FTC can challenge healthcare practice mergers

Dr. Derm owns 15 dermatology practices. Dr. Skin owns 12 similar practices. Recently a venture capitalist bought all of these practices and merged them as one practice. All of the dermatologists were given a 20-mile, two-year restrictive covenant.

The goal of these businessmen was to purse a strategy of acquiring and integrating physician group dermatology practices. They were aware of the Stark Law and Anti-Kickback Statute issues associated with such business transactions. However, when they received a Federal Trade Commission (FTC) challenge to the merger, everybody was shocked.

Can the FTC challenge such mergers if it believes that competition has been significantly adversely affected? Recently a similar challenge occurred in Nevada.

Renown Health (“Renown”) of Reno, Nev., is an integrated healthcare delivery system serving a 17-county area comprised of northern Nevada, Lake Tahoe and northeastern California. It owns and operates four general acute care hospitals, a children’s hospital and eight urgent care centers, and it employs a significant number of physicians providing services out of 16 medical group offices across its service area.

The FTC complaint arose out of the acquisition by Renown of two cardiology practices in Reno. The FTC alleged that the acquisition and employment of the physicians working in these two practices substantially lessened competition in the market for cardiology services in and around Reno.

Non-compete covenants

Prior to these transactions, Sierra Nevada Cardiology Associates Inc. (“SNCA”) and Reno Heart Physicians Inc. (“RHP”) were the two largest cardiology practices in the Reno area. Renown closed the acquisition of SNCA on Nov. 24, 2010. In connection with the acquisition of the assets of SNCA, 15 SNCA physicians entered into employment agreements with Renown.

The employment agreements included non-competition, non-solicitation and non-interference restrictive covenants. The non-competition covenant prohibited the employed physician from providing professional and medical services specializing in cardiology as an employee of a hospital, medical practice or other medical facility within a 50-mile radius of the physician’s principal place of practice for two years after the expiration or termination of his or her employment agreement.

In connection with the acquisition of the assets of RHP, 17 physicians associated with RHP entered into employment agreements with Renown. Those employment agreements included restrictive covenants that were identical to or substantially similar to the restrictive covenants in the employment agreements with the former SNCA physicians.

The FTC reviewed the transactions and the impact that the consolidation of the SCNA and RHP physicians into the Renown physician group had on competition in the relevant market. In this case, the FTC defined the relevant product market as “cardiology services” and the relevant geographic market as the “Reno area,” including Warshoe County, Nevada, but not including Carson City, Nev.

Eliminating competition

Having defined the product and geographic markets in this manner, the FTC noted that, after the consummation of the RHP acquisition, Renown employed 97 percent of the cardiologists in the relevant market. Within a short period of time of the closing of the RHP transaction, two of the Renown cardiologists terminated their employment agreements and left Reno. In addition, three new physicians commenced private practice in the Reno area. After these departures and additions to the market, the FTC alleged that Renown controlled 88 percent of the cardiologists in the Reno, Nev., area.

The FTC noted in its Complaint and Analysis of Agreement Containing Consent Orders that, prior to the transactions, SNCA and RHP were competitors in the market for cardiology services. After Renown purchased SNCA, RHP was the only significant competitor for cardiology services in the Reno market. The FTC alleged that Renown’s acquisition of RHP effectively eliminated all competition for professional cardiology services in the Reno market based on price, quality and other terms. Health plans had no bargaining power in negotiating with Renown for cardiology services because there were no competitors for these services in Reno.

The facts of the Renown case are obviously extreme. Rarely will a hospital or healthcare system in a competitive marketplace employ 88 percent of the physicians in a specific specialty. The Renown case should nevertheless serve as a cautionary tale for dermatologists as they also begin to merge into larger practices in this competitive business market.

The facts of every situation are unique. A healthcare system that controls almost 90 percent of the market in a particular professional medical specialty obviously runs a significant risk that the system’s contracting activities may be challenged by the FTC on antitrust grounds. Significant antitrust concerns may be raised even if a system controls a much lower percentage of the physicians in a single specialty in a given market, such as dermatology.

The lesson of Renown is that healthcare systems executing an aggressive physician practice acquisition and integration strategy must remain sensitive to the unique competitive features of its service area, and it should engage in a rigorous antitrust analysis of a proposed transaction.