But analysis of claims data and testimony by a
Blues plan representative demonstrated that the merged provider would have the
market power to force the insurer to raise prices or leave the market, the 8th
Circuit panel wrote.
“If antitrust authorities see someone getting
more bargaining power and being able to charge higher prices, that’s something
they’ll worry about, even if the (payer) has significant bargaining power as
well,” said Debbie Feinstein, a former top Federal Trade Commission official
who heads Arnold & Porter’s global antitrust group.
Sanford didn’t say whether it planned to abandon
the deal.
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