Walter J. McNerney Professor of Health Industry Management; Faculty Director of PhD Program; Professor of Strategy
Obamacare made us do it.
This is, in essence, one of the rebuttals made recently by St. Luke’s, a nonprofit hospital system headquartered in Boise, Idaho. In March 2013, the Federal Trade Commission and State of Idaho challenged its acquisition of a physicians practice on antitrust grounds. St. Luke’s has defended the challenge in part by arguing that some otherwise anticompetitive mergers and acquisitions may in fact be necessary to bring about the coordinated care encouraged by the Affordable Care Act (ACA).
As discussed elsewhere in this issue, some aspects of the ACA have been designed with competition in mind: the mandated insurance exchanges, for instance, pit a range of coverage and pricing plans against one another in a single, transparent arena—a process that, at least theoretically, should allow customers to purchase better coverage with lower premiums.
But as the St. Luke’s case has brought to light, healthcare providers are relying on another tenet of the ACA aimed at reining in healthcare costs to justify integrating in ways that could be anticompetitive. For example, “St. Luke’s has argued that there may be a conflict between two different laws—the antitrust laws and the Affordable Care Act,” says David Dranove, a professor of management and strategy at the Kellogg School who specializes in health enterprise management. Dranove served as an expert for the FTC and State of Idaho in the St. Luke’s case.
Arguments concluded last month, and a judge is expected to rule soon. In the meantime, hospitals everywhere are watching. The stakes are high.
Mirroring a nationwide trend toward consolidation among healthcare providers, St. Luke’s has been on quite the growth spurt of late. The hospital group has absorbed numerous physicians groups over the last decade to become the largest health system in Idaho. But the acquisition of Saltzer—at approximately 40 doctors, the largest independent multispecialty physicians group in the state—raised its competitors’ hackles and the concerns of local employers and health plans. It also drew a challenge from the FTC and the State of Idaho.
Pre-acquisition, St. Luke’s owned one of several medical groups offering primary care in Nampa, a city of roughly 80,000 about 30 minutes outside of Boise. As measured by visits, the St. Luke’s group provided about 15% of primary care services to residents of Nampa—second only to Saltzer’s 60% share. But post-acquisition, St. Luke’s share would skyrocket to about 75%, giving it approximately five times the share of its next largest competitor, St. Alphonsus (the other hospital system in the region and St. Luke’s main rival). According to Professor Dranove, insurers seeking to create networks that would appeal to area employers would face an effective monopoly for primary care services in Nampa. Insurers would have few alternatives—at least credible ones—other than to accept whatever prices St. Luke’s demanded in order to maintain or grow their coverage in Nampa and be attractive to area businesses.
A Novel Defense
The case in many ways is typical of antitrust cases, explains Dranove. The two sides are battling over such well-trodden ground as how to define the geographic market— “Are physicians in Boise, 30 minutes away, competing with physicians in Nampa?” Dranove asks—and whether hikes to already high prices for services would follow the acquisition. The two sides are also arguing over whether the proposed merger will promote efficiency.
What makes the case different is that the merger is occurring against the backdrop of the Affordable Care Act.
The St. Luke’s–Saltzer merger contains both horizontal dimensions (involving providers that offer similar services) and vertical ones (involving providers who operate at different levels of the supply chain: doctors and hospitals, for instance). But while the FTC is used to challenging horizontal mergers as anticompetitive, St. Luke’s has argued that vertical integration—and even some degree of horizontal integration—might be in line with the ACA’s focus on Accountable Care Organizations. (These are integrated networks of providers that all work together to treat a patient population.) Indeed, the argument has it, such consolidation could actually be considered pro-consumer as it can result in better outcomes as well as lower prices due to greater efficiencies and economies of scale.
“As we go forward, we need to keep an open mind. It would be premature to conclude that financial integration is necessary to achieve the clinical integration and efficiency goals of the ACA.”
“I think what they’re saying is: it’s not enough for us to be a hospital with a few doctors working for us, because that just wouldn’t give us the scope and scale to be … an Accountable Care Organization,” says Dranove. Instead, he continues, “St. Luke’s contends that hospitals must acquire lots of physicians—which could lead to market power.”
So, in short, should the courts scrutinize an acquisition that would give a hospital group an overly large share of the market even if it may help provide coordinated care?
Dranove thinks so, pointing out the difference between clinical integration—in which doctors and hospitals work together to coordinate care, reduce costs, and improve quality—and financial integration through mergers and acquisitions. He argues that St. Luke’s does not need to purchase Saltzer to fulfill its dreams of becoming an Accountable Care Organization; the benefits of coordination can be conferred via other avenues: “Can you have a joint venture with them, a partnership? Can you write contracts with them?” asks Dranove.
Indeed, he notes, the nation’s largest Accountable Care Organization, Advocate, actually works with hundreds of independent physicians. Overall, research evidence is decidedly mixed on whether financial integration is necessary for clinical integration.
Whatever the judge’s decision, it is sure to ripple widely through the industry, as healthcare providers and regulators alike determine how to marry existing antitrust laws with the new legislation in the ACA.
Dranove argues that giving St. Luke’s a pass would be rash. “As we go forward, we need to keep an open mind. It would be premature to conclude that financial integration is necessary to achieve the clinical integration and efficiency goals of the ACA,” he says. “The evidence on benefits from the kind of financial integration St. Luke’s proposes is inconclusive, but we do know that such integration can raise significant antitrust concerns.”
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