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

The FTC’s complaint alleges that the deal would reduce competition for adult primary care physician services, pediatric services, obstetrics and gynecology services, and general surgery physician services in the greater Bismarck and Mandan metropolitan area or four counties.

According to the complaint, Sanford and Mid Dakota are each other’s closest competitors in a four-county Bismarck-Mandan region of North Dakota, an area with a population of 125,000.  The FTC’s complaint alleges that the transaction would create a group of physicians with at least 75 to 85 percent share in the provision of adult primary care physician services (59 out of 77 physicians in the area), pediatric services (10 out of 12 physicians), and obstetrics and gynecology (15 out of 17 physicians) services.  Moreover, the complaint alleged that the merged firm would be the only physician group offering general surgery physician services in the relevant geographic market with a total of ten physicians.  In total, the two firms would combine approximately 94 physicians in the relevant geographic market.

The FTC also alleges that the possibility of future entry or expansion of services and facilities by other healthcare providers is unlikely.

The FTC’s concern is that the combined physician group would be able to raise reimbursement rates to insurers that would then raise premiums to consumers in the local market.

FTC Precedent

If this case seems really small, well it is.  But, this is not the first time that the FTC has blocked a very small physician group merger.

On January 24, 2014, the FTC successfully blocked St. Luke’s Health System’s acquisition of Saltzer Medical Group, a 44-doctor physician practice group.  The federal court found that the deal would have created a dominate single provider for “adult primary care physician services sold to commercial health plans” in a geographic market “no larger than the five zip codes that encompass Nampa and Caldwell, Idaho.”  It was a horizontal combination between direct competitors for the provision of primary care physician services.  The court found that the combined entity would have “80% of the primary care physicians in Nampa” and that health care costs would likely rise given the merged entity’s ability to negotiate higher reimbursement rates with commercial health care plans that would be passed on to consumers.

Basically, Nampa, at the time, had a population of 80,000 people.  The deal combined St. Luke’s eight primary care physicians and Saltzer’s 16 primary care physicians to give St. Luke’s 80% of the adult primary care physicians in a five zip code area.

St. Luke’s basically accepted the product market definition and was unable to prove to the court that the geographic market was wider than the five zip code area.  Once the court concluded that the market was limited to Nampa, the court found that the merger was presumptively anticompetitive given that the physician group merger combined 80% of the adult primary care physicians in the local area.  The court also found that the claimed efficiencies of the deal were not cognizable or merger specific and that entry was not likely.

So, the Sandford/Mid Dakota deal is larger and more complicated than the St. Luke’s deal.

Lessons Learned

The FTC’s latest enforcement action demonstrates that the FTC continues to focus attention on the health care industry.  Here, the FTC alleges that competitive harm is likely to result from the merger of two physician groups in a four-county Bismarck-Mandan region of North Dakota.  This action means that the FTC is willing to block small physician group acquisitions in very narrow product and geographic markets.  Given the FTC’s demonstrated willingness to aggressively investigate and litigate small health care transactions, physician groups contemplating mergers or acquisitions – even if not HSR Act reportable – should consult antitrust counsel in the early stages of considering a transaction.  Antitrust counsel can help physician groups understand the potential antitrust risks that they may be taking by entering into an agreement.  Antitrust counsel can also review and recommend potential alternative transaction structures and assist in identifying potential merger-specific efficiencies that may minimize the risk of potential litigation.

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