Background

In June of 2017, the FTC and the North Dakota Attorney General sued to block the merger of the two largest physician groups in Bismarck and Mandan, North Dakota.  The FTC alleged that the two groups had based on physician headcount at 75 percent of the physicians for adult primary care physician services, pediatric services, and obstetrics and gynecology services, and 100 percent of the general surgery physician services in the Bismarck-Mandan area.  The merger would eliminate competition between them and substantially lessen competition in the four markets.

Sanford Health operates more than 40 hospitals and 250 clinics, and employs more than 1,300 physicians in nine states. In the Bismarck area, it operates a 217-bed hospital and employs 160 physicians and 100 other health care providers. Mid Dakota is a multispecialty physician group that operates six clinics in Bismarck and employs 61 physicians and 19 advanced practice practitioners. Catholic Health Initiative (“CHI”), with whom Mid Dakota had a close referral relationship, operates the only other acute care hospital in the Bismarck-Mandan area.

FTC’s Case

The Court agreed with the FTC regarding the four product markets and the geographic: adult primary care physician services, pediatric services, obstetrics and gynecology services, and general surgery physician services in Bismarck-Mandan area of North Dakota. The FTC successfully put on evidence showing that patients viewed Sanford and Mid Dakota’s physician groups as substitutable with each other.

In general, competition in the health care provider market can be divided into two “stages.” In the first stage, providers compete with one another for access to insurance plans offered regionally by commercial health insurers.  In the second stage, providers compete to attract patients to their facilities. Competition in the first stage is mostly related to price or reimbursement rates that providers receive from insurers for health care services provided to patients.  Competition in the second stage is mostly related to service such as quality provided, availability of procedures, hours of operation, convenience of facilities, and innovative technology.

The FTC focused on whether the combined physician groups would have increased bargaining leverage over commercial health insurers.  In this case, the merging parties and the FTC’s economic experts both agreed that the merger would provide the combined firm with increased bargaining leverage.  The FTC was able to establish that commercial health insurers needed to have all four services in its health insurance plan and that the commercial health insurers would pay higher fees rather than market a plan without one of those services.

The Court agreed with the FTC’s evidence that showed that the merged entity would provide 85.7% of adult PCP services, 98.6% of the pediatrician services, 84.6% of the OB/GYN services, and 100% of the general surgeon services in the Bismarck-Mandan area.  With such high shares, the Court agreed that the transaction was presumptively unlawful in each of the four physician service lines.

The Court found anticompetitive effects flowing from the merger in both stages of health care competition.  The acquisition would eliminate competition between the two physician groups vying to be included in a health insurer’s network.  Obviously, the combination would eliminate the competition among physicians to obtain patients in the second stage of competition.

Buyer Power Defense

Once the FTC met its prima facie case, the defendants principal defense was that the presence of a powerful buyer, Blue Cross Blue Shield of North Dakota (“Blue Cross”) would offset any power obtained by the physician groups through the combination and would preclude any anticompetitive effects that might otherwise result.  The argument was that the realities of the market place was that Blue Cross had all of the bargaining power and the merged firm would not be able to negotiate higher reimbursement rates against Blue Cross.  The FTC countered that the powerful buyer defense is limited to situations where either a buyer is able to use its leverage to sponsor entry or vertically integrate, or where there are alternative suppliers post merger where the buyer is able to obtain lower prices.  The district court found that those situations were not present.  Instead, it noted that the evidence showed that Blue Cross could not market health plan in the Bismarck-Mandan area without the merged firm.  Accordingly, if Sanford Health were to request a rate increase post merger, Blue Cross “would have to choose between agreeing to the increase or no longer offering health plans in the Bismarck-Mandan area.”

Lessons Learned

The FTC continues to win preliminary injunctions in provider markets.  The FTC is likely to continue to challenge small local provider (hospitals and physician groups) transactions that eliminate competition and substantially lessen competition in narrow product and geographic markets.  While health insurers may wield a great deal of bargaining power, the buyer power defense is unlikely to convince the FTC or a district court judge that a deal that concentrates 75-100 of the physicians in a local area to one provider.  The buyer power defense is available when large sophisticated buyers or health insurers can exert countervailing power against the merged firm because they have the ability and wherewithal to shift a large proportion of their business to other health care providers or the health insurer has the ability to credibly threaten that it can vertically integrate or sponsor new entry.  Here, the evidence showed that the health insurer could not market a plan without the merged firm’s physicians.  Hence, the power buyer defense is unlikely to work in physician group mergers that concentrate most if not all the doctors in one firm going forward.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

DOJ Complaint

High-speed precision planting is an innovative technology that enables farmers to plant corn, soybeans and other row crops at up to twice the speed of a conventional planter.

The Antitrust Division’s lawsuit alleges that the transaction would combine the only two meaningful U.S. providers of high-speed precision planting systems.  The DOJ alleges that the deal is a merger to monopoly and even being conservative, the DOJ alleges that the combined firm would have at least 86% of the market if two other competitors that provide inferior products were included in the market.

Precision Planting manufactures precision planting equipment that is retrofitted to update existing conventional planters manufactured by Deere, Kinze Manufacturing, Inc. (“Kinze”), CNH Industrial N.V. (“Case”), and AGCO Corporation (“AGCO”).  Precision Planting has non-exclusive licensing agreements with Case and AGCO that allow them to integrate Precision Planting’s high-speed precision planting products and technology into their new planters, which directly compete against Deere planters with factory installed high-speed precision planting systems.

According to the DOJ’s complaint, Deere and Precision Planting engaged in R&D activities and then both introduced high-speed planting systems in 2014.  The complaint alleges that the two firms compete head to head through aggressive discounts and promotions as well as innovative product offerings.  Precision Planting offered a promotion and Deere responded with its own.  Precision Planting offered farmers high speed precision retrofit kits and in August 2015, Deere responded with its own offering.  Precision Planting entered into arrangements with Deere’s conventional planter competitors so Deere had to have a multifaceted approach to respond to competition in the new planter and aftermarket markets.

The DOJ does not appear to have made up these allegations as the DOJ includes a number of quotes from Deere executives where they emphasized that Precision Planting is its “main competitor” or “number one competitor” and that Precision Planting’s “pricing strategy is a concern”.  When Precision Planting entered into a partnership with Case, a Deere executive said that the partnership was “an obvious challenge to John Deere on every level” … as Precision Planting now views their agreement with Case as an opportunity to move in the new planter category.”  Deere executives said they need to “hit them from both a new and aftermarket approach in order to be fully successful.”

The DOJ further alleges that Precision Planting is a key innovator in high-speed precision planting.  Indeed, in the companies’ own words, they view high-speed precision planting as “revolutionary technology” that will “revolutionize the corn and soybean industry” and Precision Planting’s product is a “True Gamechanger for Agriculture” and expects it to become the industry standard in the coming years.

In summary, the DOJ’s complaint alleges that the merger would deny farmers the benefits of competition by eliminating present and future head-to-head competition between the two firms in the market for high speed precision planting systems; allowing the combined firm to control the pricing and quality of precision planting systems going forward; and eliminating the innovation rivalry by the two leading innovators in the high-speed precision planting systems market.

Deere Plans to Fight DOJ

For what is worth, Deere said it plans to fight back against the DOJ.  It says the DOJ’s allegations about the competitive impacts of the transaction are misguided.  Deere claims that competition in precision agriculture is strong and growing in all of these channels as companies around the world continue developing new technologies. Maybe, Deere has some support for this argument.  But, the rest of Deere’s statement appears to bolster the DOJ’s case to block as it states that if the merger is completed, farmers will still have a choice to either buy new machinery or retrofit older planting equipment and that Precision Planting will still have independence to ensure innovation and speed-to-market.  It seems like the only way to ensure independence and customer choice is to block the deal.

Lessons Learned:

The DOJ is demonstrating once again that it is indeed the tough merger cop that is needed to protect the American economy.  There is increasing evidence that mergers have cost consumers dearly in the pocket book, increased economic inequality and dampened economic opportunity.  Farmers understand this all too well.

DOJ’s challenge of Deere’s acquisition of Precision demonstrates its resolve to challenge mergers that it finds to be anticompetitive.  From the DOJ’s decision to challenge this deal, we believe that there are several lessons to be learned.

First, the DOJ continues to focus on narrow product markets where the combined firm has the ability to raise prices, reduce quality, and elimination innovation that benefits to a discrete group of customers, here, American farmers.  The DOJ has taken a lot of heat over the years for not watching out for farmers, but this case sends a strong message that it will.  Under the law, there is an emphasis on Brown Shoe.  If there is a structural presumption, the DOJ is willing to go to court.  The DOJ will ride presumption to block a deal so there is no hesitation of filing a case.  The law is the law and the DOJ is going to use the law to block a deal that raises competitive concern.

Second, the DOJ continues to send a message that it will challenge deals that reduce innovation.  Here, the DOJ has laid out a case suggesting that the merging parties are two of few firms pushing the boundaries to develop new innovations in precision planting technologies.  Blocking this deal will allow the two firms to continue to innovate against each other.

Third, the DOJ relies on the parties own statements, testimony, and documents to define the relevant product market and competitive landscape.  While Deere says that the DOJ’s allegations regarding competitive effects are misguided, much of the discussion in the complaint relies on the parties’ own statements.  The quotes are not the worst that we have seen but they do help tell the DOJ’s story about what Deere thought of Precision Planting’s innovations, promotions, and business strategy.  The quotes support the DOJ’s case and will certainly conflict with Deere’s defense.  Many merger investigations turn on documents because they indicate how the parties to the deal think about competition.  Internal company documents are not the end of the story, but they are certainly part of the analysis with respect to market definition and competitive harm.  If the merging companies document that they directly compete against each other in a narrow market, they probably do so company executives must be mindful of what they write and say prior to a merger.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com