From Rockford to Joplin and Back Again: The Impact of Economics on Hospital Merger Enforcement

• Author: Cory S. Capps
• Published date: 01 September 2014
• DOI: 10.1177/0003603X1405900302
• Date: 01 September 2014
• Subject Matter: Hospital Mergers—Articles & Commets

THE ANTITRUST BUL L E T I N :Vol. 59, N o. 3/Fall 2 014 :443

From Rockford to Joplin and back

again: The impact of economics

on hospital merger enforcement

BYCORY S. CAPP S*

After a string of failed attempts to block hospital mergers in the

1990s, federal prospective hospital merger enforcement essentially

ceased for a deca de. Then, in the la te 2000s, outco mes in litigate d

hospital merger cases reversed dramatically, with the FTC prevailing

in a number of significant efforts to block hospital mergers. This

sharp reversal can be trac ed back to the development o f economic

models of hospital competition that, by design, closely match the

st ru ct ure o f th e i nd us tr y. The se n ew m od el s pr ov id ed t he

enforcement agencies with a more sound theoretical framework—

willingness-to-pay analysis—upon which to base their cases and a set

of empirical tools for evaluating competitive effects. In this article, I

provide an overview o f the willingness-t o-pay framework a nd the

comparatively new empirical tools, and I describe how both have

affected hospital merger enforcement.

KEY WORDS:antitrust, hospital competition, unilateral effects, willingness-

to-pay, merger simulation, diversion analysis

© 2014by Federal Legal Publications, Inc.

* Partner, Bates White Economic Consulting, Washington, DC.

AUTHOR’S NOTE: I was the FTC’s expert on antitrust issues in its 2012 case, FTC

v. OSF Healthcare System. After the FTC won a preliminary injunction in federal

district court, OSF Hea lthcare abandoned its effo rt to acquire Rockford Memor ial

Hospital.

I. INTRODUCTION

After a string of six failed attempts to block hospital mergers in the

1990s—two by the Department of Justice (DOJ) and four by the Fed-

eral Trade Commission (FTC)—federal prospective hospital merger

enforcement essentially ceased for a decade. Then, in the late 2000s,

outcomes in litigated hospital merger cases reversed dramatically.

Notably, between 2008 and 2014, the FTC was able to block three of

the four hospital mergers that it opposed.1Even the one case lost by

the FTC during this period, Phoebe Putney, was not lost on the merits

of the com petit ive concerns bu t on the interpretation o f the state

action doctrine. That ruling was overturned by the Supreme Court,

albeit afte r the merger was consummated. Indeed, w ith respect to

compet itive e ffects, the Elev enth Ci rcuit sp ecific ally no ted that it

“agree[d] with the [FTC] that, on the facts alleged, the joint operation

of [Phoebe Putney] Memorial and Palmyra would substantially

lessen competition or tend to create, if not create, a monopoly.”2

444 :THE ANT I T R U S T BULLETIN:Vol. 59, No. 3/ Fall 2014

1At the time of this writing, one FTC win is currently on appeal before

the Court of Appeals for theSixth Circuit. See Melanie Evans & Gregg Blesch,

ProMedica Plans to Appeal FTC Decision, MODERN HEALTHCARE, Mar. 28, 2012,

http://www.modernhealthcare.com/article/20120328/NEWS/303289974.

In 2013, an anticipated FTC challenge appeared to have caused the only two

hospitals in Hot Springs, Arkansas, to abandon their proposed merger. Press

Release, National Park Medical Center, Capella Healthcare and Mercy Health

End Partnership Discussions (June 27, 2013), available at http://www.nation-

alparkmedical.com/2013/news/capella-healthcare-and-mercy-health-end-

partnership-discussions/. Conversely,in another 2013 case, theFTC closed its

investigation of a proposed merger in Stani slaus County, California. Letter

from Donald S. Clark, Secretary, Federal Trade Commission, to C. Scott Lent,

Esq., Counsel for Emanuel Medic al Center, Inc. (Nov. 18, 2013), available at

http://www.ftc.gov/enforcement/cases-proceedings/closing-letters/tenet-

healthcare-corporationemanuel-medical-center-inc. Agency investigations are

not public, s o the number o f other approv ed mergers an d the number of

other mergers that have been abandoned in the face of FTC or DOJ opposi-

tion cannot be determined.

2FTC v. Phoebe Putney Health Sys., No 11-12906, slip op. at 9 (11th Cir.

Dec. 9 , 2011) , available at http://www.ca11.uscourts.gov/opinions/ops

/201112906.pdf. Notwithstanding this, the Court of Appeals for the Eleventh

Circuit upheld the district court’s denial of the FTC’s request for a prelimi-

nary injunction, on the grounds that the parties were immune under the state

action doctrine. In 2013, the Supreme Court unanimously reversed the

By way of a tally, over the course of its last four hospital merger

cases, the FTC was able to convince seven consecutive presiding bod-

ies—three federal district judges, one administrative law judge, the

Sixth Circuit, the Eleventh Circuit, and the Commissioners of the

FTC—that a challenged hospital merger would likely cause a substan-

tial lessening of competition. These successes also appear to have car-

ried over to other types of healthcare provider mergers. In early 2014,

the FTC successf ully blocked an acquisition in Nampa, Idaho, that

would have combined the primary care physicians of the target med-

ical group with the existing primary care physicians of the acquiring

hospital system, St. Luke’s Health System.3

At least two factors underpin this sharp turnaround. First, the

Evanston consummated merger case, which the FTC filed in 2004 and

won in 2007, laid a strong foundation for prospective merger enforce-

ment. In that case, by using data and documents spanning the years

before and after the closing of Evanston Northwestern Healthcare’s

acquisition of Highland Park Hospital, the FTC established that the

merger had resulted in substantial post-merger price increases and

that those increases were the result of the market power Evanston

Northwestern gained from the acquisition.4Second, well before the

HO S P I TA L MERGER EN F O R C E M E N T :445

Eleventh Circuit’s decision. FTC v. Phoebe Putney Health Sys., No. 11-1160,

slip op. (U.S. Feb. 19, 2013), available at http://www.supremecourt.gov/opin-

ions/12pdf/11-1160_1824.pdf. However, for procedural reasons, after its win

before the Court, the FTC reached a settlement with Phoebe Putney that did

not unw ind the m erger. See Press Release, FTC, Hospital Authority and

Phoebe Putnam Health System Settle FTC Charges that Acquisition of

Palmyra Park Hospital Violated U.S. Antitrust Laws (Aug. 22, 2013), available

at htt p:/ /www.f tc. gov/ new s-ev ent s/pr ess -rel ease s/2 013/ 08/ hosp ita l-

authority-and-phoebe-putney-health-system-settle-ftc.

3Memorandum Decision and Order, FTC v. St. Luke’s Health Sys., Ltd.,

No. 1:13-CV-00116-BLW (D. Idaho Jan. 24, 2014); Findings of Fact and Conclu-

sions of Law, FTC v. St. Luke’s Health Sys., Ltd., No. 1:13-CV-00116-BLW (D.

Idaho Jan. 24, 2014).

4Regarding price increases, the Opinion of the Commission in Evanston

stated as follows:

There is no dispute that [Evanston Northwestern] substantially

raised its prices shortly after the merging parties consummated the

transaction . . . . [T]he evidence demonstrates that the transaction