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Antitrust Decision Adverse to St. Luke’s is Part of Nationwide Trend

By Hawley Troxell,

On January 24, 2014, Judge Winmill of the United States District Court held that St. Luke’s Health System’s purchase of the Saltzer Medical Group violated federal and state antitrust laws. This decision is significant because it (i) applies antitrust law to hospital acquisitions of physician practices, and (ii) implicitly holds that the public policy goal of improving patient care must be balanced with the public policy goal of preserving competition.

Hospitals have been consolidating for years. In Judge Winmill’s words, there is a “rough consensus” that medical care needs to move “toward a more integrated system where primary care physicians supervise the work of a team of specialists, all committed to a common goal of improving a patient’s health.” The Affordable Care Act, in fact, incentivizes formation of integrated “accountable care organizations” that use an outcome-based compensation model instead of the traditional fee-for-service model. Judge Winmill noted that some time ago St. Luke’s had the “foresight and vision” to begin purchasing independent physician groups to assemble an integrated medical system.

Integration, however, can raise prices. Medicare, Medicaid, and some private insurers pay more to a hospital than to an independent physician for the same procedure. As the Wall Street Journal reported on August 27, 2012:

As physicians are subsumed into hospital systems, they can get paid for services at the systems’ rates, which are typically more generous than what insurers pay independent doctors. What’s more, some services that physicians previously performed at independent facilities, such as imaging scans, may start to be billed as hospital outpatient procedures, sometimes more than doubling the cost.

Antitrust regulators have also noticed the price increases. In the last 15 months, the Federal Trade Commission and the attorney generals of various states have moved to block multiple acquisitions, see here.

In the St. Luke’s case, Judge Winmill found a substantial risk of less competition and higher prices:

[I]t appears highly likely that health care costs will rise as the combined entity obtains a dominant market position that will enable it to (1) negotiate higher reimbursement rates from health insurance plans that will be passed on to the consumer, and (2) raise rates for ancillary services (like x-rays) to the higher hospital-billing rates.

Judge Winmill based his decision on standard antitrust analysis. First, he held that antitrust laws apply even if the goal is to improve patient care: the law “does not give the Court discretion to set [the antitrust laws] aside to conduct a health care experiment.” Second, he held that standard antitrust analysis applies to hospital acquisitions of physician practices. Basic antitrust law holds that vertical acquisition – one competitor buying a supplier or customer at different levels in the marketplace – can be anticompetitive.

Healthcare organizations may have sound business and policy reasons to form integrated medical systems that reward providers for improving health outcomes rather than providing additional services. Judge Winmill’s decision is a reminder that these integration efforts will run afoul of antitrust laws if they have substantial anticompetitive effects.

For more information about this or other antitrust matters, please contact a member of our Health Care Group or call 208.344.6000.