Competitive Effects In Hospital Mergers
| Pages | 59-91 |
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CHAPTER III
COMPETITIVE EFFECTS IN HOSPITAL MERGERS
A. Introduction
Section 7 of the Clayton Act1 prohibits mergers that may
substantially lessen competition. Enforcement of Section 7 therefore
revolves around assessing which circumstances lead to mergers that are
likely to substantially lessen competition. This chapter briefly sets out
the analysis that courts and the enforcement agencies use to assess the
potential anticompetitive effects of mergers. It also addresses various
arguments available to overcome the presumption that arises from high
postmerger market share. These arguments include those that routinely
arise in all merger litigation, such as the effect of low barriers to entry,
whether a firm is a failing or weakened firm, whether and to what extent
the merger will lead to procompetitive efficiencies, whether the firms sell
to “power buyers,” and whether the hospital’s nonprofit status should be
considered in assessing competitive effects. In addition, this chapter
addresses a potentially new rebuttal argument unique to health care—that
changing government policies that encourage coordination of care and
changes in industry reimbursement methods that shift more risk to
providers should be taken into account when considering the competitive
effects of mergers. These arguments, both for and against enjoining
mergers, go to the heart of Section 7 of the Clayton Act, and hospital
merger litigation has played a significant role in the development of the
law.
B. Competitive Effects in Section 7 Analysis
Section 7 was designed to halt anticompetitive mergers in their
incipiency,2 and early Supreme Court decisions focused on whether a
combination of firms would result in high concentration within a specific
market.3
1. 15 U.S.C. § 18.
2. United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 589
(1957).
3. Brown Shoe Co. v. United States, 370 U.S. 294, 321-22 n.38 (1962).
60 Health Care Mergers and Acquisitions Handbook
While early opinions recognized that the structure and probable
future of each specific market should be gauged in assessing potential
anticompetitive effects,4 the Court focused on whether the effect of an
acquisition would be to increase concentration in a relevant market. In
United States v. Philadelphia National Bank,5 the Court stated:
[A] merger which produces a firm controlling an undue percentage
share of the releva nt market, and resul ts in a significant i ncrease in the
concentration of fir ms in that marke t, is so inherentl y likely to lessen
competition substantially that it must be enjoined in the absence of
evidence clearly sho wing that the merger is not likely to have s uch
anticompetitive effects.6
PNB created a presumption that where the combined firms will
obtain an undue percentage of the market, the merger will be deemed to
be anticompetitive. Applying this assumption, earlier decisions ruled that
mergers representing even relatively small changes in market share were
unlawful.7
The Supreme Court further developed its market concentration
analysis in United States v. General Dynamics Corp.,8 a case involving
coal producers. The Court held that even though the merger met PNB’s
presumption of illegality, it did not violate Section 7 because the market
shares did not take into account the limited coal reserves of the acquired
party. Because that firm would not be capable of its current level of
production in the future, the Court found that the market shares of the
firms did not properly reflect their competitive viability.9 This analysis
has not changed in the in the intervening years, since the Court has not
decided a merger case on the merits since 1974.
4. Id.
5. 374 U.S. 321 (1963) [hereinafter PNB].
6. Id. at 363.
(1966) (combined firms represented 7.5 percent of the market); United
(combined firms accounted for 24 percent of the market); see also United
States v. Aluminum Co. of Am., 377 U.S. 271, 280-81 (1964) (divestiture
ordered where merger increased market share by 1.3 percent).
8. 415 U.S. 486 (1974).
9. Id. at 498.
Competitive Effects in Hospital Mergers 61
The Supreme Court cases have established a framework in which the
agencies can make their prima facie case by demonstrating undue
concentration in a properly defined relevant market.10 If the government
establishes this prima facie showing, a presumption of illegality arises. In
response, the defendants must present evidence that a structural market
analysis overstates the reduction in competition resulting from the
merger.11 If the defendants successfully rebut the presumption of
illegality, “the burden of producing additional evidence of
anticompetitive effect shifts to the government, and merges with the
ultimate burden of persuasion, which remains with the government at all
times.”12
This analysis has been refined over the years by lower court
decisions and the Merger Guidelines promulgated by the Federal Trade
Commission (FTC) and Department of Justice (DOJ).13 In practice, the
agencies tend to present both evidence of undue concentration and
evidence to rebut the defendants’ arguments regarding the structure of
the market. Thus, when the agencies challenge a transaction, they tend to
argue that it will lead to specific anticompetitive effects.
Courts have recognized two circumstances that are each dispositive
in rebutting the PNB presumption of illegality in the face of high
combined market shares. They are (1) when the market is characterized
by low barriers to entry, or (2) when the acquired firm is failing and
would otherwise exit the market. In addition, there are a number of
factors that, when taken together, can lead courts to conclude that
anticompetitive effects are unlikely. These factors include efficiencies
that may result from the transaction, the relative competitive strength of
purchasers in the market, and, on one occasion in the context of hospital
mergers, the differences that result from a merger of nonprofit, charitable
entities. Increasingly, parties to hospital mergers are also citing changing
government policies that encourage the coordination of care among
different providers and changing reimbursement methods that shift the
risk for the health of a population to providers as additional
10. PNB, 3 74 U.S. at 363; United States v. Citizens & S. Nat’l Ban k, 422
981, 982 (D.C. Cir. 1990).
11. See, e.g., Citizens & S. Nat’l Bank, 422 U.S. at 120; PNB, 374 U.S. at
363; United States v. Waste Mgmt., 743 F.2d 976, 981 (2d Cir. 1984).
12. Baker Hughes Inc., 908 F.2d at 983.
13. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER
GUIDELINES (2010) [hereinafter MERGER GUIDELINES], available at
http://www.ftc.gov/os/2010/08/100819hmg.pdf.
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