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."

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