FTC ALJ Finds Ohio Hospital Acquisition Likely Anticompetitive, Orders Divestiture

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

An FTC administrative law judge has ordered ProMedica Health System, Inc., a non-profit healthcare system headquartered in Toledo, to divest a recently-acquired hospital.

The ALJ concluded that there was a reasonable probability that ProMedica’s consummated acquisition of rival St. Luke's Hospital will substantially lessen competition in an already highly-concentrated market for the sale of general acute-care
(GAC) inpatient hospital services to commercial health plans in the Toledo area. It violated Sec. 7 of the Clayton Act.

The FTC had alleged that the transaction reduced the number of competitors from four to three in the GAC inpatient hospital services market. The agency also challenged the transaction on the ground that it reduced from three to two the number of providers in the inpatient obstetrical (OB) services market.

The ALJ concluded, however, that the FTC failed to prove a separate relevant product market for the sale of inpatient OB services—procedures relating to pregnancy, labor, and post-delivery care—to commercial health plans or managed care organizations (MCOs) in Ohio’s Lucas County. The hospital did not refute the GAC inpatient hospital services market or the geographic market limited to Lucas County.

Defenses, Efficiency Justifications

Although St. Luke's was struggling financially prior to the acquisition, the hospital could not defend the transaction based on St. Luke's weakened financial condition, the ALJ determined. Moreover, the claimed efficiencies, such as capital avoidance savings and related operating cost savings, resulting from the combination, did not support the merger.

“The hospital did not meet its burden of showing ‘extraordinary’ procompetitive benefits or of demonstrating that the asserted efficiencies offset the likely anticompetitive effects of the increase in market power produced by the joinder,” the ALJ concluded.

Remedy

The ALJ ordered divestiture of St. Luke's to a willing acquirer, since the hospital failed to meet its burden of proving that an alternative remedy would be superior. The hospital contended that the anticompetitive effects could be remedied if it were permitted to retain St. Luke’s, but create a second “firewalled” negotiation team to negotiate and administer MCO contracts exclusively for St. Luke's, independent of Pro Medica's other Lucas County hospitals.

The proposed remedy was patterned after a remedy ordered by the FTC in a challenge to Evanston Northwestern Healthcare Corp.'s acquisition of Highland Park Hospital in Illinois in 2000. The ALJ explained that the conduct remedy in the Evanston matter was based largely on the long period of time between the closing of the transaction and the conclusion of the litigation. Because of a hold-separate agreement, the extensive integration that occurred in Evanston case had not occurred in this case.

The decision is In the Matter of ProMedica Health System, Inc., Docket No. 9346. Text of the decision will appear at CCH Trade Regulation Reporter ¶16,700.