Antitrust Alert: U.S. Appeals Court Upholds Long-Fought FTC Challenge to Ohio Hospital Merger
A U.S. appeals court has upheld an administrative determination by the U.S. Federal Trade Commission that ProMedica Health System's acquisition of St. Luke's Hospital in Toledo, Ohio, violates the antitrust laws. The U.S. Court of Appeals for the Sixth Circuit opinion is the latest chapter in the FTC's nearly four-year effort to stop the ProMedica/St. Luke's combination and continues the FTC's recent winning streak in healthcare provider cases. This case highlights the importance of the parties' ordinary course documents in merger analysis and is a reminder of the FTC's aggressive enforcement activity in the healthcare industry.
ProMedica is a non-profit healthcare system with three general acute-care hospitals in Lucas County, Ohio. St. Luke's was an independent, nonprofit community hospital in Maumee, Ohio, a suburb of Toledo in southwest Lucas County. Lucas County has two other hospital systems, Mercy Health Partners, which operates three hospitals in the county, and the University of Toledo Medical Center.
The FTC opened its investigation in July 2010, two months after ProMedica signed its agreement with St. Luke's. The transaction had not triggered the Hart-Scott-Rodino premerger notification thresholds, so the parties were not required to notify the FTC about the transaction. In response to the FTC investigation, by agreement with the FTC, ProMedica and St. Luke's closed their transaction, but did not integrate certain aspects of the business. Over the next several years, the FTC prevailed on a preliminary injunction halting further integration, an administrative trial on the merits, and an appeal of that decision to the full Commission. ProMedica then appealed to the Sixth Circuit.
Merger cases are analyzed in "relevant markets," which includes a product or service component and geographic component. An unusual aspect of this case is that the FTC and the parties did not dispute the relevant geographic market (Lucas County), but disagreed on how to define the relevant service market. Courts often have ruled against the FTC on geographic market grounds. In most hospital cases, the FTC defines the relevant service market as a broad cluster of the general acute care inpatient medical, surgical, and diagnostic services that most hospitals offer. Courts and parties before the FTC generally have adopted this definition. But here the FTC alleged a separate market for obstetric ("OB") services in addition to a conventional general acute care hospital services market. The parties argued that a separate OB market was inappropriate because the services are negotiated as a single package with health plans. The FTC argued, and the Sixth Circuit agreed, that there is a separate OB market, because in Lucas County there were different competitive dynamics for OB services than other services. Only three of the four Lucas County hospital systems offered OB services and the parties combined OB share (81%) was significantly larger than the share of general acute care services (58%).
The parties' internal documents and deposition testimony also were central to the court's decision. St. Luke's CEO testified that ProMedica was St. Luke's "most significant competitor." A ProMedica witness testified that it views St. Luke's as a "strong competitor." In a document evaluating transaction alternatives, St. Luke's CEO stated that ProMedica "has the greatest potential for higher hospital rates" and would lead to "a lot of negotiating clout." In addition, health plans testified that they would have little ability to resist ProMedica price increases post-transaction.
Further, the court cited ProMedica's high pre-transaction share and prices as evidence that an acquisition of St. Luke's only would enhance ProMedica's ability to raise prices. The court discounted the parties' argument that ProMedica's higher prices were due to higher quality, because St. Luke's quality ratings overall were better than ProMedica's.
Having established a strong presumption that the transaction was anticompetitive, the court determined that the parties had no procompetitive justifications that could outweigh the harm. The court pointed to the FTC finding that no substantial efficiencies existed and the fact that ProMedica did not even make the efficiencies argument before the Commission.
ProMedica had argued that St. Luke's was in such poor financial condition that it would not be a meaningful competitor in the future. The court referred to this defense as "the Hail-Mary pass of presumptively doomed mergers—in this case thrown from ProMedica's own end zone," finding evidence that St. Luke's financial condition was improving before the transaction.
ProMedica has announced its intent to appeal.
This decision extends the FTC's recent success in blocking healthcare provider acquisitions. Despite commentary that the federal Patient Protection and Affordable Care Act and healthcare reform offer new justification for merging providers, the FTC continues to enforce the antitrust laws aggressively in healthcare sectors.
As discussed in prior alerts, the merging parties' own documents can be the foundation to the antitrust agencies' enforcement actions. The FTC and DOJ will use exaggerations or even seemingly harmless statements (e.g., ProMedica identifying St. Luke's as a strong competitor) to prove their claims. The FTC's reliance on the parties' internal documents demonstrates the need for restraint when discussing sensitive topics such as markets, competitors, or a potential transaction.
Finally, this case highlights the importance of documenting the benefits of a transaction to consumers. A well-supported efficiency study or detailed explanation of quality benefits, relied upon by the business, can help show that a transaction is net procompetitive.
For more information, please contact your principal Jones Day representative the lawyer listed below.
Toby G. Singer
Michael A. Gleason, an associate in the Washington Office, assisted in the preparation of this Alert.
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