Sixth Circuit Affirms FTC Decision Unwinding Hospital Merger in Ohio

The Sixth Circuit recently upheld the Federal Trade Commission’s decision that the merger of two hospitals in Ohio would have to be unwound because the merger was unlawful under the antitrust laws.1 The merging parties had appealed a Commission order that affirmed the ruling of an Administrative Law Judge (ALJ) who oversaw a rare merits trial brought by the FTC. The Sixth Circuit’s opinion endorsed current antitrust agency thinking on hospital merger analysis, and confirmed that divestiture is the expected remedy in merger cases.

Background

ProMedica Health System, a healthcare system with three hospitals in the Toledo area, acquired St. Luke’s Hospital, a local community hospital, in August 2010. Two other competitors operate in the Toledo area. Although the FTC was investigating the merger, ProMedica closed the transaction pursuant to a voluntary hold separate agreement with the FTC.2  In January 2011, the FTC filed an administrative complaint, and the FTC along with the state of Ohio commenced a preliminary injunction proceeding in federal district court. In March 2011, the District Court for the Northern District of Ohio granted a preliminary injunction extending the hold separate agreement until the outcome of the FTC trial on the legality of the deal.3  Following a rare merits trial, the ALJ ruled that the transaction had violated the Clayton Act and ordered a divestiture of St. Luke’s. The Commission later affirmed the ALJ’s ruling – also expanding it by adding a second relevant product market – and ProMedica appealed to the Sixth Circuit.

Court’s Analysis and Ruling

The Sixth Circuit followed a traditional analysis that started with a structural presumption of illegality resulting from concentration levels in defined relevant markets. It defined two relevant product markets in Lucas County, each comprising a “cluster” of inpatient services: (1) general acute care (provided by all four area hospital providers) excluding obstetrics; and (2) obstetrics (provided by only three of the four area hospital providers).4

Post-merger concentration levels in both markets were found to exceed Horizontal Merger Guidelines thresholds in what the court characterized as “spectacular fashion,” with an already “dominant” ProMedica attaining a post-merger share of 58.3 percent (HHI of 4,391) in general acute care and 80.5 percent (HHI of 6,854) in obstetrics.5  The court determined that the Commission was “correct to presume the merger substantially anticompetitive.” 6

The court found that mergers raise unilateral effects concerns when the merging parties are close substitutes.7  Given the high post-merger market shares and HHI, the court concluded that it was 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.”8 This was buttressed by evidence of a “strong correlation” between the size of hospital providers in Lucas County and the reimbursement rates they charged to health plans.9

The court found that ProMedica failed to rebut the structural presumption. This was in large part because it did not argue that the merger would benefit consumers and its assertion that St. Luke’s was a “weakened competitor” was contradicted by evidence of a recent turnaround.10  The parties’ ordinary course documents and testimony by executives and third-party witnesses were found to further reinforce the presumption of likely anticompetitive effects. These included statements that St. Luke’s and ProMedica were close competitors and that their merger could enable St. Luke’s to seek higher reimbursement rates from health plans.11  In one particular part of the Toledo area, St. Luke’s and ProMedica were found to be the preferred choices of nearby residents, and health plans had to contract with at least one of them in order to market a viable network. This suggested to the court that St. Luke’s and ProMedica were close enough competitors to each other so that, combined, they could unilaterally raise reimbursement rates charged to health plans.12

The court affirmed the structural remedy ordered by the Commission, which found that divestiture of St. Luke’s was preferable to conduct remedies that require monitoring.13

Hospital Merger Analysis

The Sixth Circuit’s opinion reaffirms the need to consider market definition in the context of each particular deal and its unique competitive dynamics. The narrowest possible product market should be considered – in hospital mergers, it could be a grouping of individual procedures like inpatient obstetrics services. Localized competition may be relevant not only to geographic market definition but also to assessing the competitive effects of a transaction. Evidence of particularly close competition in certain parts of the market may suggest the potential for unilateral effects, even if competition between the parties in the overall market is more distant.

The court’s opinion also affirms that the presumption of harm associated with high combined market shares can be difficult to overcome. This was the case even though the court here went on to consider the transaction’s actual competitive effect, relying on several factors that were a focus in H&R Block/TaxACT,14 Bazaarvoice/PowerReviews,15 and other recent mergers challenged by the government:

  • Merging parties’ ordinary course documents can have a major impact on assessing likely competitive effects. Company executives should take care regarding the documents they create both in the ordinary course and with respect to potential transactions.
  • Testimony from customers – in this case, commercial health plans – can be a powerful component of the government’s case. Gauging how key constituents are likely to react to a deal should be part of any preliminary antitrust assessment.
  • Efficiencies are not just a defense, but can be a key part of showing that a deal will not have anticompetitive effects. Parties should work early in the process to build a sound factual basis for how the deal is expected to benefit consumers.

Finally, the court maintained a high bar for defending a presumptively anticompetitive merger on the basis that one of the parties is a weakened competitor. The court described this type of defense as a “Hail-Mary pass of presumptively doomed mergers,” and found that successful application of this defense would require showing a declining market share and poor financial performance absent the merger.16

Endnotes    (↵ returns to text)
  1. ProMedica Health System, Inc. v. FTC, No. 12-3583 (6th Cir. April 22, 2014).
  2. Id., slip op. at *6.
  3. Id.
  4. Id., slip op. at *12.
  5. Id., slip op. at *12, 15.
  6. Id., slip op. at *15.
  7. Id., slip op. at *13-14.
  8. Id., slip op. at *15.
  9. Id., slip op. at *14-15.
  10. Id., slip op. at *16, 18.
  11. Id., slip op. at *16-17.
  12. Id., slip op. at *14, 17.
  13. Id., slip op. at *19.
  14. U.S. v. H & R Block, No. 11–00948-BAH (D.D.C. Oct. 31, 2011).
  15. U.S. v. Bazaarvoice, Inc., Civ. No. 13-00133-WHO (N.D. Cal. Jan. 8, 2013).
  16. ProMedica Health System, slip op. at *12.
 

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