Dangerous Moves

A court invalidates a health system's acquisition of a physician group.

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An Idaho federal court ordered in January that a major health system unwind its acquisition of a prominent medical practice. The court ruled that the transaction violated federal and state antitrust laws.

While the health system likely will appeal, the case illustrates that aggressive hospital systems might acquire large medical groups at their peril. ACR members in Idaho, and perhaps other states, who may — voluntarily or otherwise — become hospital employees should assess whether the law will allow such a move. We’ll outline the court’s ruling and forecast why it matters for ACR members and their practices.


What happened?

St. Luke’s Health System owns and operates seven Idaho hospitals and employs over 500 physicians in Idaho and eastern Oregon. It acquired Saltzer Medical Group in 2012.1 Saltzer represented the largest, independent multispecialty medical practice in Idaho and included several radiologists. In 2008, the organizations established an informal partnership.

St. Luke’s also entered into a five-year professional services agreement with the group. Notably, the agreement contained an “exclusivity” provision that prohibited the Saltzer physicians from becoming employees of, or financially affiliating with, other health systems or hospitals. Before the acquisition, Saltzer physicians received a guaranteed salary with RVU-based compensation — plus compensation tied to risk or other quality-based incentives. Group leaders wanted a closer relationship with St. Luke’s to enable shifting to value-based compensation. They rejected a joint venture or looser affiliations, such as coordinating medical services in the community. St. Alphonsus Health System, a competing Idaho health system that employs over 200 physicians, sued St. Luke’s in federal and state courts. The FTC and Idaho attorney general filed a separate lawsuit against St. Luke’s and Saltzer. All plaintiffs alleged that St. Luke’s/Saltzer would create illegal anti-competitive effects in the relevant product and geographic markets. Specifically, they claimed that St. Luke’s would unlawfully gain higher reimbursements from health plans, which would pass increases to their customers via higher premiums and out-of-pocket costs.

The court praised St. Luke’s intentions to enhance quality care. But it condemned the health system’s methods as causing the costs of such care to rise. Patients likely would have to pay higher billing rates at St. Luke’s. Thus, the court ruled that the acquisition violated antitrust legislation, specifically the Clayton Act, because its effect might be “substantially to lessen competition.” St. Luke’s will have to divest itself of Saltzer’s physicians and assets.

Why should ACR members care?

You should care because your health system or hospital might try to buy your practice. This case, however, may give it some pause. The decision also matters because a federal court has decreed that better, less expensive care does not mean having to acquire and employ physicians. The court determined that independent physician groups also offer innovative, cost-effective, and value-based care.

Over the hospital’s objections, the court released documents revealing that the hospital had commissioned studies about the secondary effects of a merger. The judge said that it “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.” Therefore, even though radiologists were not directly involved, imaging income played a role in both the hospital’s actions and the court’s decision.

Who benefits – and who loses?

As with any pending court case, it’s too soon to say for certain who will benefit and who will lose from this decision. A federal appellate court may overturn the judge’s ruling. For now, however, one beneficiary is an independent practice model. The decision may provide a road map for independent practices that stand by their delivery and offer financing alternatives to health system or hospital employment. It may at least slow market trends toward greater hospital consolidation. Health systems had received a push in that direction from 2011 Federal Trade Commission and U.S. Department of Ju-tice antitrust guidelines that set up “safety zones” for accountable care organizations. Neither of these government entities will pursue antitrust cases against mergers and acquisitions that capture up to 30 percent of the relevant service market if physicians may practice outside of the ACO.

The ACR Legal Office learned that, ironically, the radiologists who belong to the Saltzer Medical Group willingly entered the acquisition. So will the employment model lose ground? Not necessarily. However, ACR members who are considering — or negotiating — closer integration need to consult with qualified local counsel.

By Bill Shields, JD, LLM, CAE, and Tom Hoffman, JD, CAE


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