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From Antitrust Law Daily, April 22, 2014

FTC order breaking up Ohio hospital merger upheld

By Jeffrey May, J.D.

The FTC properly found that a merger between two of the four hospital systems in Lucas County, Ohio, would adversely affect competition in violation of § 7 of the Clayton Act, the U.S. Court of Appeals in Cincinnati has ruled. In denying a petition by acquirer ProMedica Health System for review of the Commission’s opinion and final order for divestiture (2012-1 Trade Cases ¶77,840), the court noted that the agency’s analysis of the merger was comprehensive, carefully reasoned, and supported by substantial evidence in the record (ProMedica Health System, Inc. v. FTC, April 22, 2014, Kethledge, R).

In 2012, the FTC ordered ProMedica, a non-profit healthcare system headquartered in Toledo, Ohio, to divest a Toledo hospital (St. Luke’s) that it acquired in August 2010, after finding that the acquisition was anticompetitive. ProMedica, by far the county’s dominant hospital provider, had closed the merger with St.Luke’s; however, a “Hold Separate Agreement” between the parties and the FTC barred ProMedica from terminating St. Luke’s contracts with Managed Care Organizations (MCOs), eliminating or transferring St. Luke’s clinical services, or terminating St. Luke’s employees without cause.

Relevant markets. The appellate court agreed with the Commission’s relevant markets for purposes of analyzing the merger’s competitive effects: (1) a cluster market of primary (except obstetrical services) and secondary inpatient services; and (2) a separate market for obstetrical services.

ProMedica objected to the Commission’s clustering methodology to analyze the competitive effects. Because each individual medical procedure could give rise to a separate market in which to analyze the merger’s effects, the parties agreed that the proper approach was to “cluster” the markets. The parties disagreed, however, on the principles that should govern which services were clustered and which were not.

The Commission adopted an “administrative-convenience” theory, under which there was no need to perform separate antitrust analyses for separate product markets when competitive conditions were similar for each. The Commission applied this theory to cluster both primary services (except obstetrical services) and secondary services. After the merger, ProMedica had a market share above 50% in the market for so-called primary and secondary services and above 80% in the market for obstetrical services. The Commission excluded tertiary services from its analysis of the merger’s competitive effects.

The court rejected ProMedica’s contention that the Commission’s clustering methodology contradicted the 2010 Horizontal Merger Guidelines. ProMedica argued that under the Guidelines the “[m]arket definition focuses solely on demand substitution factors” but that the Commission focused on “supply-side” considerations. “The reference to demand-side considerations in § 4 of the Guidelines concerns the manner in which one defines a relevant market, not the conditions under which one can cluster admittedly different markets when analyzing a merger’s competitive effects,” the court explained.

The court refused to accept ProMedica’s suggestion that a package-deal theory should apply because MCOs typically bargained for all of a hospital’s services in a single negotiation. “There are no market forces that bind primary, secondary, tertiary, and OB services together like a single plywood sheet,” the court said. The court also noted that ProMedica conceded in its answer to the FTC’s complaint that the “more sophisticated and specialized tertiary and quaternary services, such as major surgeries and organ transplants, also are properly excluded from the relevant market[.]”

Presumption. ProMedica also argued that the Commission was wrong to presume the merger was illegal based upon increases in Herfindahl-Hirschman Index (HHI) data alone. HHI data is typically used to measure market concentration. In this case, the strong correlation between market share and price and the degree to which the merger would further concentrate highly-concentrated markets fully supported the Commission’s application of a presumption of illegality.

The record showed a strong correlation between ProMedica’s ability to impose price increases and its market share. “[T]he Commission had every reason to conclude that, as ProMedica’s dominance in the relevant markets increases, so does the need for MCOs to include ProMedica in their networks—and thus so too does ProMedica’s leverage in demanding higher rates.” Moreover, the Commission was entitled to take seriously the alarm sounded by a merger’s HHI data, according to the court. Further, the Commission did not merely rest upon the presumption, but instead discussed a wide range of evidence that buttressed it.

The court also concluded that ProMedica failed to rebut the presumption of illegality. “ProMedica did not even attempt to argue before the Commission, and does not attempt to argue here, that this merger would benefit consumers (as opposed to only the merging parties themselves) in any way,” the court pointed out. ProMedica argued that St. Luke’s was a “weakened competitor” and in such dire financial straits before the merger that it “was not a meaningful competitive constraint on ProMedica.” However, the court called this argument a “Hail-Mary pass of presumptively doomed mergers—in this case thrown from ProMedica’s own end zone.” St. Luke’s difficulties before the merger did not provide a basis to reject the Commission’s findings about the merger’s anticompetitive effects.

Divestiture remedy. The Commission did not abuse its discretion in choosing divestiture as a remedy, the court concluded. There was no basis for disputing the Commission’s determination that ProMedica’s suggested “conduct remedy”—which would have established, among other things, separate negotiation teams for ProMedica and St. Luke’s—was disfavored and unwarranted.

FTC reaction. “The Sixth Circuit’s decision affirming the Commission’s ruling is a victory for the residents of Lucas County, Ohio, and ensures that they will continue to benefit from competition,” said FTC Chairwoman Edith Ramirez. “As this decision demonstrates, the FTC’s vigilant enforcement of the antitrust laws in health care provider markets helps deliver lower cost, higher quality health care to consumers.”

The case is No. 12-3583.

Attorneys: Douglas R. Cole (Organ Cole + Stock LLP) for ProMedica Health System, Inc. Michelle Arington for FTC.

Companies: ProMedica Health System, Inc.

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