Healthcare Providers' Push to Consolidate Roils Payers

Healthcare provider claims that mergers boost efficiencies are drawing intense scrutiny from regulators and provoking a market challenge from payers.

Old habits are hard to break.

One of the goals of the federally led drive to create a value-based healthcare industry is to increase cooperation between major stakeholders. As a wave of healthcare provider consolidation sweeps across the country, the new age of cooperation between providers and payers is starting to look a lot like the old age of adversarial relationships.

An antitrust case in Idaho is one of the hottest fronts in the ongoing cold war between providers and payers. This week in Portland, OR, a three-member panel of the US Court of Appeals for the Ninth Circuit heard oral arguments on a challenge to a federal judge's rejection of a merger deal featuring Boise-based St. Luke's Health System.

In January, the chief judge of the US District Court in Idaho ruled St. Luke's acquisition of the state's largest independent physicians practice, Nampa-based Saltzer Medical Group, violated antitrust law. Chief Judge B. Lynn Winmill ordered St. Luke's to "fully divest itself of Saltzer's physicians and assets."

In an amicus brief filed at the US Court of Appeals, attorneys for America's Health Insurance Plans, the national health plan trade association, delivered a scalding criticism of the St. Luke's merger:

"An important issue before this Court is whether claimed clinical integration justifies the anti-competitive acquisition of a medical group by a hospital with an already significant medical group. The district court correctly required [St. Luke's and Saltzer] to show merger-specific efficiencies. Instead, [St. Luke's and Saltzer] made claims of clinical integration efficiencies and suggested that the policy goals of the Affordable Care Act overrode antitrust concerns. Those assertions are wrong."

AHIP attorneys claim the St. Luke's merger is unnecessary because healthcare efficiencies are best achieved through negotiations between payers and providers. "The efficiencies suggested by [St. Luke's and Saltzer] are being achieved through relationships between health plans and providers—in other words through market innovation—without the need for anti-competitive mergers by hospitals and providers."

A decision is expected sometime next year.

Provider-Payer Arms Race
In an interview this week, an associate professor at the University of Rochester's Simon Business School said healthcare provider consolidation is sparking a new adversarial struggle with payers. Gerard Wedig, PhD, said mergers are a "natural reaction" among providers as they seek to ensure their survival in a time of rapid change in the healthcare industry.

The main benefit of these mergers is a "stronger provider organization," but health plans are dusting off their health maintenance organization playbooks as a way to offset the surge in health system market power. Selective contracting through so-called narrow networks "seems to be coming back," Wedig said.

"Many provider mergers are based on the idea that insurers won't exclude a large health system," he said. "If you can get people to a point where they can accept a narrow network, then insurers can leave out a large health system."

Employers and consumers are reaching that point, Wedig said, noting that large employers are seeking to control costs in group insurance plans and individual consumers face the growing prevalence of high-deductible health coverage.

"Narrow networks are entirely consistent with consumers having more skin in the game," he said. "Sure, these health systems merge, but you may see them having to compete in a way that they haven't had to in the past."

ACOs Getting Antitrust Pass
Earlier this week, the St. Luke's case was a hot topic during a webinar on provider consolidation hosted by Berkeley, CA-based Catalyst for Payment Reform.

One of the webinar's presenters, Carnegie Melon University Professor Martin Gaynor, said the contested St. Luke's merger "illustrates the issues that could arise in an ACO case."

Gaynor, a former director of the Federal Trade Commission's Bureau of Economics, said there have been no antitrust lawsuits involving accountable care organizations—yet. "The concern is whether ACO stands for Anticompetitive Organization," he quipped.

Gaynor said three of the objections that the FTC raised in the St. Luke's antitrust lawsuit could be applied in an ACO antitrust case:

• St. Luke's ran afoul of antitrust law because the health system's physician groups were in direct competition with Saltzer physicians.
• St. Luke's and Saltzer made claims about achieving healthcare efficiencies that were "plausible but speculative" such as the benefit of sharing an electronic medical record system.
• The US District Court in Idaho found the efficiencies St. Luke's and Saltzer claimed were not "merger-specific" and could be achieved through other means that did not risk creating anticompetitive market conditions.

 Wedig said ACOs are likely getting an antitrust pass—for now. "It's clearly a model of healthcare delivery that's under the Affordable Care Act that holds some promise," he said. "There's been some effort to get providers to sign on to ACOs. We're trying to nurture them to some degree to see whether they can help reduce healthcare costs. You can see why [regulators] would have some sympathy for ACOs."

Merger Mania Grips Nation
During the CPR webinar, legal officials from California and Pennsylvania said the pace of provider consolidation – and antitrust reviews – is quickening across the country.

Kathleen Foote, senior assistant attorney general at the California Department of Justice, said the National Association of Attorneys General has noted a significant uptick in provider consolidation deals.

She said there were AG representatives from 38 states at a recent NAAG meeting and 27 states reported they were reviewing healthcare industry transactions, including physician group mergers and M&A deals between hospitals and physician groups. "In every location, virtually, this is a topic of great significance," she said.

Tracy Wertz, who serves as deputy attorney general in Pennsylvania, said The Keystone State is experiencing a spike in healthcare provider mergers. "We see more and more healthcare cases... currently, we have eight healthcare transactions before our office," she said.

In past years, the Pennsylvania AG rarely had more than one or two provider merger cases to review.

Data Key Factor for Regulators
In an interview before this week's CPR webinar, the organization's executive director said the combination of nationwide healthcare reform efforts and provider consolidation is a potent mix. "We're really entering into unknown territory," Suzanne Delbanco said.

She said a key healthcare provider consolidation hurdle for state officials across the country is amassing sufficient data to assess merger deals.

The data challenge is two-fold. First, variation of state data resources poses a major antitrust enforcement obstacle. Second, several recent provider consolidation efforts have crossed state lines.

"Some of this consolidation that's happening now is not traditional. There really isn't a history of market analysis to examine the impact of multi-state consolidation," Delbanco said.