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ProMedica decision enables aggressive approach to hospital merger enforcement

May 20th, 2015

by Charles Johnson

In their effort to slow the pace of hospital consolidations, federal regulators have taken a new approach that has led to increased success. The Supreme Court recently declined to review the application of this new approach, suggesting that it will continue to be employed for the foreseeable future, with far-reaching consequences for the healthcare industry.

Since the early 1980s, the Federal Trade Commission (FTC) has challenged hospital mergers that it believed to be anticompetitive, often successfully blocking such mergers before they were even consummated.

In the late 1990s, however, the FTC lost eight straight hospital merger challenges, either due to the its failure to establish the relevant market, its inability to convince the courts that the predicted anticompetitive effects would ever materialize, or due to a perception that a not-for-profit hospital's conduct is driven only by benign intentions.

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In 2002 the FTC announced a "merger retrospective," examining consummated hospital mergers to ascertain their actual effects on competition, after which it emerged with a new approach to merger enforcement. The commission resolved to challenge completed mergers, where the effects were demonstrable, rather than seeking to enjoin mergers before they were completed, and to focus on the bargaining power of each hospital system in its negotiations with managed care organizations (MCOs). This new approach placed the FTC on a path to renewed success, and it opened the doors to additional developments, including private treble-damage class actions.

Recent challenges

In 2004, the FTC challenged a 2000 merger in the Northern Chicago suburbs between the two-unit Evanston Northwestern Healthcare and Highland Park Hospital. There were no other hospitals located within the triangle formed by the three merging hospitals, although each hospital was within close driving distance of numerous other hospitals.

An administrative law judge (ALJ) concluded that the merger was unlawful (noting that Evanston's executives had written of their hope that the merger would increase their bargaining power with MCOs, and noting that the post-merger rate increases charged by the merged hospitals exceeded the rate increases for other hospitals in the area). The full commission left the merged firm intact, but it ordered separate negotiating teams to bargain with MCOs, one team for the two original Evanston hospitals and a separate team for Highland Park. After the FTC's decision, a U.S. District Court certified what may be the first private class action in a hospital merger case.

Following its Evanston playbook, the FTC in 2011 filed a complaint challenging the 2010 merger of two of the four hospitals in Lucas County, Ohio: ProMedica, a multi-hospital system, and St. Luke's, an independent community hospital. Prior to the merger, ProMedica had the largest share of the general acute care market (46.8 percent), and St. Luke's had the smallest share (11.5 percent). Since 2000, every MCO network included either ProMedica or St. Luke's. The merged system commanded 50 percent of the relevant product market for the so-called "clusters" of primary services (such as hernia surgeries and radiology services) and secondary services (such as hip replacements and bariatric surgery), and 80 percent of the separate "cluster" of obstetrical services (which were excluded from the classification of primary services).

The ALJ found that the merger resulted in "a tremendous increase in concentration in a market that was already highly concentrated"; that the elimination of competition between ProMedica and St. Luke's would increase ProMedica's bargaining power with MCOs; that the merged entity would be particularly dominant in an area of the county with a high proportion of privately insured patients; and that the merger would thus allow ProMedica unilaterally to increase its prices above a competitive level. The ALJ ultimately determined that the merger did not create sufficient efficiencies to offset its anticompetitive effects.

The Supreme Court weights in

After the full commission and the Sixth Circuit Court of Appeals affirmed the ALJ's decision to unwind the merger, ProMedica sought Supreme Court review. ProMedica's lawyers challenged the FTC's use of "cluster" market analysis; emphasized the relative weakness of the acquired hospital; and challenged the analysis of market effects, which combined unilateral effects (i.e., the ability to command monopoly prices) and collaborative effects (the increase in market concentration). On May 1, 2015, the Supreme Court issued its decision declining to review the case.

The Supreme Court's ProMedica decision suggests that the FTC will persist in the new approach to hospital mergers that emerged after its 2002 "merger retrospective." The FTC will target mergers by dominant hospital systems that increase the merged system's bargaining power in negotiations with MCOs, even though this increased bargaining power is a major factor driving the recent consolidation trend. The lack of a pre-merger challenge will bring little comfort to merging systems, especially when a post-merger challenge may be more successful. The specter of private class actions further increases the stakes for those considering hospital system mergers.

Charles S. Johnson III is a seasoned trial lawyer with Holland & Knight in Atlanta. Mr. Johnson primarily focuses in the areas of public policy and complex business disputes. He began his legal career as an antitrust lawyer and served as adjunct professor of antitrust law at the University of Georgia Law School.

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