Editor’s note: This post is part of a Health Affairs Blog symposium stemming from “The New Health Care Industry: Integration, Consolidation, Competition in the Wake of the Affordable Care Act,” a conference held recently at Yale Law School’s Solomon Center for Health Law and Policy. Links to all posts in the symposium will be added to Abbe Gluck’s introductory post as they appear, and you can access a full list of symposium pieces here or by clicking on the “Yale Health Care Industry Symposium” tag at the bottom of any symposium post.

With many health law academics discussing the perverse incentives that providers have to consolidate, such as increasing bargaining leverage and raising prices, it is important to note that there is another side to the story. The St. Luke’s case provides a great example.

In St. Luke’s, the Federal Trade Commission (“FTC”), the Idaho Attorney General, and two competing hospitals challenged the acquisition by St. Luke’s Health System (“St. Luke’s”) of the Saltzer Medical Group (“Saltzer”) under the federal antitrust laws. The FTC and Attorney General alleged that the transaction would reduce competition in the market for primary care physician services in Nampa, Idaho, because St. Luke’s already employed a number of primary care physicians; the hospitals alleged that competition would also be reduced in several other markets, including the market for general acute care (hospital) services. In essence, the government pursued a horizontal case, alleging harm to competition stemming from a merger of competitors, while the hospitals added an allegation of vertical foreclosure, asserting that hospital competitors of St. Luke’s would be harmed by losing referrals from Saltzer.

The court found in favor of the plaintiffs and ruled that the acquisition was anticompetitive, but it based its decision on the FTC’s theory and did not reach the vertical foreclosure question.

As mentioned, the FTC litigated the case on the theory that it was a horizontal combination of two sets of physician groups that, post-merger, would be able to raise prices in a traditional antitrust sense. That the FTC chose to pursue only this avenue for its case is quite telling, and that the court chose not to reach the question of whether there was a violation based on a vertical theory is important as well. Antitrust enforcers are currently struggling to determine how and when to bring a vertical foreclosure case, and how to identify when harm to competition is truly occurring. Certainly there are situations where vertical integration can be harmful, but because St. Luke’s was not analyzed by the court on a vertical theory it cannot be relied upon as precedent for that conclusion.

Understanding The Impact Of Vertical Integration

Instead, St. Luke’s should be examined through a practical lens so that government agencies and courts may understand the actual impact of vertical integration on health care providers and what drives hospital acquisitions of physician practices. For example, it is important to ask what alternative sources of referrals exist for the other hospital competitors in the market. In the St. Luke’s case, the private plaintiffs must have believed they did not have any alternative source of referrals, because they took the drastic step of bringing a lawsuit, certainly a major undertaking.

In other markets, however, there may be alternative ways to compete. For instance, competing hospitals could be more proactive in acquiring physicians themselves. An examination of alternatives is necessary to determine whether the market can be more dynamic, and therefore whether a vertical acquisition truly is anticompetitive.

Similarly, the options available for health plans must be more closely considered. In many cases, health plans allege that hospital acquisitions of physician practices ultimately lead to higher prices because of the increased bargaining leverage of the hospitals. Yet, it is often unclear that these acquisitions necessarily lead to new bargaining power that was not previously at the hospital’s or the physician group’s disposal.

Moreover, what mechanisms can health plans put in place to steer patients to lower priced providers? How should this impact antitrust analysis? Health plans are equipped to introduce tiered networks and high-deductible plans to encourage their customers to utilize lower-priced providers while still maintaining patients’ autonomy to make their own choices.

The viability of these alternatives should be explored in every case. Cases are often brought because the government or private parties believe there are no true alternatives to the merging parties, but in the continuingly evolving world of health care more and more options to encourage patients to use lower-cost providers are becoming available. Ultimately, consideration of these new options may lead to different conclusions in antitrust cases.

Distinguishing Policy And Legal Issues

The difference between policy issues and true antitrust law violations should also be carefully considered going forward. Many believe that an impetus for acquiring physician practices is a hospital’s ability to charge higher rates under contracts that provide for higher hospital-based reimbursement for physician services at sites owned by hospitals. These payment differentials exist because hospitals have higher costs and provide more services than small physician practices. Nevertheless, there is a legitimate question as to whether rates should increase if an acquisition occurs but the services provided by all parties otherwise remain the same.

Yet, this is a policy debate, not an antitrust debate. In a very competitive market with many options a hospital could still acquire physicians and charge higher rates if its contracts provide for hospital-based reimbursement. It is therefore important to distinguish between situations in which higher rates are due to a lessening of competition and those that are simply a function of a contractual arrangement with a health plan. Policy issues should not be addressed through antitrust enforcement.

The one area where everyone seems to agree is that there is a growing momentum of physicians leaving private practice and hospitals acquiring physicians. Those engaged in the business side of health care believe that there are legitimate justifications for having everyone under one roof. Hospitals often have difficulties persuading physicians to cooperate with their care management approaches when they do not have the same financial and institutional interests. Therefore, managing the care of patients can in fact improve when everyone’s interests are aligned.

Consequently, it is important for antitrust enforcers to give more credence to the benefits that come from more integrated systems. The antitrust laws are flexible enough for enforcers to take this into account, and to make appropriate determinations as to the real implications of an acquisition. That the FTC has never brought a vertical integration claim challenging a hospital’s acquisition of physicians illustrates this flexibility. It is vital that the health care industry be provided a legitimate opportunity to create more efficiency in the health care system.

Returning to the St. Luke’s case, the District Court seemed to struggle with this tension as well:

St. Luke’s saw this major shift coming some time ago. And they are to be complimented on their foresight and vision. They started purchasing independent physician groups to assemble a team committed to practicing integrated medicine in a system where compensation depended on patient outcomes.

The court gave credence here to St. Luke’s motivation for acquiring physicians, and went so far as to state that it would improve the health care system: “The Acquisition was intended by St. Luke’s and Saltzer primarily to improve patient outcomes. The Court believes that it would have that effect if left intact, and St. Luke’s is to be applauded for its efforts to improve the delivery of health care in the Treasure Valley.”

Despite this high praise, the court felt that antitrust laws demanded that it intercede. “But there are other ways to achieve the same effect that do not run afoul of the antitrust laws and do not run such a risk of increased costs. For all of these reasons, the Acquisition must be unwound.”

Author’s note: The views expressed in this article are my own and do not reflect the views of Jones Day or any of its clients.