Court upholds unwinding yet another health care merger



April 30, 2014

Antitrust Alert

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.[1] This decision constitutes the third significant victory for government challenges to mergers in the health care industry in the past year.[2] Health care businesses considering combinations need to be aware of this developing trend and take proper steps to avoid government scrutiny and litigation.

Background

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[3] 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.

What can we learn from the ProMedica decision?

A number of important lessons can be gleaned from the ProMedica decision:

  • First, the FTC and its counterpart, the Department of Justice Antitrust Division (“DOJ”), will not hesitate to challenge mergers like the one at issue in ProMedica even though they do not rise to the level that requires pre-merger reporting under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”). Indeed, three days after the Sixth Circuit released its ProMedica decision, Leslie C. Overton of the DOJ gave a speech emphasizing that the thresholds of the HSR Act that trigger pre-merger reporting do not provide a safe harbor for mergers that do not meet those thresholds.[4] As Ms. Overton explained, during the last four years, the DOJ alone commenced 73 investigations into non-reportable transactions and challenged more than a quarter of those transactions.
  • Second, a transaction is not likely to escape the attention of the DOJ and FTC merely because it is non-reportable. Both agencies actively monitor merger activity and also receive unsolicited information concerning such mergers from market participants.
  • Third, there is no separate or different standard for judging a transaction that is non-reportable or that has already been consummated. Ms. Overton emphasized this in her speech, and the court in ProMedica applied the regular standard for judging mergers under section 7 of the Clayton Act.
  • Fourth, proof of post-merger anticompetitive effects is not required but can be highly probative if it exists. Indeed, the court in ProMedica did not discuss any post-merger evidence. See also “Overton Speech.”
  • Fifth, pre-merger evidence remains the central inquiry, and statements by the merging parties are often the best evidence that the effects of a merger are likely to be anti-competitive. This was certainly the case in ProMedica. Thus, it is important to engage antitrust counsel as soon as a merger is first contemplated in order to lessen the risk of creating such damaging evidence.
  • Sixth, forget about raising the “weakened competitor” defense unless the applicable facts are highly unusual such that you can show that the competitor is going to fail beyond any reasonable doubt.
  • Seventh, potential antitrust issues raised by non-reportable transactions should be taken seriously. If a transaction involves a niche product or there are indications that the merger is viewed as a means to stop margin erosion, reduce pricing pressure or eliminate a key competitor, caution should be exercised and antitrust counsel should be consulted.
  • Eighth, as recommended by Ms. Overton, if there are antitrust concerns, consider approaching the DOJ or FTC before consummating the merger, cooperate with any ensuing investigation and think proactively about actions that might remedy the antitrust concerns and allow the merger to go forward. Ignoring the problem, closing the transaction and then being subjected to an investigation and possible divesture remedy, which may have to “unscramble the eggs,” can result in significant transactional cost and business disruption.

What can businesses do now?

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:

  • Avoid creating documents that define the market narrowly, describe market shares of various competitors, complain about pricing pressure or competition in the market or characterize the competitive strength of your own business or that of your competitors.
  • Describe and document any ability to command higher prices than competitors as resulting from higher quality services or greater efficiency rather than market power.
  • Characterize the benefits of any contemplated merger as arising from enhanced efficiency or quality rather than lessening competitive pressures.
  • Consult experienced antitrust counsel as soon as a combination is contemplated.
  • Notify the FTC or DOJ before consummating a business combination, even if it does not reach the thresholds for required reporting under the HSR Act.

  1. ProMedica Health System, Inc. v. Federal Trade Commission, 2014 U.S. App. LEXIS 7500 (2014).
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  2. On March 29, 2013, the Supreme Court agreed with the FTC that an acquisition of a private hospital by a county hospital authority was not protected by the state action doctrine but was subject to challenge by the FTC. Federal Trade Commission v. Phoebe Putney Health Systems, Inc., 133 S.Ct. 1003 (2013). On January 24, 2014, the FTC and certain private parties obtained a judgment unwinding an acquisition by a hospital of a physician practice group. Saint Alphonsus Medical Center – Nampa, Inc. v. St. Luke’s Health System, Ltd., 2014 U.S. Dist. LEXIS 9264 (2014).
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  3. The parties had stipulated that the geographic market for primary and secondary GAC Services was Lucas County, but the evidence showed that people would often seek tertiary and quaternary services outside Lucas County.
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  4. “Non-reportable Transactions and Antitrust Enforcement,” a speech by Leslie C. Overton, Deputy Assistant Attorney General, DOJ Antitrust Division, given on April 25, 2014 (“Overton Speech”), can be found at http://www.justice.gov/atr/public/speeches/305472.pdf.
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The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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