Mid-Atlantic Health Law TOPICS

In the past few years, the antitrust aspects of loosely affiliated physician "networks" have received significant attention. However, the Department of Justice (DOJ) and the Federal Trade Commission (collectively the Agencies) are also interested in the full "merger" of physician practices.

Specifically, during 1997, the DOJ was asked to comment on three proposed physician mergers. In April, the DOJ stated that it would not challenge the merger of two groups of orthopedic specialists constituting 32% of the orthopedic providers in Mobile, Alabama (Orthopaedic Associates), or the merger of two practices constituting 50% of the vascular surgeons in Baton Rouge, Louisiana (CVT Surgical Center).

In July, however, the DOJ indicated that it may take enforcement action if the merger of three groups of gastroenterologists, constituting over 85% of the gastroenterologists with hospital privileges in Allentown, Pennsylvania, were consummated (Gastroenterology Associates).

The DOJ's comments on these proposed mergers provide important insights for the merger of other physician practices.

A. Merger Guidelines

The Agencies issued joint Merger Guidelines in 1992. These guidelines (which are applicable to all industries, not just health care) establish a framework for evaluating whether a merger is likely to harm competition, and thus be prohibited under the antitrust laws.

Under these guidelines, the product and geographic markets in which the merging parties presently operate are defined, competitors in these markets are identified, and the market share of each competitor is determined. A formula, called the Herfindahl-Hirschman Index or HHI, is then used to determine the concentration levels of the relevant markets before and after the proposed merger.

If the proposed merger will significantly increase concentration in a market that is already moderately or highly concentrated, the Agencies will analyze the likely pro- and anti-competitive effects of the merger.

B. Product (or Service) Market Definition

In the health care field, services provided by a particular physician specialty may often be a relevant service market. Indeed, in Orthopaedic Associates, the market was defined simply as "orthopedic services provided by orthopedic specialists."

In CVT Surgical Center, however, one merging practice was composed of cardiovascular-thoracic surgeons, while the other merging practice performed only peripheral vascular surgery. Out of the hundreds of types of surgical procedures that these two practices performed, the DOJ focused on the approximately 60 procedures that were performed in common by both practices.

C. Geographic Market Definition

In each of the three proposed mergers, the DOJ stated that "in general, and especially in urban and semi- urban areas, health care geographic markets are localized, although somewhat less so for specialist markets than for primary care markets."

The DOJ noted in CVT Surgical Center that a market encompassing more than one city or metropolitan area may be appropriate if payors could and would defeat a small hypothetical price increase in one town by sending patients to other towns within the proposed market.

D. Market Concentration

With respect to market concentration, the DOJ departed from the Merger Guidelines, and did not apply the HHI index. Instead, the DOJ simply evaluated what percentage of all competing physicians the merged entity would comprise in the relevant product and geographic market.

For instance, in Gastroenterology Associates, the merged practices would have constituted from 86-92% of board-certified gastroenterologists in a single-city market, and 63-67% if the market were expanded to include a second nearby city. This high post-merger concentration of the gastroenterology market raised substantial antitrust concern.

In contrast, while the post-merger practice in Orthopaedic Associates would have included 32% of the orthopedic specialists in the area, there were at least twelve alternative orthopedic specialists or groups of specialists to which managed care plans and third-party payors could turn, if there were an attempt to raise prices.

Moreover, where only one or very few practitioners of a medical specialty are needed for payor provider panels, as was the case with the vascular specialists in CVT Surgical Center, the presence of a few independent specialists is likely to offer sufficient contracting alternatives for payors to prevent a large merging group from exercising market power.

E. Efficiencies

In CVT Surgical Center, the DOJ indicated that the lack of potential anti-competitive effects made it unnecessary to scrutinize likely pro-competitive efficiencies. Nevertheless, the following potential efficiencies were noted: the enhanced ability to specialize; the enhanced ability to acquire costly state-of-the-art equipment and technology; and the consolidation of duplicative and underutilized diagnostic and testing equipment.

However, the efficiencies of utilization review, quality assurance, and efficiency and quality parameters offered in Gastroenterology Associates were not sufficient to offset the expected anti-competitive effects of the merger, especially because the DOJ believed that such efficiencies were already in place as a result of the merging physicians' participation in various networks and PHOs.

F. Comments of Payors

Of particular significance in each of the proposed mergers is the DOJ’s consideration of, and reliance on, the comments and reactions to the proposed merger by managed care plans and third-party payors within the market.

In Gastroenterology Associates, payor input shaped the product and geographic market definitions, and weighed in strongly on the DOJ’s evaluation of the anti- competitive effects of the merger, and likely entry into the market by new competition. The payors' misgivings and concerns, supported by the available facts, led the DOJ to refuse to provide assurance that enforcement action would not be taken if the merger were consummated.

In Orthopaedic Associates, however, the DOJ noted that, while the combination of 32% of the orthopedic specialists in the relevant geographic market could raise competitive concerns, no managed care plan or other third-party payor expressed concern.

G. Conclusion

For now, it appears that the DOJ will be liberal in allowing physician mergers that do not result in groups with well over a 50% market share, provided there is no outcry from the payor community. Physicians will have to wait and see whether the DOJ will continue to follow enforcement policies that are consistent with these recent responses.