Antitrust trends and considerations for physician mergers

Kevin Hahm: ©Hunton Andrews Kurth LLP

Antitrust scrutiny of physician combinations will likely remain a key area of focus for enforcement as consolidation of physician practices continues through acquisitions by health systems, payers, and private equity (PE) firms. The Federal Trade Commission devotes a substantial share of its resources to health care antitrust enforcement, with 21% of enforcement actions in the general health care sector (not including pharmaceuticals and medical devices) in recent years. In 2021, the FTC launched a multi-year study of the effects of physician group and health care facility consolidation that occurred from 2015 through 2020, ordering six health insurance companies to provide claims data for 15 states to allow the FTC to evaluate the horizontal and vertical effects of physician mergers. The FTC expects the outcome to improve its ability to forecast the impact of physician and health care facility mergers on competition.

In September 2023, the FTC commenced litigation against U.S. Anesthesia Partners Inc. (USAP) and its PE sponsor Welsh, Carson, Anderson & Stowe alleging that the two engaged in a decade-long anticompetitive scheme to consolidate anesthesiology practices in Texas. This action continues the trend of the FTC’s commitment to using every available tool to combat consolidation in health care. In February 2024, USAP settled with the Colorado Attorney General, which brought an antitrust enforcement action based on conduct including serial acquisitions of physician practices, entering into exclusive contracts with hospitals, and imposing non-compete/non-solicitation agreements on employed physicians. In March 2024, the FTC hosted workshop examining the role of PE in health care markets, as well as launched an inter-agency inquiry with the Antitrust Division of the Department of Justice and Department of Health and Human Services into PE and other corporations’ control over health care.

Physician practices looking to engage in merger & acquisition activity should be cognizant of the antitrust risks associated with various enforcers’ (including the FTC, DOJ, state AGs, and private plaintiffs) pursuit of novel and non-traditional theories of competitive harm.

FTC enforcement actions

Since 2011, the FTC pursued enforcement actions (or threatened action) against a handful of physician combinations. Prior to the United/DaVita matter in 2019, these matters were based a traditional theory of harm—the loss of horizontal competition between competing physician groups. Horizontal competition in these matters involved individual physician specialties in the same localized geographic area. These matters include:

Providence Health & Services/Spokane Cardiology (2011) – proposed combination of cardiology groups in the Spokane, WA, area was abandoned after the FTC and state attorney general expressed competition concerns.

Renown Health (2012) – after Renown Health acquired two major cardiology groups in the Reno area, it settled with the FTC to allow the acquired cardiologists to seek other employment to restore competition.

St. Luke’s Health System/Saltzer Medical Group (2013) – after the FTC and Idaho attorney general challenged the combination of two PCP practices in the Nampa, ID, area, and prevailed in both district court and the Ninth Circuit, the court ordered divestiture of one of the practices.

Keystone Orthopaedic Specialists (2015) – after the merger of six independent orthopedic practices in the Berks County, PA, area, Keystone and Orthopaedic Associates of Reading settled with the FTC by agreeing to keep the two practices separate.

CentraCare Health (2017) – CentraCare settled with the FTC to allow for a number of physicians to leave the health system in order to resolve the FTC’s allegations that the proposed merger would eliminate competition for adult PCP, pediatric, and OB/GYN services.

Sanford Health (2017) – the FTC and North Dakota attorney general challenged the proposed acquisition of a large multi-specialty clinic and alleged the merger would eliminate competition for adult PCP, pediatric, OB/GYN and general surgery services.After the FTC/ND AG prevailed in both district court and the Eighth Circuit, the parties abandoned.

Potential harm from vertical mergers

These matters involved various combinations of physician groups with other health care providers. In addition to owning or employing their own physicians, the providers in St. Luke’s and CentraCare were also health systems that owned hospitals and other outpatient facilities.Moreover, the providers in Providence Health, Renown Health, and Sanford Health were health systems that owned both hospitals and an insurance plan. Although not asserted in the FTC’s complaints at the time, these other lines of business could have been the basis for the FTC to also allege a vertical theory of harm in these cases.

Vertical mergers involve a combination of products or services at different levels of a supply chain. A typical vertical theory of competitive harm regarding physician services would involve an allegation of foreclosure (or raising rivals’ costs). For instance, a hospital system that acquired physician practices (Hospital A) could foreclose a rival hospital (Hospital B) from referrals by its newly-acquired physicians. Similarly, Hospital A could increase the price of its physician services to Hospital B in order to disadvantage its rival. Foreclosure can also occur in payer/provider context. A health system (or payer) that had its own insurance plan and acquired physician practices (Insurer A) could foreclose a rival insurer (Insurer B) by withholding the services of its newly acquired physicians. Insurer A could also increase the price of its physician services to Insurer B in order to disadvantage its rival.

In the St. Luke’s case, the merger was also challenged by private plaintiffs that were competitor hospitals in the area. Those competitor hospitals alleged a vertical theory of harm based on foreclosure – i.e., that St. Luke’s control over PCP services could foreclose referrals to rival hospitals. This theory of harm was not addressed by the district court, however, as the court found the merger illegal and ordered divestiture based on the horizontal theory of harm alone.

Challenges to physician combinations based on nontraditional theories of harm and by other plaintiffs

In 2019, the FTC sought an enforcement action involving an acquisition of physician practices by an integrated entity with both an insurance arm and its own physician practices. There are two major takeaways from this matter. First, the FTC alleged both horizontal and vertical theories of harm, with the vertical theory of harm based on the concern that the acquirer could raise the costs of its physician services to rival Medicare Advantage (MA) insurers or even withhold those services completely. Second, the physician services at issue in this matter were a bundle of various physician services that the FTC alleged to be a distinct relevant antitrust market as “managed care provider organization services.” The FTC’s alleged bundle market of physician services departs from definition of the relevant service market in previous merger challenges which involved specific physician specialties (e.g., PCPs, cardiologists).See this article for a full discussion of market definition issues for bundled products and services in antitrust merger cases.

As previewed above, the FTC’s 2023 case against USAP differs from prior enforcement actions in a number of ways. It marks the first lawsuit against a PE firm alleging a series of roll-up acquisitions, including acquisitions of small groups with small market shares (sometimes even less than 1%). This approach of analyzing a series of acquisitions can now be found in Guideline 8 of the Revised Merger Guidelines that were issued by the DOJ and FTC in December 2023. While serial acquisitions have generally been associated with PE firms, any corporate entity, including hospital systems and payers, could also be targets of the theory that serial acquisitions of physician practices harm competition. Also, the USAP complaint includes allegations similar to a monopoly leveraging or a “cross-market” merger theory of harm in other Texas markets outside of Houston and Dallas where monopolies are alleged. A “cross-market” merger theory of harm involves providers that do not compete for patients based on geography.For instance, the FTC’s allegations against USAP extend to other parts of Texas (Tyler, Amarillo, and San Antonio) where USAP did not previously have any presence, i.e., the acquisitions did not result in any change in concentration in those markets. See this article for a more fulsome discussion of the USAP case.

In the FTC case against USAP, the FTC is seeking structural relief, which could include a requirement to divest acquired practices or unwind previous deals. However, the attorney general did not seek structural relief in its settlement with USAP, but instead required a behavioral remedy, including ending its exclusive contracts with hospitals and waiving non-compete/non-solicitation agreements with physicians.

As seen in the St. Luke’s case, physician combinations can also be challenged by private plaintiffs as well as by the government. First, private plaintiffs can include competitors. In Vasquez v. Indiana University Health, Inc., a vascular surgeon alleged antitrust claims against Indiana University Health including acquiring a PCP group in Bloomington, Indiana, and then foreclosing referrals to vascular surgery rivals such as the plaintiff. In St. Francis v. Hartford Healthcare Corp., St. Francis has alleged antitrust claims against Hartford Healthcare including prior acquisitions of multiple physician groups and subsequent foreclosure of referrals to rival hospitals such as the plaintiff. Second, private plaintiffs can include customers. Private class actions by customers have also been filed against USAP and Hartford Healthcare.

Antitrust enforcement against acquisition of physician practices is likely to continue as plaintiffs test novel and non-traditional theories of harm. Unique antitrust issues may arise depending on whether the buyer is a health system, payer, PE firm, or simply another independent physician practice. It will be important to monitor the progress of some of these ongoing cases to see whether courts accept novel and non-traditional theories of competitive harm.

Kevin Hahm is a partner at the law firm Hunton Andrews Kurth LLP where he focuses on antitrust merger review, including pre-transaction counseling, merger investigations and merger litigations. He can be reached at khahm@huntonAK.com, or via the firm’s website – https://www.huntonak.com.