Picking up the scent

Chasing the national mandates for efficiency and coordinated care, St. Luke's Health System in Boise, Idaho, has devoted large sums to buying up doctors' offices and consolidating key markets across the state.

Until February, that is, when officials with the three-hospital system were summoned to a meeting with the state's antitrust regulators and informed of an ongoing investigation—the kind of unpleasant experience that experts say hospitals across the country are having with increasing frequency.

The national spike in physician acquisitions has been met with a corresponding dose of scrutiny from antitrust officials, who say they want to make sure hospitals aren't using the laudable goal of improving care as cover for corporate consolidations that jack up consumer healthcare prices.

In Idaho, St. Luke's had been trying to buy up one of the state's largest and oldest medical practices, Saltzer Medical Group. But the hospital learned in its Feb. 22 meeting that investigators with the state attorney general's office and the Federal Trade Commission were probing their pattern of recent acquisitions of physician offices.

“This acquisition, if consummated, directly affects our current antitrust review,” Idaho Attorney General Lawrence Wasden wrote in a Feb. 24 summary letter to St. Luke's. “I would hope that upon conclusion of our investigation there would be an opportunity to share with you concerns we have, if any, and work to address them amicably and informally without the need for litigation and court participation.”

And to clear up any doubt about his seriousness, Wasden specifically noted that he has the power to force a divestiture of Saltzer, if needed.

After the meeting with Wasden's staff, officials at St. Luke's agreed to hold off on buying physician practices for 90 days—a deadline set to expire this week.

Like many hospitals, St. Luke's Health System's physician ranks have boomed in the past two years. It directly employs 370 doctors today, up 85% compared with 200 in July 2010. The explosion in support personnel for the doctors has fueled a 40% expansion in the system's payroll, to about 10,000 today, making St. Luke's the largest private employer in Idaho.

Nationally, the New England Journal of Medicine reported last year that already more than half of all U.S. physicians are directly employed at hospitals and health systems. That milestone was passed in 2008, before federal support for accountable care organizations and other incentives for integrated care in the reform law accelerated the trend.

Given the rapid pace of physician employment at St. Luke's, system officials there said the antitrust scrutiny was hardly surprising. “I can't say that we were shocked or surprised by this,” said St. Luke's President and CEO Dr. David Pate, who is also a lawyer. “No one wants to go through this kind of investigation. But in a way we welcome it, because if there's an issue, I want to know about it now,” he said. “Let's just see if there are issues. We don't believe that there are.”

The FTC has a decadeslong record of targeting hospital mergers and acquisitions, seeking injunctions in federal courts three times since early 2011. In the realm of physician acquisitions, however, the body of law widely cited by attorneys stems entirely from matters resolved in the past 18 months. And none of the physician antitrust cases has gone to trial.

“The FTC has not brought a case that I can think of involving physician acquisitions,” said Douglas Ross, an antitrust lawyer in Seattle with Davis Wright Tremaine. “Clearly it is an area of FTC interest, and they are continuing to conduct a number of investigations in markets across the country.”

In 2010, Ross represented Providence Health & Services in one of the best-known FTC challenges to a physician acquisition. As in all the previous cases, the health system backed off rather than fight the FTC and the state attorney general in court, choosing instead to buy just one of the two cardiology practices in Spokane, Wash., that it had hoped to acquire. The other one was bought by Kootenai Health in nearby Coeur D'Alene, Idaho.

FTC Competition Bureau Director Richard Feinstein has said the Providence case showed that the commission is keenly interested in physician acquisitions. “In some cases, such arrangements can create highly concentrated markets that may harm consumers through higher prices or lower quality of care,” he said in an April 2011 statement.

Mike Wilson, chief executive of Providence Health Care Eastern Washington, said the system does conduct market-power investigations before buying practices. In at least one ongoing case, the system has declined to buy a doctor's office over concerns that the deal would attract antitrust scrutiny, choosing instead to try to form an affiliation that doesn't involve an acquisition.

Asked whether he was afraid a competitor in Spokane might buy the practice instead, Wilson said of the doctor's office: “We are in conversations with that group at this point in time.”

Wilson said the FTC's view of the risks to consumers from provider consolidations stands in contrast to the positive aspects of such deals extolled by other federal entities. Those benefits include efficiency in coordinating care between doctors and hospitals, systems' ability to recruit physicians, and the access to care provided by not-for-profit systems regardless of patients' ability to pay.

“The goals of healthcare reform in creating a delivery network—we have proven in Spokane that they bump up against the FTC rules, and we believe that those should be somehow resolved,” Wilson said. “And we are probably not the only community that feels that way.”

However Tracy Wertz, a senior deputy attorney general in the Pennsylvania, noted in a speech in Washington last month that greater efficiency among providers doesn't necessarily lead to lower prices for consumers. Sometimes the opposite may be true. In a May 4 presentation to members of the American Health Lawyers Association and the American Bar Association, Wertz said larger physician practices may gain market power to command higher prices from insurers, especially if they combine with hospitals, which bill for much higher overhead costs than stand-alone doctor practices. Wertz also cast doubt on the efficiency argument, noting that cost-savings are less likely to be passed on to consumers if a deal ends up eliminating the kind of strong market competition that would otherwise force providers to offer better prices.

Her office was involved in another of the often-cited physician-merger cases—a simultaneously filed federal lawsuit and consent judgment in 2011 regarding Urology of Central Pennsylvania, which was created following the merger of five doctors' practices in 2005. Investigators contended the merger led the practice to offer fewer services and request higher prices from insurers.

Another nationally studied case involved MaineHealth, a seven-hospital system based in Portland that in 2011 agreed to a sweeping consent decree with the state attorney general's office as a condition of buying two cardiology clinics in town. The agreement requires the system to maintain physician prices, limit its overall operating profit to no more than 3% of its operating revenue until 2016, and meet patient-safety goals.

Meanwhile in Idaho, observers say it's clear that the business strategies of St. Luke's are paying off. Dr. Joseph Williams, one of 10 physician co-owners of the independent Idaho Urologic Institute in Meridian, said it's impossible to miss all the St. Luke's signage erected on prime real estate that has been bought up and converted to not-for-profit status in the greater Boise area. “I think that they charge premium prices for the care that their newly purchased clinics provide, and it is apparent that they are doing well from a profitability standpoint, as evidenced by their property acquisitions,” Williams said.

On the contrary, St. Luke's CEO Pate said physician prices are “pretty much set statewide” by private insurers and government payers. “No, it's not a matter of increasing physician prices,” Pate said. “In fact it is really the other side which is my interest. More and more physicians have gone to not taking charity patients, not accepting Medicaid. And now even a growing number of physicians who will not take on any new Medicare patients,” he said. “By our taking on physician practices, as a nonprofit tax-exempt system, we are actually promoting access because we will take on patients regardless of ability to pay.”

TAKEAWAY: Antitrust regulators are taking closer looks at hospitals buying physician practices as providers rush to integrate under the mantle of healthcare reform.