United States: US Appeals Court Upholds FTC Hospital Merger Decision

Recently the US Court of Appeals for the Sixth Circuit upheld a Federal Trade Commission (FTC) decision prohibiting the largest hospital in the Toledo, Ohio, area from merging with a competing hospital. The decision continues the FTC's recent string of successful, very focused attacks on a limited number of hospital-related mergers. The case is notable for a number of reasons, including:

  1. the court's analysis of what presumptively proves an illegal merger;
  2. the extent to which the court referred to the parties' internal documents and employee testimony as support for the FTC decision;
  3. the court's noting the failure of the hospital, in the face of such evidence, to offer any justification based on better quality, better access, lower costs or some combination of these; and
  4. the court's rejection of a "weakened competitor" or "flailing firm" defense, because the evidence indicated a profitable competitor.

The case involved a proposed merger between two of the four hospital systems in Lucas County, Ohio, (whose county center is Toledo): ProMedica, the dominant hospital provider, and St. Luke's, an independent community hospital. Post-merger, ProMedica was left with a market share above 50 percent in one relevant product market (the so-called primary and secondary services) and above 80 percent in another (for obstetrical [OB] services). An administrative law judge, and later the full FTC, found that the merger would adversely affect competition in violation of Section 7 of the Clayton Act. The FTC found that the merger increased ProMedica's market share far above the threshold required to create a presumption that the merger would lessen competition. It also found that a large body of other evidence—documents and testimony from the merging parties themselves, testimony from the managed care organizations (MCOs) and expert testimony—confirmed that the merger would have a substantial anticompetitive effect.

The Sixth Circuit denied ProMedica's petition for review, concluding that the FTC's "analysis of this merger was comprehensive, carefully reasoned and supported by substantial evidence in the record."

Relevant markets: The court agreed with the FTC that the relevant markets for purposes of analyzing the merger's competitive effects are (1) "a cluster market of primary (but not obstetrical) and secondary inpatient services—a "general-acute care" or "GAC market," and (2) "a separate market for OB services." The relevant geographical market is Lucas County.

Presumptive illegality: Based on the increases in market share in the relevant markets, and concentration in those markets post-merger (as measured by the Herfindahl-Hirschman Index, or "HHI"), the FTC found that the merger to be "presumptively illegal." The court found that the FTC "was correct to presume the merger substantially anticompetitive" based on HHI data. In doing so, it considered but rejected ProMedica's argument that measuring market concentration to apply a presumption of illegality only applies in "coordinated-effects" cases, and not when a merger is challenged based on a "unilateral effects" theory. ("Unilateral effects theory . . . holds that '[t]he elimination of competition between two firms that results from their merger may alone constitute a substantial lessening of competition.'") The court stated that, even without conducting the kind of substitutability analysis associated with a unilateral effects approach, "the record in the case shows a strong correlation between ProMedica's prices, "i.e., its ability to impose unilateral increases," and its market share. In this regard, the evidence showed that in this market, "the higher a provider's market share, the higher its prices," and "that fact is not explained by the quality of ProMedica's services or its underlying costs," but instead by ProMedica's "bargaining power." 

The court found that the FTC "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, "[e]ven in unilateral effects cases, at some point the Commission is entitled to take seriously the alarm sounded by a merger's HHI data," which in this case involved ProMedica's dominant markets shares in the relevant markets" and a "merger that would drive those numbers even higher... making it extremely likely, as a matter of simple mathematics, that a 'significant fraction' of St. Luke's patients viewed ProMedica as a close substitute for services in the relevant markets." Prior to the proposed merger, ProMedica's prices were on average 32 percent higher than Mercy's, 51 percent higher than UTMC's and 74 percent higher than St. Luke's.

The court referred to other evidence relied upon by the FTC that "buttresses" the presumption. Managed care organizations have historically found it necessary to include either ProMedica or St. Luke's in their networks since those hospital systems are dominant in southwest Lucas County, where St. Luke's is located, and where the two were direct competitors before the merger. St. Luke's viewed ProMedica as its "most significant competitor," while ProMedica viewed St. Luke as a "[s]trong competitor"; ProMedica offered to discount its rates by 2.5 percent for MCOs that excluded St. Luke's from their networks. ProMedica's rates before the merger were among the highest in the state, while St. Luke's rates did not even cover its cost of patient care (even though St. Luke's quality ratings on the whole were better than ProMedica's).

Rebutting the presumption: When it came to the issue of whether ProMedica rebutted the presumption that the merger is substantially anticompetitive, the court made much of the fact that ProMedica did not attempt to argue that "this merger would benefit consumers . . . in any way." The court found that the St. Luke's financial difficulties before the merger (in connection with its "weakened competitor" defense) provided no basis to reject the FTC's findings about the merger's anticompetitive effects—in light of its increasing market share before the merger and cash reserves sufficient to pay all of its obligations and meet its capital needs. The court colorfully referred to the "weakened competitor" defense as ProMedica's "Hail Mary pass."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
6 Dec 2017, Webinar, New York, United States

Join Dentons for a complimentary webinar focused on the ongoing challenge of integrating new technologies into existing information governance policies and risk management frameworks.

24 Jan 2018, Seminar, San Francisco, United States

Dentons will host our Fourth Annual Courageous Counsel Leadership Institute in January, centered on the theme "Cultivating Innovation."

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.