Business

St. Luke’s-Saltzer deal led to friction, factions, millions of dollars spent in Treasure Valley

Saltzer Medical Group went from a multimillion-dollar independent practice to a leaner group owned by a larger health system, within about a year. St. Luke’s now says it can’t find anyone willing to take over Saltzer and that it cannot just release the practice, because Saltzer won’t take back the specialized services that St. Luke’s had absorbed.
Saltzer Medical Group went from a multimillion-dollar independent practice to a leaner group owned by a larger health system, within about a year. St. Luke’s now says it can’t find anyone willing to take over Saltzer and that it cannot just release the practice, because Saltzer won’t take back the specialized services that St. Luke’s had absorbed. kjones@idahostatesman.com

A storied medical group was born in the 1970s. The founding doctor was Joseph Saltzer, whose chance encounter with a rancher whose bull had a strep infection laid the path to his success as a Treasure Valley physician. The Saltzer Medical Group grew from a handful of doctors to become one of the largest practices in the state.

In 2013, one of its biggest business decisions was the subject of a federal antitrust court case that national experts believed could shape the future of a common practice in the health care industry: hospitals buying up doctors’ practices.

At its heart, the lawsuit also was about the future of two Idaho health care giants: St. Luke’s and Saint Alphonsus health systems. Both of the systems wanted to build new hospitals in Nampa, where Saltzer is based. There were hundreds of millions of health care dollars up for grabs in Canyon County, and many patients from there were driving to Boise or Meridian for care.

Saltzer was a linchpin.

The story of St. Luke’s multimillion-dollar purchase of Saltzer — and the ongoing battle after a judge ruled the buyout illegal — is told in hundreds of documents. They offer an intimate look at the year in which Saltzer split into factions; St. Luke’s and Saint Alphonsus tried to predict what the takeover and the lawsuit would mean for them; and the dealmakers kept going even after authorities cautioned them not to.

A SCHISM

Saltzer worked with St. Luke’s for decades. They coordinated in the mid- to late 2000s, recruiting doctors and growing in tandem in Nampa and Meridian.

In 2011, they got serious about uniting. Saltzer was the biggest primary-care provider in Canyon County, and St. Luke’s was the “dominant” hospital system in the entire Treasure Valley. Their union made sense, Saltzer leaders believed. Leaders from both organizations assembled a team of five to six people to negotiate a deal.

Those talks took a turn in October 2011. The Saltzer practice at the time was co-owned by more than two dozen physicians. Their habits and desires did not always mesh. The prospect of joining St. Luke’s ticked off some of the doctors. They didn’t want to be under the thumb of a health system. They owned shares of Treasure Valley Hospital — a surgical center that competed with St. Luke’s and eventually sued St. Luke’s over the Saltzer deal. They wanted an exit strategy if the buyout went wrong.

Saltzer is dealing with significant internal friction ...

Confidential discussion document related to 2012 Saltzer acquisition

But talks progressed, and Saltzer had offers on the table from St. Luke’s and Saint Alphonsus. A spokesman for Saint Alphonsus — a local health system that is part of the much larger, national CHE Trinity Health — said its bid was in part a defensive move to keep St. Luke’s from acquiring the physician group.

DOLLARS AND CENTS

Both offers initially contained clauses that would require Saltzer doctors not to compete with the health systems if they decided to part ways, a Saltzer document shows.

Both also offered salary guarantees, sabbaticals, eight or 12 weeks of vacation per year, and $1,000 or $3,300 per weekend to doctors who agreed to be on call beyond their usual schedule (though Saltzer said the $1,000 offered by St. Luke’s was “unacceptable” and should be revised).

Thousands of dollars for a weekend wasn’t unheard of at the time. A national report based on 2012 data said on-call compensation ranged from $75 to $2,400 per day, with about 35 percent of doctors receiving those daily stipends. Surgeons claimed a median $1,000-a-day stipend; primary-care doctors made $150 a day.

UNINTENDED CONSEQUENCES

In the end, Saltzer voted to go with St. Luke’s — a decision that turned out to be a costly and tricky move for both businesses.

St. Luke’s spent tens of millions of dollars on the Saltzer acquisition and is likely to spend tens of millions more on bills from the antitrust lawsuit.

The state, federal and private plaintiffs argued that St. Luke’s was poised to profit from the Saltzer acquisition well into the future — not just from the patients Saltzer would bring, but from the referrals Saltzer would make to St. Luke’s surgeons, specialists, medical imaging centers and laboratories.

St. Luke’s offered to pay Saltzer’s primary-care doctors more than what they made as independent doctors. It expected to fund those raises through higher Medicare charges — because Medicare pays more for procedures when they’re under the umbrella of a hospital and through “other downstream revenue sources” such as labs, specialists and imaging.

There also is evidence in the documents that St. Luke’s, as it became a larger player in a community, could demand higher payments from insurance companies.

But, at least when the acquisition was being completed, St. Luke’s projected a net income from Saltzer of $91,000 for the year — a fraction of 1 percent of its multimillion-dollar investment in the buyout. The health system had its eye on Canyon County as a growing population hub, and it needed to have primary-care doctors flying the St. Luke’s flag there, especially as it drafted plans to build a full-scale hospital nearby.

PRACTICE TORN APART

The deal gutted Saltzer’s business, according to Saltzer’s recent statements to a federal court.

Saltzer revenues were about $45 million per year before it was acquired. Emails exchanged between Saltzer doctors who owned the business at the time say that amount was cut in half when several of Saltzer’s most profitable surgeons left because they didn’t want to become St. Luke’s employees.

For months, the prospect of joining St. Luke’s created a schism at Saltzer.

The many doctors who held ownership — and votes — in Saltzer split into factions. They wrote scathing emails and text messages, some using mild profanity. They engaged in campaigns to win hearts and minds, sending letters to partners who were on the fence. Employees involved in the deal talked about the toll it took on what had been the longest-running business of its kind in the state.

“(It) saddens me that the group has become divided in the past several months as this Luke’s deal rapidly approaches closure,” said one email from Andrew Curran, a Saltzer doctor who later left to work for Saint Alphonsus.

I guess I’m seeing firsthand what greed can do to individuals.

Nancy Powell, Saltzer’s former chief financial officer, in a 2011 email

BATTLE GOES PUBLIC

When it learned that Saltzer was planning to sell to St. Luke’s, the Idaho attorney general and the Federal Trade Commission took interest. They began an investigation into possible antitrust violations — and warned the businesses to put the deal on hold or risk being sued.

St. Luke’s and Saltzer pressed on and made plans to close the sale in late 2012.

Saint Alphonsus and Treasure Valley Hospital sued, asking a federal judge to block the deal until antitrust allegations went to trial. The request for a temporary block gave Saint Alphonsus some time to weigh its options.

Sally Jeffcoat, then the CEO of Saint Alphonsus and now a regional executive for CHE Trinity Health, exchanged emails with other Saint Alphonsus leaders about a week before suing. Jeffcoat suggested the hospital “double down on our physician liaison and business development strategy.” If the judge blocked the deal, she said, Saint Alphonsus should use the time to “develop an approach for Saltzer.”

Our PR campaign will have to be effective, with being patient centered and keeping patients close to home.

Sally Jeffcoat, former Saint Alphonsus CEO, in a 2012 email

She also wondered, “What will happen to our project we are building currently, and what will we do to address the potential build of a hospital by (St. Luke’s in Nampa).”

EYE ON THE FUTURE

To open a new hospital, Saint Al’s and St. Luke’s both needed doctors who would be willing to staff its departments. They needed doctors to admit or refer patients to the new hospital for surgeries and other procedures.

Saint Alphonsus planned to build a new, updated hospital near Interstate 84 to replace its aging one about 20 minutes south of the highway. Saint Al’s feared it wouldn’t have enough referrals and admissions for that hospital if Saltzer joined St. Luke’s and started to steer patients to St. Luke’s hospitals.

St. Luke’s executives and several doctors have said that worry is unfounded. In court testimony, they said St. Luke’s and Saltzer both refer to competitors and wouldn’t stop.

Saint Alphonsus Chief Financial Officer Blaine Petersen said in a Statesman interview that “the decision to build the replacement hospital had to do with the demographics. ... Being more convenient to a larger number of patients. Building a state-of-the-art facility. We would have done it regardless of what happened with Saltzer.”

But, he said, the litigation “caused us to pause” those plans.

Meanwhile, St. Luke’s had sketched out plans for — and borrowed more than $100 million it could use to build — a hospital in Nampa. “In order to build a new hospital, you need to have the support of a medical staff,” said minutes from a St. Luke’s executive meeting. “Having the support of (Saltzer) would be helpful.”

St. Luke’s broke ground this August on the $97 million hospital next to its existing health plaza near Midland Boulevard and Cherry Lane.

St. Luke’s Chief Operating Officer Chris Roth told the Statesman that St. Luke’s had “intended all along to proceed with the hospital, because that’s what the community needs, regardless of whether we have an affiliation or integration with Saltzer.

“That said, the ... support of the medical community is crucial.”

Saint Alphonsus thought that if St. Luke’s opened a new Nampa hospital, it would have a “devastating” effect on Saint Alphonsus, according to a document the Saint Alphonsus Nampa CEO approved.

QUESTIONS RAISED WITHIN ST. LUKE’S

Debate also bubbled within St. Luke’s. Thomas Huntington, a doctor and member of the regional board of directors then and now, questioned the practice of buying out doctors, writing in an email, “Let’s be realistic. Employing physicians is not achieving better costs. It is achieving better profit.”

A St. Luke’s cardiologist complained that some Saltzer doctors did not meet clinical, ethical and cultural standards.

“It will be very disappointing to us doctors who work on the west side (of the Treasure Valley) to have to refer to these guys because they are now part of Luke’s when we are fully aware that they offer a far inferior product to what our colleagues at IPA (Idaho Pulmonary Associates in Meridian) can provide,” the doctor wrote in an email.

Roth said there was overarching support inside St. Luke’s for the acquisition.

“Anytime you work with a large group, (there are) things in any merger or acquisition you end up working through,” he told the Statesman. “At the highest level (you have) pretty good alignment, and then ... you work through the details.”

If we didn’t think there was an alignment, we would not have moved forward.

Chris Roth, chief operating officer of St. Luke’s Health System

At the same time, the Federal Trade Commission’s inquiry into the Saltzer deal put on hold the St. Luke’s acquisition of another business: the Elmore Medical Center, which had been a tax district-owned hospital in Mountain Home. The Saltzer legal issues, paired with the hurdles of weaving together two businesses, delayed that merger by about a year.

There was a hiccup along the way after Saltzer became part of St. Luke’s.

St. Luke’s and Saltzer emphasized in court documents at the trial that Saltzer doctors would now be able — and required — to take low-income Medicaid and uninsured patients in Canyon County. But emails a few months after the takeover described “the third example of Saltzer turning down Medicaid patients in less than a week.”

The deal cost St. Luke’s dearly, and the takeover costs aren’t over yet.

St. Luke’s put about $16.5 million just into getting the deal done. That included a payment to Saltzer doctors of about $9 million that they would keep if the deal eventually fell through.

$16.5 million The lower end of how much Saint Alphonsus and St. Luke’s expected to spend on Saltzer

St. Luke’s also promised to pay Saltzer’s doctors a guaranteed salary that witnesses testified was about the same as the $8.5 million to $9.5 million that Saint Alphonsus had offered.

The ensuing lawsuit will continue to cost St. Luke’s money. St. Luke’s said in recent court filings that it could be on the hook for more than $25 million in attorney fees and costs.

INSIDE SALTZER

The internal emails indicate that Saltzer doctors wondered if they were getting into a bind from which Saltzer’s only exit was to join a larger system.

As the Federal Trade Commission scrutinized the deal, and a handful of surgeons quit, at least one Saltzer doctor voiced alarm, asking why the practice wasn’t coming up with a contingency plan for survival if the acquisition fell apart.

Saltzer today is working through those issues, having told a federal court that post-acquisition Saltzer cannot simply resume its prior business.

After tens of millions of dollars sunk into a deal, Saltzer told the court earlier this year, the practice is now incapable of returning to its former self, one of the most robust health care businesses in the Treasure Valley. It could not afford to reclaim its labs and other “ancillary” services.

Saltzer President John Kaiser declined to be interviewed for this story. Through a spokesperson, he sent the Statesman this statement:

“The Idaho Statesman has now written a half-dozen stories looking back at a complex court case that was decided in 2014. ...

It is fair to say the legal issues have been widely discussed and reviewed. Meanwhile, our focus at Saltzer Medical Group remains directed to the future and ensuring the highest quality care for our patients.

Saltzer President John Kaiser in an email to the Statesman

“Anyone following these issues is aware that health care in the Treasure Valley is now, and always has been, a ‘team sport’ where a variety of providers in a range of locations work together to provide the best possible outcome for patients. We remain committed to that proposition.

“We certainly respect the decision of the court, and we continue to work to implement a plan that serves our patients and helps ensure Saltzer’s economic viability far into the future.”

 

Audrey Dutton: 208-377-6448, @IDS_Audrey

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