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Bates White analysis provides support to the FTC’s challenge of St. Luke’s acquisition of Saltzer Medical Group

On January 24, 2014, in the matter Federal Trade Commission v. St. Luke’s Health System, Ltd., Judge B. Lynn Winmill, of the US District Court in the District of Idaho, ordered divestiture of the affiliation between St. Luke’s Health System (St. Luke’s) and Saltzer Medical Group (Saltzer).

In December 2012, St. Luke’s, an Idaho-based system that operates nine hospitals and employs hundreds of physicians, acquired Saltzer, Idaho’s largest independent, multispecialty physician practice group. The Federal Trade Commission (FTC), Idaho Attorney General, and rival hospitals urged the US District Court for the District of Idaho to unwind the 2012 purchase on the grounds that the acquisition would enhance St. Luke’s market power over adult primary care physician services in Nampa, Idaho, and allow it to demand higher rates for healthcare services, ultimately leading to higher costs for healthcare consumers. Judge Winmill concluded, “although possibly not the intended goal of the acquisition, it appears highly likely that healthcare costs will rise as the combined entity obtains a dominant market position that will enable it to (1) negotiate higher reimbursement rates for 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.”

Northwestern University Professor and Bates White Academic Affiliate David Dranove, who was supported by a team of Bates White economists led by Partner Cory Capps, testified on behalf of the FTC and the State of Idaho. Professor Dranove offered two reports as well as deposition and trial testimony on market definition, competitive effects, and efficiencies. Consistent with Judge Winmill’s decision, Dr. Dranove provided analyses showing that Nampa was a relevant geographic market and that the merger would substantially enhance St. Luke’s market power. Also consistent with Judge Winmill’s conclusion that claimed efficiencies were not merger specific, Dr. Dranove provided an empirical study of St. Luke’s past physician group acquisitions that showed that St. Luke’s prior primary care physician acquisitions had failed to lower the total cost of medical care for patients of those acquired physicians.

This is the first major case involving acquisitions of independent physician groups by hospitals that has gone to trial in recent years. The decision may shape the future of hospital acquisitions of physician’s practices and pave the way for further challenges to consummated deals in the healthcare sector.

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