Type: Law Bulletins
Date: 04/24/2014

Sixth Circuit Affirms FTC Order of Divestiture in ProMedica-St. Luke’s Merger

On April 22, 2014, the 6th U.S. Circuit Court of Appeals issued its opinion affirming the Federal Trade Commission’s ruling that a 2010 merger between ProMedica Health System and St. Luke’s Hospital in Toledo, Ohio, violated Section 7 of the Clayton Act. This decision represents another victory for the FTC in a string of recent challenges to health care mergers, including a district court’s order earlier this year that an Idaho hospital divest a large physician group that it had acquired. See Saint Alphonsus Medical Center--Nampa, Inc. v. St. Luke’s Health System, Ltd., 2014 WL 407446 (D. Idaho Jan. 24, 2014).

In this most recent case, ProMedica Health System, Inc. v. F.T.C., 2014 WL 1584835 (6th Cir. Apr. 22, 2014), Pro-Medica’s acquisition of St. Luke’s had been closed in August 2010, subject to a Hold Separate Agreement with the FTC that prohibited ProMedica/St. Luke’s from terminating St. Luke’s existing contracts with managed care organizations, eliminating or transferring any St. Luke’s clinical service lines, or terminating any St. Luke’s employees without cause. The FTC filed an administrative complaint against ProMedica in January 2011, and after an administrative law judge ordered ProMedica to divest St. Luke’s, the full commission affirmed the ALJ’s order.

The 6th Circuit dismissed ProMedica’s appeal from the commission’s order and agreed with the FTC’s conclusion that the merger could substantially lessen competition in two relevant markets: (1) general acute care (“GAC”) services, of which ProMedica and St. Luke were two of the four providers in Lucas County and held 46.8% and 11.5% of the GAC market, respectively, prior to the merger; and (2) inpatient obstetrical services, of which ProMedica and St. Luke were two of the three providers in Lucas County and possessed 71.2% and 9.3% of the OB market, respectively, prior to the merger. In addition, the court observed that the Herfindahl-Hirschman Index (“HHI”), which is often used to measure market concentration, indicated that both markets were highly concentrated before the merger and that the merger “blew through [the HHI] barriers in spectacular fashion.” The court concluded that the markets were already highly concentrated and that ProMedica’s prices were already among the highest in Ohio, that the merger would increase ProMedica’s bargaining power, and that ProMedica had not established any procompetitive efficiencies that offset the presumed anticompetitive effects of the merger. The court also rejected ProMedica’s contention that the merger should be allowed because St. Luke’s was a “weakened competitor,” characterizing the argument as “the Hail-Mary pass of presumptively doomed mergers” that had been “thrown from Pro-Medica’s own end zone.”

The 6th Circuit’s embrace of the FTC’s analysis of the merger is significant for a number of reasons. The court agreed that managed care organizations, and not patients, are the “purchasers” for purposes of determining a merger’s competitive impact. The court also accepted the FTC’s reliance upon the HHI data to presume the merger would substantially lessen competition even though the FTC challenged the merger under a unilateral-effects theory, in which the HHI normally is supposed to have little application. This could be explained in part because the HHI levels were so high and because of other evidence indicating that ProMedica had substantial bargaining power due to its market share. The court’s acceptance of the FTC’s definition of the relevant product market by “clustering” services for which competitive conditions were similar may represent a path for plaintiffs to meet the substantial burden of establishing a relevant product market. Finally, the court’s observation that undoing the acquisition is a “natural remedy” for an unlawful merger suggests that conduct remedies will be the exception and not the rule.

Whether the FTC is becoming more adept at picking its fights or the courts are becoming more receptive to the FTC’s approach to health care mergers, the ProMedica decision reiterates the important role that antitrust continues to play in health care.

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