THE EVOLVING THREAT OF ANTITRUST LITIGATION IN HEALTH CARE

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1 THE EVOLVING THREAT OF ANTITRUST LITIGATION IN HEALTH CARE WHY PROVIDERS MUST TAKE HEED By Keith Lavigne and Scott Williams

2 THE EVOLVING THREAT OF ANTITRUST LITIGATION IN HEALTH CARE In the business of medicine, health care providers must cope with the ever increasing cost of doing business and mounting competition while also facing shrinking reimbursement rates. To counter this trend, providers of all types began searching for a solution to achieve the goals of the Patient Protection and Affordable Care Act (PPACA) - increased affordability, better quality of care and access to a wider range of health services. On the heels of the PPACA, the age of bigger is better was born. Across the country, health care providers have acquired, merged or created various types of affiliations with other health care providers to fill in gaps in services, achieve greater economies of scale and deliver higher quality patient care at a lower cost. In 2014, for the third consecutive year, at least 95 transactions involving hospitals were announced which constitutes a 44 percent increase over the number of transactions announced in 2010, the year the PPACA was enacted. 1 The chief downside to these unique alignments and large number of transactions is the antitrust risk market changes born from regulation will inevitably invite additional regulation and oversight. While price-fixing and conspiracy to allocate markets remain staples of antitrust litigation, we have entered a new age of antitrust liability for health care providers. Investigations, challenges and lawsuits have targeted numerous types of business activities, but the growing edge for antitrust is undeniably related to health care Mergers and Acquisition (M&A) activity. Providers must embrace the reality that M&A activity no matter how big or small carries antitrust risk if it leads to the exercise of market power in the form of higher prices or reduced quality of care or access. Health care market participants should not expect an abatement of the vigorous antitrust enforcement. Therefore, unlike any other time in history, an unprecedented level of due diligence in M&A activities must be performed in order to avoid the severe consequences associated with antitrust liability. A New Antitrust Landscape Emerges In 2004, the Federal Trade Commission (FTC) retrospectively challenged the acquisition of Highland Park Hospital by Evanston Northwest Health Care four years earlier. The litigation in the case continues more than 14 years after its inception. So much time has passed that Evanston Northwest has since changed its name to NorthShore University HealthSystem. In the case, the FTC produced evidence that prices at the merged hospitals had increased post-transaction. The respondents argued that the merger had resulted in improved clinical quality, which justified the price increases. The Administrative Law Judge in the litigation ruled against the respondents claims, finding no evidence in the improvement of quality of care relative to other In 2014, for the third consecutive year, at least 95 transactions involving hospitals were announced which constitutes a 44 percent increase over the number of transactions announced in 2010, the year the PPACA was enacted. 1 Hospital Transactions: Source: Kaufman, Hall & Associates, LLC

3 THE EVOLVING THREAT OF ANTITRUST LITIGATION IN HEALTH CARE health care providers. In the ruling, the judge took into account a variety of inpatient outcomes, such as risk-adjusted data on inpatient mortality rates across different medical conditions and surgical procedures. The case is particularly instructive for future antitrust litigation arguing similar price-versus-quality issues. In commenting on the case, FTC Commissioner Julie Brill stated, If a merger among (health care) providers that are close substitutes increases the merged provider s leverage with health plans because of inadequate alternatives, the provider gains the ability to obtain supra-competitive pricing. 2 Even though the value of many transactions involving physician practice groups is likely to be short of the new threshold, thorough due diligence must be performed. The risk of actions by competitors seeking to enjoin these types of transactions remains significant because of the perceived increase in market power. Unless the merger produces actual cost savings, it is likely to come under the FTC s close scrutiny and spring a possible investigation. An analysis of the 2004 ruling co-authored by the FTC s Bureau of Economics confirms this view. 3 Hospital mergers are unlikely to improve quality absent a reduction in the cost of producing (this) quality, the Bureau s authors stated. In other words, hospitals contemplating a merger or acquisition should focus on the ways the alignment will reduce costs, whether by means of a superior hospital exporting its knowledge and practices to an inferior one, through economies of scale, or as a result of differences in financial resources, the authors wrote. 4 If higher prices cannot be justified by demonstrable improvements in quality care, the parties involved may be retrospectively subjected to unwinding a multi-yearold transaction. After a string of government defeats to similar cases in the 1990 s, this case has since become the foundation of subsequent government investigations and antitrust litigation involving the health care industry. As Commissioner Brill boasted in June 2014, Using the improved enforcement framework beginning with our Evanston case, we now have an impressive string of victories under our belt. 5 Developing Legal Threats As providers continue to pursue M&A deals, they must give more consideration to evolving federal antitrust and private litigation actions. For example, the revised reporting threshold under the Hart-Scott-Rodino (HSR) Antitrust Act opens up industry M&A transactions to greater regulatory scrutiny. The HSR Act requires that the parties engaging in a proposed M&A transaction file notifications with the FTC and Department of Justice (DOJ) when the transaction exceeds a specified threshold. The 2015 revised threshold under HSR automatically triggers notification when the transaction value exceeds $76.3 million, up from $75.9 million in When notification is required, the transaction cannot close until the regulators approve the deal. Take, for instance, Idaho-based St. Luke s Health System s acquisition of Saltzer Medical Group, a large independent, multi-specialty physician practice group also located in Idaho. The case is the first fully litigated challenge by the FTC to a hospital s acquisition of a physician practice. The complaint alleged that the acquisition had combined the two largest providers of adult primary care physician services in the Nampa, Idaho area, with the intent of increasing St. Luke s ability and incentive to demand higher reimbursement rates from commercial health plans, thereby leading to higher health care costs for Idaho employers and area consumers. The St. Luke s Saltzer Medical merger was not subject to the HSR notification requirements, as the value of the deal fell below the threshold. The transaction closed in late 2012, after the court denied a preliminary injunction motion filed by St. Luke s competitors, St. Alphonsus Health System and Treasure Valley Hospital, to stop the acquisition. The FTC subsequently joined the fight in 2013, and filed an action in federal district court to block the deal. In early 2014, the trial court and the United States Court of Appeals for the Ninth Circuit ruled that the transaction violated both the state s anti-competition rules and Section 7 of the federal Clayton Act. Although the judge in the case, Chief Judge Lynn Winmill of the U.S. District Court for the District of Idaho, initially applauded St. Luke s for its foresight and vision in trying to improve health care delivery through the acquisition, he ultimately found no convincing proof of extraordinary efficiencies ample enough to overcome the higher prices. 7

4 THE EVOLVING THREAT OF ANTITRUST LITIGATION IN HEALTH CARE The risk of actions by competitors seeking to enjoin these types of transactions remains significant because of the perceived increase in market power. Judge Winmill further attested that there are other ways to achieve the same [health care quality improvements] that do not run afoul of the antitrust laws and do not run such a risk of increased costs. 8 The ruling is the first time a federal court has found a hospital s purchase of a physician practice to be unlawful. Following the court s decision, FTC Chairwoman Edith Ramirez issued a statement applauding the decision as an important victory for both competition and consumers. 9 The hospital will have to fully divest itself of Saltzer Medical s assets and physicians. Obviously, the financial costs of pursuing the transaction, closing the deal, attending to preliminary post-merger integration needs, and then unwinding the merged entity were not insignificant for either party. Heightened Enforcement As these cases signify, the FTC and DOJ are devoting substantial resources to litigating M&A transactions in the health care sector. Since President Obama took office, the percentage of formal requests by the agencies for socalled second requests a signal that the agencies will undertake an investigation of a transaction has increased by approximately 40 percent. 10 In the aftermath of the stepped-up investigations by the DOJ and FTC, numerous law firms have issued timely notices to clients to prepare for possible antitrust litigation, noting that if the transaction appears to alter the health care industry s competitive landscape, it will surely arouse suspicion. Since virtually every transaction has the potential of shifting the competitive balance, all M&A activity is likely to be scrutinized. The St. Luke s-saltzer Medical case underlines the perceived conflict that exists between the FTC s antitrust regulations and a hospital s need to provide more efficient health care under the PPACA. Although the Administrative Judge in the case agreed with the transacting hospitals that the primary purpose of the acquisition was to improve patient outcomes via a more integrated medical system, the post-transaction efficiencies were found not to be merger-specific, i.e., other ways existed to achieve the same objectives. 11 The objective of greater accessibility to health care services under the PPACA and the enforcement obligations of the FTC appear to be in conflict. The industry is thus confronted with a confounding paradox: while the PPACA is compelling sector consolidation to increase provider scope and scale, government antitrust investigations are aimed at limiting this activity. The FTC is dismissive of this assertion. The agency s position is that higher quality of care and antitrust investigations have the common goal of promoting highquality and cost-effective health care. 12 Some providers [are] complaining that the federal government is `speaking out of both sides of its mouth, with the Medicare program encouraging providers to come together and create organizations that will enable greater collaboration, while the antitrust agencies challenge them, Commissioner Brill stated. 13 But, as she further commented, numerous studies have found that the existence of excess provider market power results in higher prices, lower quality, and less innovation. More Threats Ahead The potential unwinding of the St. Luke s-saltzer merger is sure to test the boundaries of legal coordination of health care integration under the federal antitrust laws. If the past is any indication of the future, the health care industry can expect an increase in similar government investigation and enforcement actions. Certainly, the FTC has made it abundantly clear that it has no intention of weakening its resolve to pursue and punish anticompetitive behavior. Sometimes we are told that antitrust has no role in rapidly evolving industries (like the health care sector), but we disagree, stated Deborah Feinstein, director of the FTC s Bureau of Competition, in a June 2014 speech. Effective antitrust enforcement is as important in a time of dynamic change as in periods of stability, if not more so. 14

5 THE EVOLVING THREAT OF ANTITRUST LITIGATION IN HEALTH CARE The health care sector can expect no empathy from the FTC for the profound impact of the PPACA on the industry. As Ms. Feinstein explained, the FTC is a law enforcement agency, and not a regulatory body. We take what is before us and decide whether it violates the antitrust laws, she said, adding that a competitive health care marketplace (is) crucial to the success of on-going health care reform efforts. Due Diligence Dimensions The bottom line is that the FTC will continue to aggressively target M&A transactions in the health care sector if it appears this activity has harmful effects on pricing and competition, whether the transaction has been finalized or not. In this environment, hospitals must contemplate several key threshold questions, among them: Will the proposed transaction offer the potential for pro-consumer cost savings or extraordinary quality improvements in the provision of health care services? Does the transaction constitute a bona fide integration, or is it simply a mechanism to enhance leverage with payers via joint negotiations? In developing the answers to the questions and navigating the minefield of exposures, it is imperative that health care providers work closely with legal counsel, particularly those specializing in antitrust litigation. Since all M&A activities will inevitably alter the competitive landscape in a geographic region, a comprehensive antitrust risk analysis must be part of the due diligence process. Facing The Challenges Today In light of these recent developments, health care providers must exercise greater due diligence in their pursuit of greater economies of scale. Whether through mergers, acquisitions or other forms of affiliations, heightened vigilance in managing their transactional exposures is a necessity, not an option, and failure to do so could expose these health care providers to significant risk. Stay tuned for the fourth segment of our Rising Tide of Risk for the Health Care Industry series, where we will provide an in-depth look at peer review and credentialing-related litigation, and how it can impact various issues ranging from operations to acquisitions. If the transaction is deemed to be a bona fide integration, are pricing agreements among the participants necessary to achieve the benefits of the collaboration? What impact will the proposed transaction have on the hospital s market share and the specialty services provided in its market? Are there any exclusive agreements in place with physicians in the organization and the target organization? Is there any anticipated increase in fee for service pricing structures? Should there be reason to anticipate adverse public reactions to the transaction?

6 About the Authors: Keith Lavigne is Executive Vice President, ACE USA Professional Risk, based in New York. He oversees the retail and wholesale management liability business for North America, focusing on private and not-forprofit companies. Mr. Lavigne can be contacted at Scott Williams is Vice President, ACE USA Professional Risk, based in New York. He is responsible for overseeing the underwriting operations for all private/ not-for-profit management liability accounts generated out of the New York, Boston and Atlanta regions. He previously served as Division Counsel for ACE s retail and wholesale management liability business in both the US and Canada, focusing on private and not-for-profit companies. Mr. Williams can be contacted at Scott.Williams@acegroup.com. Endnotes 1 PRWeb. Number of Hospital Transactions Remains High in 2014 According to Kaufman Hall Analysis. PRWeb.com (2015). 2 Brill, Julie. (2014). Competition in Health Care Markets. Washington, D.C.: Hal White Antitrust Conference. 3 Ibid 4 Ibid 5 Ibid 6 Federal Trade Commission. (2015). FTC Announces New Thresholds for Clayton Act Antitrust Reviews for 2015 [Press release]. Retrieved from ftc-announces-new-thresholds-clayton-act-antitrust-reviews Federal Trade Commission v. St. Luke s Health System, Ltd. Complaint for Permanent Injunction, Case No. 1:13-CV BLW (D. Idaho Mar. 26, 2013) 8 Ibid 9 Federal Trade Commission. (2014). Statement of FTC Chairwoman Edith Ramirez on the U.S. District Court in the District of Idaho Ruling in the Matter of the Federal Trade Commission and the State of Idaho v. St. Luke s Health System Ltd. and Saltzer Medical Group, P.A. [Press release]. Retrieved from news-events/press-releases/2014/01/statement-ftc-chairwoman-edith-ramirez-us-district-court-district 10 Gibson Dunn Antitrust Merger Enforcement Update and Outlook. GibsonDunn.com (2014). aspx#_toc Saint Alphonsus Medical Center v. St. Luke s Health System, LTD.; Federal Trade Commission v. St. Luke s Health System, Ltd. Memorandum Decision and Order, Case No. 1:12-cv BLW (D. Idaho Jan. 1, 2014) Ibid 13 Ibid 14 Feinstein, Deborah L. (2014). Antitrust Enforcement in Health Care: Proscription, not Prescription. Washington, D.C.: Fifth National Accountable Care Organization Summit. documents/public_statements/409481/140619_aco_speech.pdf The information contained in this document is intended for general marketing purposes and information only. For terms and conditions of coverage, please refer to the specific policy wording. ACE Group /2015