United States: Despite Presence Of "Power Buyer," FTC Obtains Preliminary Injunction Of Proposed Physician Acquisition In North Dakota

While antitrust enforcement of hospital mergers is well-established, physician acquisitions have only recently and increasingly seen antitrust scrutiny. Last week, in a 69-page opinion, a federal district court granted the Federal Trade Commission’s (“FTC”) request for a preliminary injunction against Sanford Health’s proposed acquisition of Mid Dakota Clinic, a large multispecialty group, pending the FTC’s administrative trial on the merits scheduled for January. FTC v. Sanford Health, et al., Case. No. 1:17-cv-00133 (D. N.D. Dec. 15, 2017). The district court’s decision came after a four-day evidentiary hearing that involved 16 witnesses and more than 1,600 exhibits. Notably, the FTC asserted that the proposed acquisition would substantially lessen competition in four distinct physician service lines in the Bismarck-Mandan area of North Dakota. The merging parties had asserted, inter alia, that the presence of a powerful buyer — Blue Cross Blue Shield of North Dakota (“BCBSND”) — would preclude any anticompetitive effects that might otherwise result from the proposed transaction. The merging parties have already filed a Notice of Appeal. 

Following an eight-month investigation of the proposed transaction, the FTC and the North Dakota Attorney General sued to block the merger in June, alleging that the parties are each other’s main competitors and that the merger would result in high shares in the markets for adult primary care physician (“PCP”) services, pediatric services, obstetrics and gynecology (“OB/GYN”) services, and general surgery physician services in Bismarck-Mandan in violation of Section 7 of the Clayton Act. Determination of a Section 7 violation rests with the FTC, however, district courts may grant a preliminary injunction if it would be in the public interest after weighing the equities and considering the FTC’s likelihood of success.

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.

Two-Stage Competition

The district court accepted a framework of two-stage health care competition for its analysis: first, competition among health care providers to be included as “in-network” providers in commercial health insurer plans; and second, competition among in-network health care providers to attract patients. In the first stage of competition, health care providers and commercial insurers negotiate reimbursement rates and terms. Experts for the merging parties and the government agreed that the transaction would result in increased bargaining leverage for the merged entity in the first stage of competition. In the second stage, where competition is generally focused on non-monetary factors, both parties agreed that competition among providers improves the quality of service.

Relevant Market Definition

The parties diverged over the proper definition of the relevant market, and whether the dominance of BCBSND should be considered in defining the market, or only as a defense. The government alleged four distinct relevant product markets based on specialty. The district court noted that this market definition was supported by evidence from representatives of the three primary commercial insurers in the Bismarck-Mandan area who all agreed that a plan must include adult PCPs, pediatricians, OB/GYN physicians, and general surgeons to be marketable. The government identified Bismarck-Manden as the relevant geographic market based on the Hypothetical Monopolist Test (“HMT”). The HMT is an iterative process that first identifies a candidate market and then asks whether a hypothetical monopolist could profitably impose a small but significant nontransitory increase in price (“SSNIP”) (typically 5%) over a particular product or service. The government established that commercial health insurers would accept a SSNIP rather than market a plan in the area that did not include PCP, pediatrician, OB/GYN, or general surgeon services. Moreover, the Bismarck-Manden area encompasses the four counties which Sanford Health and Mid Dakota each consider their primary geographic market.

Defendants contended that the government’s market definition was erroneous because it did not adequately consider the realities of the North Dakota insurance market in which BCBSND has all the bargaining power. The district court disagreed, holding that BCBSND’s dominance should be considered as a defense rather than as part of the market definition calculus.

Under the government’s market definition, 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. The post-merger level of market concentration as measured by the Herfindahl-Hirschman Index (“HHI”) would be highly concentrated in each market, with a change in HHI for each of the four service lines exceeding the Horizontal Merger Guidelines’ threshold for a presumption of enhanced market power.

The court found anticompetitive effects flowing from the merger in both stages of health care competition. The acquisition would eliminate competition between the parties for favorable inclusion in a payor’s network. Since all the physicians would be under the same corporate umbrella, it would also eliminate the competition among physicians to obtain patients in the second stage of competition.

Defenses

The court followed the burden-shifting approach that has been used in many other merger cases. Once the government had met its prima facie case, the defendants could bring forth its defenses and efficiency arguments.

Here, the merging parties significantly relied on a “powerful buyer” defense, arguing that the merged entity could not negotiate higher reimbursement rates against the dominant North Dakota payer, BCBSND. The government 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 here. Instead, it noted that although BCBSND has a statewide share of 55-65% of the commercial health insurance market, its market share has declined in the last several years. Significantly, evidence showed that BCBSND does not consider CHI a viable alternative to either Sanford Health or Mid Dakota, and, most importantly, that BCBSND could not construct a marketable health plan in the Bismarck-Mandan area without the merged entity. As a consequence, if Sanford Health were to request a rate increase post merger, BCBSND “would have to choose between agreeing to the increase or no longer offering health plans in the Bismarck-Mandan area.”

The district court also addressed in detail the potential efficiencies and synergies of the proposed transaction, which Sanford Health and Mid Dakota contended would counter any anticompetitive effects of the proposed transaction. The merging parties pointed to a document titled “Stronger Together: Synergy” which they described as a summary of merger-specific synergies that would result from the transaction. However, the district court discounted the relevance of the document because it was primarily written by counsel. Defendants also commissioned Deloitte to quantify the claimed efficiencies in clinical care, ancillary services, and non-clinical areas. Although the district court acknowledged some efficiencies, it nonetheless found that such efficiencies were not sufficient to overcome the anticompetitive effects of the transaction that would result in a near-monopoly.

The defendants also argued that CHI would be motivated to introduce new competition into these physician service lines; the district court, however, found that defendants had not established that entry or expansion by CHI would be timely, likely, or sufficient to counteract the near-monopoly that would result from the proposed transaction. Nor did defendants provide evidence that Mid Dakota was financially troubled or that it would imminently depart from the market if the merger is not consummated.

Particularly if upheld on appeal, this case would provide an important validation to the FTC’s continued and increased health care antitrust enforcement focus on physician acquisitions. An administrative trial on the merits is currently scheduled to begin on January 17, 2018. However, it is likely to be postponed pending the appeal to the Eighth Circuit that Sanford Health and Mid Dakota have filed.

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