Harrison (Buzz) J. Frahn IV
Jennifer S. Palmer
Jacques (Jordan) Lamothe
Simpson Thacher & Bartlett LLP
In FTC v. Sanford Health, 926 F.3d 959 (8th Cir. 2019), the United States Court of Appeals for the Eighth Circuit discussed the application of § 7 of the Clayton Act to proposed mergers between healthcare providers. In 2017, amidst the ongoing trend of consolidation in the healthcare industry, two North Dakota healthcare providers, Sanford Bismarck (“Sanford”) and Mid Dakota Clinic, P.C. (“Mid Dakota”) entered into a stock purchase agreement. Id. at 962. Both the Federal Trade Commission and the North Dakota Attorney General sued Sanford and Mid Dakota (collectively, “Companies”) to enjoin the merger, claiming it would substantially lessen competition in violation of § 7 of the Clayton Act. Id.; see 15 U.S.C. § 18. The agencies moved for a preliminary injunction, which the district court issued after an evidentiary hearing. Sanford Health, 926 F.3d at 962. The Companies appealed, leading to the Eighth Circuit panel’s affirmation of the district court’s order preliminarily enjoining the Companies’ proposed merger. Id. at 966. While largely driven by a deferential standard of review, the court’s analysis provides a clear framing of several legal issues that can arise in litigation over healthcare provider mergers, particularly the effect of a strong insurer in the market.
In 2016, North Dakota’s Bismarck-Mandan region was primarily served by three integrated healthcare provider networks: Sanford, which operated multiple clinics and an acute care hospital while employing approximately 54 physicians; Mid Dakota, a multi-specialty physician group comprised of approximately 42 physicians; and Catholic Health Initiatives St. Alexius Health (“Catholic Health”), which employed approximately 88 physicians. Id. at 961‑62. Similarly, the region’s commercial health insurance market was divided between three insurers: Blue Cross Shield North Dakota (“Blue Cross”), Medica, and Sanford Health Plan, respectively accounting for approximately 61%, 31%, and 8% of the market. Id. As the region’s primary insurer,Blue Cross had entered into participation agreements with every general acute care hospital in North Dakota and with approximately 99% of the state’s practicing physicians. Id.
Against this backdrop, Mid Dakota offered itself for sale in 2015, prompting both Sanford and Catholic Health to submit bids. Id. at 962. Mid Dakota ultimately executed an asset purchase agreement with Sanford in August 2016, then entered into a stock purchase agreement with Sanford ten months later. Id. The proposed merger would have resulted in Sanford possessing the following market shares in the region: 99.8% of general surgeon services, 98.6% of pediatric services, 85.7% of adult primary care physician services, and 84.6% of OB/GYN physician services. Id.
The Federal Trade Commission and North Dakota Attorney General both sued to enjoin the merger, then moved for a preliminary injunction. Id. District courts may enjoin a proposed merger if the government shows that, “weighing the equities and considering the Commission’s likelihood of ultimate success, such action would be in the public interest.” FTC v. Tenet Health Care Corp., 186 F.3d 1045, 1051 (8th Cir. 1999). After considering the parties’ arguments and weighing the equities, the district court granted the agencies’ motion for a preliminary injunction based on its finding that the agencies had established a prima facie case that the proposed merger would harm market competition in the areas of adult primary care physician services, OB/GYN physician services, and general surgeon services. FTC v. Sanford Health, Sanford Bismarck, No. 1:17-CV-133, 2017 WL 10810016, at *31 (D.N.D. Dec. 15, 2017). The Companies appealed soon after. Sanford Health, 926 F.3d at 961.
The Eighth Circuit reviews the issuance of a preliminary injunction under an abuse of discretion standard, asking whether the district court based its decision on a clearly erroneous factual finding or erroneous legal conclusion. Id. at 962. Whereas the clearly erroneous standard for vacating or reversing a district court’s factual finding requires a “definite and firm conviction that a mistake has been made,” Pioneer Hi-Bred Int’l v. Holden Found. Seeds, Inc., 35 F.3d 1226, 1235 (8th Cir. 1994), a reviewing court “owes no special deference to the district court” on matters of pure law, Lankford v. Sherman, 451 F.3d 496, 504 (8th Cir. 2006).
II. Baker Hughes Burden Shifting
In a case otherwise dominated by factual issues concerning the effects of the proposed merger on the Bismarck-Mandan healthcare market, the Companies’ first argument on appeal alleged a pure legal error in the district court’s application of the Baker Hughes burden-shifting framework. Sanford Health, 926 F.3d at 963. In evaluating the agencies’ likelihood of success, the district court had applied the burden-shifting framework endorsed by the D.C. Circuit in United States v. Baker Hughes Inc., 908 F.2d 981 (D.C. Cir. 1990). See Sanford Health, 926 F.3d at 962-63. Under that framework, the plaintiff must present a prima facie case that the merger will result in undue market concentration, after which the burden of production shifts to the defendant to rebut a presumption that the merger will substantially lessen competition, then back to the plaintiff to produce additional evidence should the defendant meet its burden. Id. Throughout these burden-shifting phases, the ultimate burden of persuasion remains on the plaintiff at all times. Id.
After finding that the agencies had established a prima facie case that the proposed merger would harm competition, the district court stated, “the burden shifts to the defendants to produce evidence that clearly shows that no anticompetitive effects are likely in order to overcome the plaintiffs’ prima facie case.” Sanford Health, 2017 WL 10810016, at *27 (emphasis added). The district court had drawn its “clearly shows” language from a 1963 Supreme Court decision, United States v. Philadelphia National Bank, which had similarly required a defendant to present “evidence clearly showing that the merger is not likely to have such anticompetitive effects” in order to defeat a plaintiff’s prima facie showing. 374 U.S. 321, 363 (1963).
But in the decades since Philadelphia National, multiple Supreme Court opinions dropped “clearly” from this formulation, leading the D.C. Circuit to conclude that the Supreme Court has, “[w]ithout overruling Philadelphia Bank, . . . at the very least lightened the evidentiary burden on a section 7 defendant.” Baker Hughes, 908 F.2d at 991. Pointing to these more recent cases, the Companies argued the district court erred by shifting the government’s burden of persuasion onto the defendants. Sanford Health, 926 F.3d at 963.
Notwithstanding the district court’s use of Philadelphia National’s outmoded “clearly shows” language, the Eighth Circuit held that the district court applied the proper burden-shifting framework. Id. In line with Baker Hughes, the district court had expressly noted that the agencies retained the ultimate burden of persuasion at all times. Id. And viewing the district court’s citation to Philadelphia National in context, the Eighth Circuit characterized the district court as merely recognizing that, “where the plaintiffs presented strong evidence of monopolization or near-monopolization in each service line, it was necessary for the defendants to make a strong presentation in rebuttal.” Id. Thus, considering the totality of the district court’s burden-shifting analysis, the Eighth Circuit declined to base a finding of legal error on the district court’s out-of-context description of the defendants’ burden.
III. Assessing the Proposed Merger’s Effects
Turning to the Companies’ challenges to the district court’s factual findings, the Eighth Circuit examined the district court’s definition of the relevant market and its assessment of the proposed merger’s potential effects. For both sets of issues, the appellate court determined that the district court had not committed any clear error.
Relevant Market Definition
To start, the Companies took issue with the district court’s definition of the relevant market. Id. The court had defined the relevant geographical area as the Bismarck-Mandan region, and identified four relevant product markets: adult primary care services, pediatric services, OB/GYN physician services, and general surgeon services. Id. To do so, the court employed the “hypothetical monopolist test,” which asks whether a hypothetical monopolist in the proposed market could impose a “small but significant nontransitory increase in price” (“SSNIP”). Id. If consumers could defeat a price increase by switching to products outside the proposed market, the proposed market definition would be too narrow and require redefinition. Id. In this case, based on insurance company testimony and empirical analysis of insurance claims data, the district court found that commercial health insurers would accept a hypothetical monopolist’s SSNIP rather than shift away from offering insurance plans in the Bismarck-Mandan area that included Bismarck-Mandan area physicians providing adult primary care services, pediatric services, OB/GYN services, and general surgeon services. Id. at 963-64.
The Companies argued on appeal that the district court erred in its application of the hypothetical monopolist test by failing to account for Blue Cross’s market power in the Bismarck-Mandan region. Specifically, the Companies claimed that no healthcare provider in the region would be able to impose a price increase on Blue Cross given that insurer’s dominant market position. Id. at 964.
The Eighth Circuit summarily rejected the Companies’ argument for relying on a misunderstanding of the hypothetical monopolist test. Id. The relevant question is not whether a hypothetical monopolist would choose to increase prices on an insurer, the court said. Id. Rather, the test turns on whether consumers, facing an assumed price increase from a hypothetical monopolist, would shift to products outside the proposed market in response to the price increase. Id. Applied to a merger between healthcare providers, the test becomes a question of “whether an 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 in a region outside of the proposed geographic market.” Id. Accordingly, even if Blue Cross’s alleged bargaining power would influence a hypothetical monopolist’s decision about whether to raise prices, that bargaining power would not impact whether Blue Cross could find substitute physician services outside the market defined by the district court. Id. Accordingly, the Eighth Circuit held that the district court did not clearly err in defining the relevant market.
Assessing the Proposed Merger’s Effects
Next, the Companies challenged the district court’s finding that they failed to rebut the agencies’ prima facie showing that the proposed merger would lessen competition in the relevant market. The district court found that the agencies made a prima facie showing with evidence that the proposed merger would push the market’s Herfindahl-Hirschman Index—a commonly used measure of market concentration—“well above” the Department of Justice’s Horizontal Merger Guidelines’ threshold for presuming that the proposed transaction would likely enhance market power. Sanford Health, 2017 WL 10810016, at *27. The Companies raised four arguments in response: first, that market concentration has no relationship to bargaining power in the relevant market; second, that Catholic Health would soon enter the market to compete with Sanford after the merger; third, that merger efficiencies would offset potential harms to customers; and fourth, that Mid Dakota’s weakening condition justified the merger. Sanford Health, 926 F.3d at 964.
Ultimately, the Eighth Circuit held that the district court did not clearly err in rejecting each of these proffered defenses. For their first argument, the Companies again relied on Blue Cross’s alleged bargaining power in the relevant market. They contended that further market concentration among North Dakota healthcare providers would not lead to price increases because Blue Cross sets reimbursement rates using a statewide pricing schedule. Id. As a result, the Companies claimed, even a healthcare provider with a monopoly in one region of North Dakota would not be able pressure Blue Cross to alter its statewide reimbursement rates. Id.
Neither the district court nor the Eighth Circuit found the Companies’ argument convincing. Weighing testimony and evidence from Blue Cross representatives against testimony from the Companies’ expert, the district court concluded that it was unlikely Blue Cross would be able to leverage its market position after the merger to obtain lower prices from alternative suppliers or sponsor new entries into the market. Id. Presented with similar arguments on appeal, the Eighth Circuit succinctly determined that the district court did not clearly err by crediting the agencies’ evidence. Id. at 965.
The Eighth Circuit similarly rejected the Companies’ second argument that Catholic Health’s entry into the market would offset the proposed merger’s anticompetitive effects. While a new competitor’s entrance into a market may counteract a merger’s anticompetitive effects, this only occurs if the entrance is “timely, likely, and sufficient in its magnitude, character, and scope to deter or counteract the competitive effects of concern.” Id. (quoting Horizontal Merger Guidelines § 9). The district court found that Catholic Health’s entry into the relevant Bismarck-Mandan markets, even if possible, would not occur in a timely fashion due to difficulties recruiting physicians and establishing a competitive reputation. Id. Although the Companies pointed to evidence that Catholic Health intended to enter the relevant market and had already begun recruiting physicians, the Eighth Circuit held that the district court did not clearly err by giving greater weight to evidence that Catholic Health’s market entry would not occur soon enough. Id.
Turning to the Companies’ third argument concerning merger efficiencies, the Eighth Circuit concluded that the district court reasonably found that the putative efficiency benefits did not offset the proposed merger’s anticompetitive effects. For efficiencies to counteract anticompetitive effects, they must be “independently verifiable and derived specifically from the merger.” Id. The Companies proffered five allegedly merger-specific consumer benefits that would flow to Bismarck-Mandan region consumers after the proposed merger: (1) Imagenetics, a program integrating genetic medicine into primary care, (2) behavioral health therapists embedded into primary care clinics, (3) cancer care trials and cancer care outreach to communities outside the Bismarck-Mandan area, (4) a combined and customized electronic medical record system that would better integrate and coordinate patient care, and (5) recruitment of subspecialists to the area. Id. The district court, however, found that only the Imagenetics program was merger-specific and that this program, by itself, did not offset the proposed merger’s effects. Id.
On appeal, the Companies argued that the district court erred in finding that four of their proffered benefits were not merger-specific. But under the deferential abuse of discretion standard, the Eighth Circuit determined that the district court’s findings were adequately supported by the record. Id. at 966. Even though Mid Dakota did not currently offer all of those benefits, the FTC’s expert had reported that Mid Dakota was at least capable of developing them without the merger. Id. In the Eighth Circuit’s view, this was sufficient to support the district court’s findings. Id.
Last, the Eighth Circuit accepted the district court’s rejection of the Companies’ argument that Mid Dakota’s poor long-term prospects justified its merger with Sanford. Id. The district court reviewed evidence that Mid Dakota had increased its revenue in the three years preceding the present litigation, offered physician compensation well above the national average, and put itself up for sale to take advantage of a high share value. Id. For those reasons, the district court found that Mid Dakota was financially healthy. The Eighth Circuit summarily concluded this finding was not clearly erroneous.
Although much of FTC v. Sanford Health’s outcome appears to flow from the court’s deferential abuse of discretion review, the opinion offers practical guidance for framing some of the legal issues that arise under § 7 of the Clayton Act when dealing with healthcare provider mergers, particularly with respect to arguments based on an allegedly dominant insurer’s market power. The court’s opinion also illustrates a reluctance to infer from one-off statements that the district court engaged in improper burden shifting when the totality of the district court’s analysis indicates that it correctly applied burdens of persuasion and production.