Santa Barbara Cottage Hospital is part of Cottage Health System, which plans to merge with Sansum Clinic, a physician network. (Business Times file photo)

As the regulatory review of the proposed merger between Cottage Health System and Sansum Clinic  stretches to the six-month mark, a recent federal court ruling points out key issues that arise when a dominant hospital system buys a major physician group.

In an Idaho case decided earlier this year, the Federal Trade Commission intensely focused on whether the deal was likely to raise health-care costs for consumers.

In deciding the case, a federal judge conceded that the transaction was likely to improve patient outcomes but struck down the merger because it created a juggernaut that could pressure insurers into paying higher rates that would be passed on to consumers.

On the South Coast, Cottage and Sansum submitted their proposed merger to regulators last fall. The process is not open to the public, and the FTC has a range of options, including imposing conditions on the merger before approval.

Both groups declined to release the documents that they sent to the FTC to the Business Times.

“Cottage Health System is committed to assuring access to affordable health care for the communities we serve,” Cottage spokeswoman Maria Zate said in an email. “We value the collaboration of our entire medical staff in achieving this goal.”

Sansum Clinic declined to comment for this story.

An FTC spokesman said the commission can’t comment on the Cottage-Sansum deal because it is currently under review.

Meanwhile, a newly formed group of independent doctors has already voiced concerns that a combined Cottage and Sansum would have unprecedented power to negotiate higher rates with insurers and other payers. The independent doctors also worry that patients will have fewer choices and could receive less personalized care.

Attorney Bart Walker, who handles hospital transactions for North Carolina-based law firm McGuireWoods, said the FTC “looks at a variety of factors, but primarily it’s concerned with maintaining the competitive environment.” He said the case of  St. Luke’s Health System in Idaho shared many similarities with the Cottage-Sansum deal.

FTC intervention in Idaho

In 2013, the FTC and Idaho officials filed a federal lawsuit seeking to block St. Luke’s Health System from buying Saltzer Medical Group. St. Luke’s operated seven hospitals in Idaho with nearly 850 beds. Saltzer has only 41 physicians, but it is Idaho’s largest independent, multi-specialty physician practice group and was the dominant group of primary care physicians for Nampa, a city of 81,000.

The deal was blocked at the end of January. In his decision, Federal Judge B. Lynn Winmill wrote that “St. Luke’s is to be applauded for its efforts to improve the delivery of health care in the Treasure Valley. But there are other ways to achieve the same effect that do not run afoul of the antitrust laws and do not run such a risk of increased costs. For all of these reasons, the acquisition must be unwound.”

The FTC said the bargaining power with insurers and other payers was a key driver of its case.

“The combination of St. Luke’s and Saltzer would have given the merged hospital system the market power to demand higher rates for health care services, ultimately leading to higher costs for both employers and consumers,” FTC Chairwoman Edith Ramirez said in a statement after the court victory. “Keeping health care costs low and quality high by ensuring vigorous competition between providers is, and will continue to be, a top Commission priority.”

Independent doctors

Santa Barbara Preferred Health Partners has formed to bring together 175 independent doctors from 40 different specialties. Physician Michael Bordofsky said that the group was formed in part over concerns about the Cottage-Sansum merger.

“It’s clear in this community that the large, powerful groups — Cottage, Sansum — have been able to negotiate better rates from payers than independent groups of physicians,” Bordofsky said. “The larger and more powerful they become, the better they’re going to do negotiating rates. That does drive up costs to the consumer. Just as important, it threatens the choices that people have.”

It’s unclear exactly how the Cottage-Sansum merger would affect competition. Sansum has about 180 physicians. Cottage says it has about 650 physicians on its medical staff, but that figure includes Sansum and independent doctors who have admitting privileges.

With five facilities, Cottage is essentially the only hospital operator in the Santa Barbara region and parts of the Santa Ynez Valley. The nearest competing hospitals are in Ventura and Lompoc.

Comparing markets

Health-care costs can vary sharply between markets, with competition as the main driver.  Greg Van Ness, CEO of Ventura-based Tolman & Wiker Insurance Services, which has no relationship with either Sansum or Cottage, pointed to the example of the Sacramento area. With a population of more than 2 million, that region transitioned from having 15 independent hospitals in the 1990s to only four systems today.

“Because of the concentration of a small number of large providers, the rates that get passed along through the insurers are generally higher than Los Angeles,” Van Ness said. “You can get less expensive health insurance in Los Angeles than you can in Sacramento because of competition.”

On the South Coast, the independent doctors have not yet come together to negotiate rates as a group.  Bordofsky said that the group could take that step in the future. But Walker, the hospital deal attorney, said the existence of a robust group of independent doctors could, paradoxically, help the Cottage-Sansum deal pass regulatory scrutiny. “Generally, it increases the odds the transaction will be approved if there are viable competitors in the market,” Walker said via email.