We are in the middle of series of posts exploring the recent obstruction of trade case in Boise, Idaho against St. Luke's Health System.

Click here for part one of this series.

Click here for part two of this series.

Click here for part three of this series.

Click here for part four of this series.

With the plaintiffs having established a prima facie case (one of the few things that I remember from my college debate team days, and I feel so smart when I say it) that the acquisition of the Saltzer Medical Group was anticompetitive, the question turned to how St. Luke’s would defend its actions.

They made two basic arguments, both right out of the front page of the hospital system playbook.

First, St. Luke’s argued that healthcare costs too much because of the fee-for-service payment system. With that, the judge seemed to agree. Therefore, they needed to build an integrated delivery system with a bunch of employed physicians in order to care for people in a seamless way, on a proactive basis, with coordinated care, moving toward population management, and yada yada yada.

You know exactly what they said.

‘We are pursuing the grand vision,’ was the claim. ‘Trust us, at some point, this will all magically kick in. Quality will improve. Access will increase. Cost will drop. Yes, yes, in the meantime we have these pesky cost increases that look a lot like a monopolist simply using its leverage to get better pricing. But that is just the cost of getting to the Promised Land.’

I paraphrased slightly.

Second, even Epic makes an appearance in the defense. They are everywhere. Yes, part of the argument for acquiring 80% of the primary care physicians in Nampa (and asking people to overlook those anticompetitive facts) was hinged on St. Luke’s $40 million Epic implementation. You have to really concentrate hard to see that connection, but Epic executives have to be thrilled because the testimony of the St. Luke’s folks is better than anything the Epic marketing department could ever write. Epic not only solves every problem in healthcare, but it also makes a killer omelet.

Unfortunately for the argument, there is nothing about Epic that says it can’t be offered to independent physicians. In fact, St. Luke’s had a program to allow independent physicians to have access to their installation of Epic. So all of those great benefits, fresh breakfast included, could be shared without the physicians having to be employed.

Ironically, this was called the ‘Efficiency Defense.’

As you know by now, in his ‘Findings of Fact and Conclusions of Law’ Judge B. Lynn Winmill rejected the defense and has ordered St. Luke’s to divest the Saltzer Medical Group. In another piece of delicious irony, the original deal between the clinic and the hospital states that in the case of divesture, the docs get to keep $9 million of the $16 million paid. That should help cover the legal bills.

So kids, what did we learn this week?

Lots, but let me sum it up with one of Judge Winmill’s final statements:

However, the Findings of Fact demonstrate that while employing physicians is one way to put together a unified and committed team of physicians, it is not the only way. The same efficiencies have been demonstrated with groups of independent physicians.

As we have been saying here from the beginning, there is, in fact, a sustainable path to continued independence for physicians if you are willing to take it. Now we can quote an esteemed federal judge to back us up.

We are in the middle of series of posts exploring the recent obstruction of trade case in Boise, Idaho against St. Luke's Health System.

Click here for part one of this series.

Click here for part two of this series.

Click here for part three of this series.

One of the most hilarious lines from a hospital executive, especially when they try to say it with a straight face, is that their employed primary care physicians are free to refer patients to whichever specialists they wish, and in fact, their employed specialists are free to put their patients in whatever hospital they want, including the competition.

OK, that is technically true, but it still causes most rational people to giggle a bit when someone tries to claim in earnest that the employment of physicians does not impact referral and admission patterns.

Uh, then why did you employ them in the first place?

One great thing about a federal trial is that a lot of information gets out there and on the record. Judge Winmill's 'Findings of Fact and Conclusions of Law' is a treasure trove.

A cardiovascular practice was acquired by St. Luke's. Prior to the acquisition, they admitted 1 of every three patients into St. Al's, the other hospital in town. After they were acquired? Zero.

An orthopedic group had put over half of its patients in St. Al's before it was acquired. After being snatched up by St. Luke's, that number fell to 6%.

A primary care group did 81% of their imaging at St. Al's before being acquired, and then a whopping 19% after their paychecks said 'St. Luke's' across the top.

Can we just call a spud a spud?

We are in the middle of series of posts exploring the recent obstruction of trade case in Boise, Idaho against St. Luke's Health System.

Click here for part one of this series.

Click here for part two of this series.

In the last post, we looked at the inappropriate market leverage gained by St. Luke's, even before its acquisition of the Saltzer clinic. Besides the math from the economists and Blue Cross of Idaho, there were plenty of internal communications from both St. Lukes and Saltzer that affirmed that was exactly part of their objective in getting together. But contracting leverage was not the only way the deal would enhance revenue.

Another was our old friend, 'hospital-based' billing.

If you are regular reader of this space, you may know we have been railing on this very dumb thing for years. Once a physician practice is acquired by a hospital, costs go up because routine services such as lab and x-ray that used to be billed at a lower ambulatory rate and now are now billed at the much higher hospital rate. This is true for government payers as well as commercial ones.

Now we have an esteemed federal judge on record agreeing with us and saying he also thinks this wrinkle has problems. Can we please get someone in Congress to read the 'Findings of Fact and Conclusions of Law' from this case?

Judge Winmill cites the Berkely Forum Study as stating the cost for physician services go up because of hospital-based billing, but he did not even need that source. St. Luke’s own analysis of the Saltzer acquisition had already concluded the same thing, with their own consultant projecting a revenue increase of $750,000 from lab billing and another $900,000 from diagnostic imaging.

Sounds like a $1.65 million increase in the cost of healthcare in Nampa, Idaho for the exact same services.

Coincidently, there are about 1.6 million people that live in Idaho. So, consider that a $1 per person tax for something that does not even pretend to deliver any benefit to the people. Just one way to look at it.

Blue Cross triangulated this fact with its estimate that what it would have pay for Saltzer’s ancillary services would go up 30-35% after the acquisition, just because of hospital-based billing.

And right there in section 127 of Judge Winmill’s report it states that St. Luke’s planned to fund the 30% pay raise it promised to the Saltzer physicians with the additional revenue it would get from ‘hospital-based billing.’

We’re bending the cost curve here, but I think this is the wrong direction.

We are in the middle of series of posts exploring the recent obstruction of trade case in Boise, Idaho against St. Luke’s Health System.

Click here for part one of this series.

The case in Boise against St. Luke's went to the heart of the entire premise of the hospital-centric integrated delivery system.

St. Luke's argued that it was buying physician practices in order to build a better delivery mousetrap, one that would address the problems of the fractured current system. They claimed their strategy, like many other hospital-based systems, would improve patient outcomes. The court generally agreed that if left intact, it could have had that effect.

But the antitrust laws are there to answer a very specific question that is relatively blind to particular policy leanings of one political party or the other. The issue before the court was whether St. Luke’s, with the acquisition of the Saltzer clinic, would have anticompetitive power in the Nampa market. The court concluded it would.

It also concluded there are other ways to achieve the desired outcomes of improved patient outcomes and lower cost besides having the big hospital system employ all of the physicians. This is a huge point.

There are several tests a court takes when assessing whether or not a player such as St. Luke's has amassed so much power as to make the market anticompetitive. One of those is market share.

The 'Findings of Fact and Conclusions of Law' discusses a highly complicated mathematical measure to calculate market share concentration. I must admit that this section of the judge’s report goes better with a nice cabernet in hand, but I battled through. There is this little index that ranges from 0 (a hypercompetitive market with an infinite number of opportunities for the consumer) to pure monopolistic 10,000 (only one choice).

The wizards behind this measure say that a market is highly concentrated (that is, consumers are in danger of getting the short end of the stick) if the index is calculated to be 2,500 or higher. They also say any particular merger that increases the measure from what it was by 200 points or more is presumed to 'enhance market power.'

The Saltzer deal caused the Nampa market index to jump to 6,219, an increase of 1,607 points due to this deal alone.

Boom. The economists have spoken.

So what does the Herfindahl-Hirschman Index mean in English?

Leverage, my friends, leverage.

According to Blue Cross of Idaho, the largest payer in the state, in 2007 St. Luke’s Boise hospital was receiving an average level of reimbursement compared to other facilities in the state. Between 2007 and early 2012, St. Luke’s acquired around 80 physician clinics in the area, all of this even before they acquired the big Saltzer clinic.

What happened because of those acquisitions?

In 2012, the St. Luke's system had three of the five top paid hospitals in Idaho and its top hospital was getting 21% more than the average Idaho hospital.

Anyone want to guess what the Blues would be facing in the next round of contract negotiations, what with the market now at the sizzling 6,219 on the HHI?

Boom. The payers have spoken.

Lofty visions aside, that kind of leverage does not benefit the good people of Idaho.

Boom. The judge has spoken.

People in Boise are proud of their famous spuds and the bright blue Astroturf of the Boise State football stadium, but otherwise are generally happy staying out of the spotlight and quietly enjoying life in Idaho. But recently, Boise has been the epicenter of a landmark healthcare trial, a major lawsuit against the biggest health system in state that was accused of becoming too powerful a monopoly.

Because I am a healthcare nerd, and because we have some friends in that market and know a little bit about the dynamics at play there, I have been following the case. To prove the depth of my nerdiness, I recently read the entire 52 page 'Findings of Fact and Conclusions of Law' issued by Chief Judge B. Lynn Winmill that laid out his rationale for ordering the divestiture of a large physician group recently acquired by the health system. People around the country have been watching this case with interest, and for good reason, because the essence of the integrated delivery system model was being challenged.

Because you have a better social life than me and have not read the 52 page court document, our posts this week will summarize the findings of the case that are germane to our ongoing discussions here. It is fascinating.

First, let me briefly outline the situation.

St. Luke's is the largest integrated delivery system in Idaho. They own a lot of hospitals and employ a lot of docs. At the end of 2012, St. Luke's acquired the Saltzer Medical Group, a 41 physician group in Nampa, a city 30 minutes to the west of Boise.

St. Alphonsus, the other hospital system in the area, and Treasure Valley Hospital, a physician owned surgery hospital in Nampa, sued on the grounds that the Saltzer acquisition made the market uncompetitive in St. Luke’s favor. Eventually, the Federal Trade Commission and the State of Idaho joined the suit against St. Luke’s.

On January 24, 2014, Judge Winmill agreed with the plaintiffs and ordered St. Luke’s to divest the Saltzer practice.

Two key disclosures are in order before we move on. First, ALN has no clients in Idaho, but we do have relationships with some of the physicians at Treasure Valley Hospital. Second, this finding may or may not be appealed.

Tomorrow, we'll start unpacking some nuggets in Judge Winmill’s document.