The role of the United States’ antitrust laws are to ensure competition, not to prescribe or favor any particular organizational structure. Yet recent Federal Trade Commission (“FTC”) enforcement actions in the health care provider merger arena have done just that – dictated that if provider groups want to integrate, they can only do so through contractual means, not by merging their businesses. Everyone accepts the proposition that health care integration is essential to improving health care and bending the cost curve. Yet often the FTC has been a roadblock to provider consolidation arguing that any efficiencies can be achieved through separate contracting. But this regulatory second guessing is inconsistent with sound health care and competition policy.
Health care provider consolidation poses some of the most challenging antitrust issues. Particularly challenging are efforts by hospitals to acquire or integrate with physician practices. There is clearly tremendous pressure from both the demand and supply side for greater integration between hospital and physicians. And arrangements between firms in a vertical relationship are treated solicitously by the antitrust laws, because they are typically procompetitive and efficient. Where competitive concerns arise from a merger or alliance, the FTC will ask if there are efficiencies from the relationship and, if so, whether there are less restrictive alternatives to achieve the efficiencies. If there is a less restrictive alternative, the FTC will claim the efficiencies should not be credited. So for example, if the FTC believes that contractual arrangements between doctors and hospitals can achieve comparable efficiencies, the FTC will reject the merging parties’ claimed efficiencies.
Front and center in this debate is the challenge to a Boise, Idaho hospital’s vertical acquisition of a physician practice, Saltzer Medical Group, containing 41 doctors in a neighboring community. In FTC v. St. Luke’s Health System, Ltd., No. 13-cv-00116 (D. Idaho, Jan. 24, 2014), the FTC argued that St. Luke’s acquisition of Saltzer’s 16 primary care doctors could substantially lessen competition for “Adult Primary Care Services” in Nampa, Idaho. Although noting numerous benefits of the merger including the likely improvement of patient outcomes, the court ignored the potentially positive implications of the vertical employment arrangement between St. Luke’s and Saltzer and ultimately agreed with the FTC’s opinion that the case was a substantially lessening of competition due to a horizontal overlap between providers. As a result, the court ordered a full divesture of Saltzer.
The court readily acknowledged the need for integration among these health care providers. “The merger require[s] a major shift away from our fragmented delivery system toward a more integrated system where primary care physicians supervise the work of a team of specialists, all committed to a common goal of improving a patient’s health…[St. Luke’s] is to be applauded for its efforts to improve the delivery of healthcare.” Nonetheless, the court followed the lead of the FTC and ultimately required the breakup of St. Luke’s and Saltzer. (A decision currently on appeal to the Ninth Circuit).
Why, you ask?
Because the court bought-in to the FTC’s argument that there are less restrictive ways to achieve the desired integration than through a merger. The court suggested, for example, that “employing physicians,” as St. Luke’s would do through the merger, is merely only one way to integrate and coordinate care. The court relied on the FTC’s claims that “there are a number of organizational structures that will create a team of unified and committed physicians other than that selected by the Acquisition.” The mere existence of such alternatives, without having demonstrated the effectiveness of such alternatives in the Nampa, Idaho setting, was enough for the FTC to argue there were less restrictive alternatives to the merger.
The FTC’s untested arguments utilized in St. Luke’s ignore basic market realities faced by health care providers. As has been well documented, cost-control through the integration of health care services is a critical national priority. Americans spend 18 percent of U.S. gross domestic product on health care. One major reason for high health care costs is the “siloed-approach” to medicine in which providers work autonomously and are ineffective in their ability to coordinate care with other providers. In order to curtail rising costs and improve care, health policies and laws, such as the Affordable Care Act, have led to a transformational change in providing health care services and payment: the decline of volume-based fee-for-service payment in favor of a value-based, patient outcome oriented approach. As noted by the American Hospital Association, these policy changes have created strong financial pressures for hospitals to reduce costs as providers face reductions in reimbursement, changed incentives, and limited access to capital.
When generally comparing mergers to contracting, economists have long noted that mergers are more efficient when transactions costs are high and there are “too many contingencies” in writing or enforcing a contract. These very conditions are found in health care markets where the market is in constant flux, there is limited information, and products are highly specialized. Along with economic theory, there are also a number of other reasons why “alternative” arrangements such as contractual arrangements among providers, even when available, are impractical alternatives to provider mergers.
First, mergers offer the most cost-effective way for providers to integrate and improve quality of care. As demanded by health reform, providers must act as cost-savers and are required to tie financial incentives to improving care.  The changes require providers to lower cost and achieve higher quality while simultaneously developing sufficient scale to bear risk from incentive based contracts. Under this new system, the most successful entities will have the appropriate economies of scale and scope to promote this structural change. While unaffiliated physicians and small group practices are on the frontlines of health care offering primary services, these providers do not have nor resources to develop integrated delivery models. Tightly integrated merged entities can develop sufficient scale and scope, can efficiently coordinate care between physicians, and are easily able to share information and adopt programs that can facilitate this fundamental change.
Second, high-level care coordination requires significant investment including the usage of complex health information technology systems. These information systems are extremely costly to both implement and operate requiring significant investment with a price tag in the nine-figure range. Many smaller provider groups, including physician practices, cannot afford to implement such systems. As noted by the parties in St. Luke’s, Saltzer, a mid-size physician practice, “needed to upgrade its medical record system and health information technology to keep pace with industry, but could not afford to do so without partnering with a large system.”
Third, mergers have been the most effective and competitive integration method. Most health care provider mergers are viewed as procompetitive. In fact, since 2008, less than two percent of all hospital mergers have been challenged in court. Provider mergers have also been very successful at increasing consumer benefits. In their recent Center for Healthcare Economic and Policy study on hospital realignment, Margaret E. Guerin-Calvert and Jen A. Maki found that mergers between hospital providers generally lead to significant “improvements in access, value, and efficiency.”
There are also numerous real world examples of fully vertically integrated entities that have led to effective provider integration. Renowned health care organizations such as Geisinger Health System and Intermountain Healthcare in Utah have utilized integrated systems through employment of physicians to successfully improve patient benefits such as service quality, institute preventive health measures, and lower costs. The models utilized by these organizations and others promote integration and efficiencies that could not be achieved through provider contracting.
Furthermore, there is real world evidence of the effectiveness of the merger model in incentivizing quality of care and lower price. Nationally, the vast majority of payment is fee-for-service with only 11 percent of all health care dollars being “value-oriented,” tied to financial incentives or risk. However, in California, 42 percent of all health care payments are value-oriented with 97 percent of those payments “at risk.” As noted by economist Monica Noether, California’s Kaiser Permanente, which owns hospitals, employs physicians, and operates a health plan as part of an integrated network, covers a large portion of the state’s privately insured lives and effectively utilizes value-oriented contracts with its providers. Without Kaiser’s integrated system, California would be unlikely to have such a high percentage of value-oriented care.
Lastly, while contracting arrangements sometimes may offer the best compromise for a particular provider affiliation, it is often an ineffective alternative compared to a tightly integrated merger. In fact, as noted by the court in St. Luke’s, Saltzer had “made attempts to coordinate care with other health systems under less-formal affiliations” but “none of these projects came to fruition.” Contractual agreements or joint ventures between providers create structural and coordination hurdles. Providers who jointly contract must comply with a complex, outdated regulatory system. Laws such as the Federal Anti-Kickback Statute and the Physician Self-Referral Law, more commonly known as the Stark Law, complicate initiatives among providers attempting to incentivize cooperation among providers. The application of a joint venture between parties also does not exempt providers from the antitrust laws. The review process at the FTC for lawful joint ventures still requires agency analysis and scrutiny, which can take over a year to complete, delaying any benefits of integration efficiently achieved through a merger.
Beyond regulations, contractual arrangements are time sensitive, costly, and complex creating numerous non-legal obstacles. Under such circumstances, parties can find it difficult to utilize a limited contractual arrangement to inform structural change which will align incentives and improve quality of care. Any notion that contracting is a more effective alternative to achieving integrated care when compared to mergers is unsubstantiated. As the antitrust enforcers’ own Merger Guidelines pronounce “the Agencies do not insist upon a less restrictive alternative that is merely theoretical.”
Integration is necessary to improve the delivery of health care in this country. Still, the St. Luke’s court was correct in one assertion: in the delivery of health care, “there are a number of organizational structures.” However, the implementation of different organizational structures to promote coordination and quality of care must comport with market, regulatory, and provider realities. What works for some health care providers will not work for all. Therefore, in the competitive analysis of provider mergers, enforcers should not invariably argue that contracting always represents the least restrictive alternative. Such blanket assertions are improper and not founded in practice-based evidence. In actuality, mergers between health care providers often remain the most effective way to transition health care practice to a fully integrated patient-centered model. The FTC and the courts should not permit the perfect to be the enemy of the good.
David Balto is an antitrust attorney an a former director of the FTC’s bureau of competition.
 ProMedica Health System, Inc. v. FTC, No. 12-3583, affirmed 2014 U.S. App. LEXIS 7500, (6th Cir. Apr. 22, 2014); FTC v. OSF Healthcare Sys., 852 F. Supp. 2d 1069 (N.D. Ill. 2012); In the Matter of Reading Health Sys., FTC Docket No. 9353 (Nov. 16, 2012).
 FTC v. St. Luke’s Health System, Ltd., No. 13-cv-00116 at 47.
 Amitabh Chandra et al., Is This Time Different? The Slowdown in Health Care Spending, Brookings Inst. (2013), available at http://www.brookings.edu/~/media/Projects/BPEA/Fall%202013/2013b_chandra_healthcare_spending.pdf.
 Fundamental Transformation of the Hospital Field, Am. Hospital Assoc. (2012), available at http://www.aha.org/content/13/fundamentaltransform.pdf.
 See Ronald Coase, The Nature of the Firm, 4 Economica 386, (1937)
 Monica Noether, The St. Luke’s-Saltzer Antitrust Case: Can Antitrust and Health Care Reform Policies Converge?, 2 CPI Antitrust Chronicle 1, 5 (2014).
 Noether, supra note 6, at 5.
 FTC v. St. Luke’s Health System, Ltd., No. 13-cv-00116 at 8.
 Margaret E. Guerin-Calvert & Jen A. Maki, Hospital Realignment: Mergers Offer Significant Patient and Community Benefits (2014), available at http://www.fticonsulting.com/global2/media/collateral/united-states/hospital-realignment-mergers-offer-significant-patient-and-community-benefits.pdf.
 Catalyst for Payment Reform, Only 11 Percent of Payment to Doctors and Hospitals in the Commercial Sector Today is tied to Their Performance at 1 (2013), available at http://www.catalyzepay mentreform.org/images /documents/release.
 See Noether, supra note 6, at 6.
 FTC v. St. Luke’s Health System, Ltd., No. 13-cv-00116 at 8 (emphasis added).
 U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines at § 10 (2010), available at http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf (emphasis added).
 FTC v. St. Luke’s Health System, Ltd., No. 13-cv-00116 at 47.