Delineation of Relevant Markets in Hospital Mergers

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CHAPTER II

DELINEATION OF RELEVANT MARKETS IN

HOSPITAL MERGERS

A. Introduction

Relevant market definition is a key issue in most hospital merger

matters. Although the 2010 Department of Justice (DOJ) and Federal

Trade Commission (FTC) Horizontal Merger Guidelines1 have generally

emphasized a focus on competitive effects analysis over formal market

definition, the delineation of relevant product and geographic markets

remains an important element of hospital merger cases. Indeed, in each

of the hospital merger challenges filed and decided since the 2010

Merger Guidelines were issued the FTC has alleged, and courts have

required the government to prove, relevant markets.

1.

Relevant Product Market Delineation

Both the government and the courts typically define hospital product

markets to comprise some cluster of hospital services provided to

patients.2 These cluster markets usually include inpatient general acute

care hospital services, but at times also have included psychiatric

hospital services, primary and secondary inpatient services, and

outpatient surgery services.3 Including other services in the same market

1. 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.

2. See infra Part B of this chapter.

3. See, e.g., ProMedica Health Sys. v. FTC, 749 F.3d 559 (6th Cir. 2014)

(market included a cluster market of pri mary (but not OB) and sec ondary

inpatient services and a separate market for OB services); FTC v. Tenet

Health Care Corp., 17 F. Supp. 2d 937, 942 (E.D. Mo. 1998) (defendants

did not dispute FTC’s definition of a primary and secondary inpatient

services market), rev’d on other grounds, 186 F.3d 1045 (8th Cir. 1999);

FTC v. Butterworth Health Corp., 946 F. Supp. 1285, 1290-91 (W.D.

Mich. 1996) (specifically including normal childbirth, gynecology,

pediatrics, general medicine, and general surgical services), aff’d, 121

F.3d 708 (6th Cir. 1997); United States v. Mercy Health Servs., 902 F.

18 Health Care Mergers and Acquisitions Handbook

as inpatient general acute care services generally means that numerous

additional health care providers, many of which are non-hospital

providers, will be included within the relevant market. This, in turn,

diminishes the market share of the merging hospitals as well as overall

market concentration. Conversely, if the relevant product market is

limited to inpatient general acute care services the resulting market

shares of the merging parties and overall market concentration will be

higher. Sufficiently high market shares and market concentration may

result in a presumption of anticompetitive harm from the merger. Thus,

product market definition can bear heavily on ultimate outcomes.

The importance of product market definition is underscored by the

results in two cases from the late 1980s involving, respectively, hospital

mergers challenged by the government in Roanoke, Virginia, and

Rockford, Illinois. In United States v. Carilion Health System,4 the

district court upheld a merger of two hospitals in Roanoke, in part

because it included outpatient medical services within the relevant

product market. The court reasoned that because a significant number of

medical needs could be treated either on an inpatient or outpatient basis,

a significant number of patients could choose to have their health

problems treated in a hospital, clinic, or doctor’s office. Under this

expanded market definition, the estimated post transaction market share

of the merging hospitals was modest, and the court denied the

government’s attempt to block the merger.

In contrast, in United States v. Rockford Memorial Corp.,5 the

hospital merger did not withstand the government’s challenge. There, the

district court found that the hospitals provided a type of medical service,

characterized by overnight care and accessibility to a centrally located

variety of services that could not be provided by outpatient clinics. The

court found this type of medical care to constitute an economically

significant market and, accordingly, defined the relevant product market

Supp. 968, 976 (N.D. Iowa 1995) (specifically excluding inpatient

psychiatric care, substance abuse treatment, rehabilitation services, and

open-heart surgery), vacated as moot, 107 F.3d 632 (8th Cir. 1997);

United States v. Rockford Mem’l Corp., 717 F. Supp. 1251 (N.D. Ill.

1989) (specifically excluding outpatient services), aff’d, 898 F.2d 1278

(7th Cir. 1990); United States v. Carilion Health Sys., 707F. Supp. 840,

847-48 (W.D. Va.) (specifically including outpatient services), aff’d, 8 92

F.2d 1042 (4th Cir. 1989).

4. 707 F. Supp. 840 (W.D. Va.), aff’d, 892 F.2d 1042 (4th Cir. 1989).

5. 717 F. Supp. 1251.

Delineation of Relevant Markets in Hospital Mergers 19

to comprise inpatient acute care services only. Restricting its analysis of

market share to hospitals, the court concluded that the merger would

result in an impermissible increase in market power. Consequently, it

enjoined the merger under Section 7 of the Clayton Act.6

Both the Carilion and Rockford district court decisions were upheld

on appeal.7 In all but one subsequent hospital merger case decided in the

decade after Carilion and Rockford,8 the product market was defined, as

in Rockford, as acute care inpatient hospital services, although the issue

does not appear to have been contested in any of these decisions.9 The

product market issue was contested in United States v. Long Island

Jewish Medical Center10 and again in later cases.11

The government’s current approach and the recent trend in the case

law is to define the relevant product market cluster to include inpatient

general acute care services sold to commercial health plans.12 This

definition excludes outpatient services, psychiatric services, and

rehabilitation services and government payors (e.g., Medicare,

Medicaid). While product market definition is still contested in hospital

6. Id. at 1251.

7. United States v. Carilion Health Sys., 1989 U.S. App. LEXIS 21294 (4th

Cir. 1989) (per curiam unpublished opinion with limited precedential

value); Rockford Mem’l Corp., 898 F.2d 1278 (7th Cir. 1990).

8. Compare United States v. Long Island Jewish Med. Ctr., 983 F. Supp.

121 (E.D.N.Y. 1997) with Butterworth, 946 F. Supp. at 1290-91, aff’d,

121 F.3d 708 (6th Cir. 1997); see also United States v. Mercy Health

Servs., 902 F. Supp. 968 (N.D. Iowa 1995), vacated as moot, 107 F.3d

632 (8th Cir. 1997); FTC v. Freeman Hosp., 911 F. Supp. 1213 (W.D.

Mo. 1995), aff’d, 69 F.3d 260 (8th Cir. 1995); FTC v. Univ. Health, 938

F.2d 1206 (11th Cir. 1991); Adventist Health Sys./West, 1994 FTC

LEXIS 54 (1994).

9. For example, in University Health, the district court noted that: “The

product that is involved here is acute in-patient [sic] hospital services or

such other term of art as the record might disclose. There is very little

dispute about that.” FTC v. Univ. Health, 1991 WL 117432, at *3 (S.D.

Ga. 1991), order vacated, 938 F.2d 1206 (11th Cir. 1991).

10. 983 F. Supp. 121 (primary and secondary care provided by anchor

hospitals vs. general acute care).

11. See, e.g., ProMedica Health Sys. v. FTC, 2014 U.S. App. LEXIS 7500

(6th Cir. 2014); Evanston Nw. Healthcare Corp., 2005 LEXIS 146, at

*270 (Initial Decision Oct. 20, 2005), aff’d, 2007 LEXIS 210 (2007).

12. See, e.g., FTC v OSF Healthcare Sys., 852 F. Supp. 2d 1069, 1075-76

(N.D. Ill. 2012); FTC v. ProMedica Health Sys., 2011 U.S. Dist. LEXIS

33434, at *146 (N.D. Ohio 2011).