April 30, 2014
Author(s): John R. Foote
The Sixth Circuit recently upheld a decision ordering the unwinding of a merger of two Ohio hospitals, marking another victory for government challenges to mergers in the health care industry. Health care businesses considering combinations need to be aware of this developing trend and take steps to avoid government scrutiny and litigation.
Successful challenges to health care industry mergers are on the rise. On April 22, 2014, the United States Court of Appeals for the Sixth Circuit upheld a decision of the Federal Trade Commission (“FTC”) ordering the unwinding of an August 31, 2010, merger of two hospitals in Lucas County, Ohio. ProMedica Health System, Inc. v. Federal Trade Commission. This decision constitutes the third significant victory for government challenges to mergers in the health care industry in the past year. Health care businesses considering combinations need to be aware of this developing trend and take proper steps to avoid government scrutiny and litigation.
The challenged merger had been consummated between ProMedica Health System, Inc. (“ProMedica”), the largest of four hospital providers in Lucas County, with a market share of 46.8% for general acute inpatient services (“GAC Services”), and St. Luke’s Hospital (“St. Luke’s), the smallest of the four hospital providers, with a market share of 11.5% for GAC Services. St. Luke’s had struggled for a number of years prior to the merger, but its financial condition had improved in the year immediately prior.
The court agreed with the FTC that there were two relevant product markets. One consisted of a combination of primary and secondary GAC Services (“GAC Market”), for which the court found that competitive conditions were similar across all four of the Lucas County hospital providers. The other consisted of obstetric services (“OB Market”), which were provided by only three of the four hospitals, including the two that merged. Tertiary and quaternary services were excluded from the relevant market because the court found that they were defined by a broader geographic market and because St. Luke’s offered neither type of those services.
The court analyzed whether the merger was likely to lessen competition in a number of different ways. First, it employed the Herfindahl-Hirshman Index (“HHI”), a measure of market concentration used by the FTC to classify markets as unconcentrated (HHI below 1500), moderately concentrated (HHI between 1500 and 2500), and highly concentrated (HHI above 2500). Noting that, as a general matter, a merger that increases the HHI by more than 200 to an HHI above 2500 is presumptively anticompetitive, the court found that the ProMedica merger “blew through those barriers in spectacular fashion,” increasing the GAC Market by 1,078 to an HHI of 4,391 and increasing the OB Market by 1,323 to an HHI of 6,854.
In addition to the HHI analysis, the court found an exceptional correlation between ProMedica’s premerger market share and its prices, which were 32% higher than the hospital with the second highest market share, 51% higher than the hospital with the third highest market share, and 74% higher than St. Luke’s, with the lowest market share. The court reasoned that this correlation could be explained only by ProMedica’s extremely strong bargaining power vis a vis the private insurers that paid for most of its services. Based on this strong bargaining power and the extreme HHI numbers, the court concluded that the merger was presumptively illegal.
Turning to the question of whether or not ProMedica had rebutted this presumption, and noting that the primary goal of the antitrust laws is to enhance consumer welfare, the court emphasized that ProMedica had not even attempted to argue, let alone prove, that the merger created any pro-competitive efficiencies that would benefit consumers. Moreover, the court recognized that the FTC had introduced significant contrary evidence that made it virtually impossible for ProMedica to successfully rebut the presumption. Characterizing ProMedica and St. Luke’s as the FTC’s best witnesses, the court cited evidence that St. Luke’s viewed ProMedica as its “most significant competitor,” while ProMedica viewed St. Luke’s as a “strong competitor.” The court also quoted an admission by the CEO of St. Luke’s that the merger might “harm the community by forcing higher hospital rates on them.”
The court dismissed ProMedica’s argument that the merger could not have harmed competition because St. Luke’s was a “weakened competitor.” The court called this the weakest of all grounds for justifying a merger and characterized it as the “Hail-Mary pass of presumptively doomed mergers.” Moreover, the court found that, in any event, the evidence did not support the characterization of St. Luke’s as a “weakened competitor.”
Thus, the court upheld the FTC’s finding that the merger violated the Clayton Act and further held that the FTC had not abused its discretion by ordering divestiture of St. Luke’s as the remedy.
A number of important lessons can be gleaned from the ProMedica decision:
Whether or not contemplating a combination in the near future, there are steps that can be taken now to lessen the risk if and when an acquisition is pursued:
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