Hospitals and healthcare systems that are pursuing a strategy of acquiring and integrating physician group practices are certainly aware of the Stark Law and Anti-Kickback Statute issues associated with these transactions. In a recent case arising out of Reno, Nevada, however, the Federal Trade Commission has served notice that it too is paying close attention to these transactions, and that it will bring enforcement actions in situations where it believes that competition has been significantly adversely affected.
Renown Health of Reno, Nevada (“Renown”) 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 sixteen 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.
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 November 24, 2010. In connection with the acquisition of the assets of SNCA, fifteen 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.
Renown closed the acquisition of RHP on March 17, 2011. In connection with the acquisition of the assets of RHP, seventeen 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, Nevada.
Having defined the product and geographic markets in this manner, the FTC noted that, after the consummation of the RHP acquisition, Renown employed 97% 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% of the cardiologists in the Reno, Nevada 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.
Renown agreed to enter into two consent orders to settle the Complaint. The FTC stated that the “goal of the Consent Orders in these matters is to restore competition for cardiology services in the Reno area as quickly as possible.” The FTC sought to accomplish this goal primarily by requiring Renown to suspend enforcement of the restrictive covenants in the physician employment agreements. Under the Consent Orders, Renown agreed to allow the cardiologists to confidentially explore other employment opportunities in the Reno, Nevada area; and, if a physician elected to work elsewhere, Renown agreed to terminate the physician’s employment agreement and to waive enforcement of the restrictive covenants. The Consent Orders provided that Renown must allow a minimum of six, but not more than ten, of its employed cardiologists to terminate their employment agreements and to go to work for a competitor or competitors in the Reno market.
The facts of the Renown case are obviously extreme. Rarely will a hospital or health care system in a competitive marketplace employ 88% of the physicians in a specific specialty. The Renown case should nevertheless serve as a cautionary tale for healthcare systems that are aggressively acquiring physician practices and integrating physicians into its system. The FTC is clearly keeping a sharp eye on physician acquisition and integration transactions. If a healthcare system, through its acquisition and integration activities, employs a dominant share of the physicians in a particular specialty, and if the FTC believes that as a result of the health system’s acquisition and integration activities it is effectively limiting competition based on price, quality and other terms in the relevant market, then the FTC has shown that it will not hesitate to bring an action to enforce federal anti-trust law.
The facts of every situation are unique. A healthcare system that controls almost 90% of the market in a particular professional medical specialty obviously runs a significant risk that the system’s contracting activities may be challenged on anti-trust grounds. Significant anti-trust concerns may be raised even if a system controls a much lower percentage of the physicians in a single specialty in a given market, however. 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 anti-trust analysis of a proposed transaction or series of transactions where the effect of the transaction(s) may give the system sufficient market power to eliminate or substantially reduce competition.