By Nicole D. Prysby, J.D.
The FTC is likely to succeed in proving that the merger of two health care providers would substantially lessen competition in four types of physician services in the Bismarck-Mandan area.
A preliminary injunction against the merger of two health care providers in the Bismarck-Mandan area has been upheld by the Eighth Circuit Court of Appeals. The appellate court agreed with the district court’s conclusion that the FTC was likely to succeed in proving that the merger would substantially lessen competition in four types of physician services in the Bismarck-Mandan area. The court rejected the providers’ argument that the district court improperly shifted the burden of persuasion, pointing out that because the FTC presented strong evidence of monopolization or near monopolization in each service line, it was necessary for the providers to make a strong presentation in rebuttal, but that did not shift the ultimate burden of persuasion. The court also rejected an argument that the insurer for the area is a dominant buyer and providers would therefore not be able to raise prices. Finally, the court rejected the providers’ arguments that a competitor would alleviate the anticompetitive effects of the merger and that the efficiencies of the merger would justify the near-monopoly (FTC v. Sanford Health, June 13, 2019, Colloton, S.).
Background. In December 2017, North Dakota health care providers Sanford Health and Sanford Bismarck and Mid Dakota Clinic, P.C. (MDC) were temporarily enjoined from consummating their proposed merger, pending an FTC administrative trial. The FTC challenged the combination on the ground that the deal would purportedly create the largest group of physicians offering adult primary care physician (PCP) services, pediatric services, obstetrics and gynecology (OB/GYN) services, and general surgery physician service in the market. According to the FTC, the proposed transaction threatens substantial harm to competition in four relevant service markets: (1) adult PCP services; (2) pediatric services; (3) OB/GYN services; and (4) general surgery physician services. Sanford and MDC are the two largest providers of each of the relevant services in the Bismarck-Mandan area. If the companies merge, then Sanford will have the following market shares in the Bismarck-Mandan region: 99.8% of general surgeon services, 98.6% of pediatric services, 85.7% of adult PCP services, and 84.6% of OB/GYN physician services.
The district court granted the preliminary injunction after determining that the plaintiffs were likely to succeed in proving that the acquisition would substantially lessen competition in the four types of physician services in the Bismarck-Mandan area. Sanford and MDC appealed.
Preliminary injunction upheld. Sanford and MDC argued that the district court improperly shifted the ultimate burden of persuasion to them when it required them to produce rebuttal evidence that "clearly shows" that no anticompetitive effects were likely. The court rejected that argument, finding that the lower court had correctly followed the framework requiring the FTC to present a prima facie case that the merger will result in an undue market concentration, then placing the burden of production for rebuttal on Sanford and MSC. Because the FTC presented strong evidence of monopolization or near monopolization in each service line, it was necessary for Sanford and MDC to make a strong presentation in rebuttal, but that did not shift the ultimate burden of persuasion.
Sanford and MDC also argued that the district court erred in defining the relevant market, in that it failed to account for insurer Blue Cross’s dominant position in the market, which would prevent a provider from forcing a price increase on Blue Cross. But the court noted that the correct test is not whether a monopolist would increase prices on an insurer, but whether the insurer could avoid a price increase by contracting with physicians who offer services that are outside of the proposed service markets or who are located outside of the proposed geographic market. Here, the undisputed testimony was that there are no functional substitutes to a plan offering adult primary care services, pediatric services, OB/GYN physician services, and general surgeon services in the Bismarck-Mandan area. The court thus did not clearly err in defining the relevant market.
Sanford and MDC had raised several arguments in their attempt to rebut the FTC’s prima facie case, which they reiterated on appeal. First, that Blue Cross is a dominant buyer that sets reimbursement rates using a statewide pricing schedule. Even if a provider has a monopoly in one region, the provider would be unable to increase Blue Cross’s reimbursement rates, so the merger would not impact prices. This argument failed based on evidence from Blue Cross that Sanford, after the proposed merger, would indeed have the power to force Blue Cross to choose between raising prices or leaving the Bismarck-Mandan region, according to the appellate court.
The companies argued that Catholic Health, a competitor of Sanford, was poised to enter the Bismarck-Mandan market, which would counteract the anticompetitive effects of the merger. The court rejected this argument, because of Catholic Health’s testimony that it could not timely compete with Sanford in the Bismarck-Mandan market.
Sanford and MDC also argued that the district court erred in evaluating the quality efficiencies that would be generated by the merger (for example, a combined and customized electronic medical records system). But the bulk of the efficiencies were not derived specifically from the merger (the companies could have offered them without the merger, even if they were not already doing so), and efficiencies almost never justify a merger to monopoly or near-monopoly.
This case is No. 17-3783.
Attorneys: Elizabeth C. Arens for the FTC. Elin S. Alm, Attorney General's Office, for State of North Dakota. Robert M. Cooper (Boies Schiller Flexner LLP) for Sanford Health, Sanford Bismarck and Mid-Dakota Clinic, PC.
Companies: Sanford Health; Sanford Bismarck; Mid-Dakota Clinic, PC
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