The Continuing Saga of Hospital Merger Enforcement

• Author: Cory Capps, Laura Kmitch, Zenon Zabinski, and Slava Zayats
• Position: The authors are economists at Bates White Economic Consulting in Washington, DC. Dr.
• Pages: 441-496

THE CONTINUING SAGA OF HOSPITAL

MERGER ENFORCEMENT

C

ORY

C

APPS

L

AURA

K

MITCH

Z

ENON

Z

ABINSKI

S

LAVA

Z

AYATS

*

The Federal Trade Commission prevailed in four recent, fully litigated

health care provider merger cases, though it had to visit courts of appeals in

the Sixth, Third, and Seventh Circuits along the way. The Sixth Circuit upheld

the FTC’s win in ProMedica, while the Third and Seventh Circuits reversed

district court losses for the FTC in Hershey and Advocate.

1

The FTC also

prevailed in a primary care physician merger case, St. Luke’s-Saltzer, which

involved similar economic and legal issues. That case also reached the appel-

late stage, with the Ninth Circuit upholding the district court’s ruling in favor

of the FTC.

2

Over the same period, several other hospitals abandoned pro-

posed mergers in the face of FTC opposition.

Four merger rulings in a single industry by appellate courts in as many

years is remarkable. Collectively, these rulings speak directly to the economic

and legal issues that lie at the heart of merger cases: market definition, com-

petitive effects, conduct remedies, quality and cost efficiencies, and innova-

* The authors are economists at Bates White Economic Consulting in Washington, DC. Dr.

Capps served as the FTC’s expert on antitrust issues in its challenges to the acquisition of Rock-

ford Memorial Hospital by OSF Health System (with Dr. Zayats) and the acquisition of St.

Mary’s Hospital by Cabell Huntington Health System (with Dr. Zabinski). Dr. Capps also

worked on behalf of the FTC in its challenge to the St. Luke’s-Saltzer merger. While at the FTC,

Ms. Kmitch worked on multiple hospital merger challenges.

1

ProMedica Health Sys., Inc., FTC Docket No. 9346, 2012 WL 2450574 (June 25, 2012),

aff’d, ProMedica Health Sys., Inc., v. FTC, 749 F.3d 559 (6th Cir. 2014); FTC v. Penn State

Hershey Med. Ctr., 185 F. Supp. 3d 552 (M.D. Pa. 2016), rev’d, 838 F.3d 327, 343 (3d Cir.

2016); FTC v. Advocate Health Care, No. 15 C 11473, 2016 WL 3387163 (N.D. Ill. June 20,

2016), rev’d, 841 F.3d 460 (7th Cir. 2016), on remand 2017 WL 1022015 (N.D. Ill. Mar. 16,

2017). The parties did not appeal in FTC v. OSF Healthcare System, 852 F. Supp. 2d 1069 (N.D.

Ill. 2012).

2

Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., No. 1:12-cv-00560,

2014 WL 407446 (D. Idaho Jan. 24, 2014), aff’d, 778 F.3d 775 (9th Cir. 2015).

441

82 Antitrust Law Journal No. 2 (2019). Copyright 2019 American Bar Association. Reproduced

by permission. All rights reserved. This information or any portio n thereof may not be copied

or disseminated in any form or by any means or downloaded or stored in an electronic

database or retrieval system without the express written consent of the American Bar

Association.

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tion. We discuss these four cases, with an emphasis on economic and antitrust

questions that now appear resolved, as well as those that remain open.

I. THREE DECADES OF HOSPITAL MERGER ENFORCEMENT

Loosely speaking, each of the last three decades marked a distinct era of

hospital merger enforcement and litigation outcomes. In the 1990s, the FTC

and Department of Justice (DOJ) lost six successive hospital merger cases. In

the 2000s, the agencies largely halted prospective hospital merger enforce-

ment—neither agency would challenge a prospective hospital merger until

2008, when the FTC challenged one in Northern Virginia. The parties aban-

doned that deal shortly after the FTC sued, marking the first agency win in

over a decade.

3

The FTC’s successful challenge in that case set the stage for

the 2010s, when the FTC launched a series of prospective hospital merger

challenges, as well as three primary care physician merger challenges, and

ultimately prevailed in each fully litigated case.

A. T

HE

1990

S

—S

EVEN

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TRAIGHT

G

OVERNMENT

L

OSSES

In the late 1980s and early 1990s, the DOJ and FTC won several hospital

merger challenges, including United States v. Rockford Memorial Corp. In so

doing, the agencies set a precedent for using the Elzinga-Hogarty (E-H) meth-

odology to define relevant geographic markets in hospital cases.

4

The E-H

methodology, originally developed for commodity markets, relies on the

flows of sales into and out of a region to determine the relevant geographic

market.

5

Applied to hospital mergers, this methodology indicated that relevant

geographic markets should be defined as areas from which few patients leave

and into which few patients enter.

6

Notably, the DOJ and FTC, and not just

3

Order Dismissing Complaint, Inova Health Sys. Found., FTC Docket No. 9326 (June 17,

2008), www.ftc.gov/sites/default/files/documents/cases/2008/06/080617orderdismisscmpt.pdf;

Joint Stipulated Motion for Order Dismissing Complaint, FTC v. Inova Health Sys. Found., No.

1:08-cv-460 (E.D. Va. June 11, 2008), www.ftc.gov/sites/default/files/documents/cases/2008/06/

080611commonwealthstip.pdf.

4

See, e.g., United States v. Rockford Mem’l Corp., 717 F. Supp. 1251, 1271 (N.D. Ill. 1989),

aff’d, 898 F.2d 1278 (7th Cir. 1990); FTC v. Univ. Health, 938 F.2d 1206 (11th Cir. 1991).

5

Kenneth Elzinga & Thomas Hogarty, The Problem of Geographic Market Definition: The

Case of Coal, 23 A

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B

ULL

. 1, 2 (1978); Kenneth Elzinga & Thomas Hogarty, The Prob-

lem of Geographic Market Delineation in Antitrust Suits, 18 A

NTITRUST

B

ULL

. 45, 45 (1973).

See detailed discussion in Cory S. Capps, From Rockford to Joplin and Back Again: The Impact

of Economics on Hospital Merger Enforcement, 59 A

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B

ULL

. 443, § II (2014).

6

Memorandum Opinion & Order at 9, FTC v. Penn State Hershey Med. Ctr., No. 1:15-cv-

2363 (M.D. Pa. May 9, 2016).

Relatedly, both the agencies and defendants also sometimes used, at least superficially, critical

loss analysis (CLA) to define geographic markets. Barry C. Harris & Joseph J. Simons, Focusing

Market Definition: How Much Substitution Is Necessary? 12 R

ESEARCH

L. & E

CON

. 151, 157

(1989). CLA entails two steps. First, compute the critical loss, defined as the percentage of

customers that would have to leave a market for a specified price increase to be unprofitable.

2019]

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ONTINUING

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AGA OF

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OSPITAL

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ERGER

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NFORCEMENT

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defendant hospitals, used E-H to define markets.

7

In this respect, the agencies’

initial successes sowed the seeds of their future losses.

Indeed, between 1994 and 1999, the federal agencies lost six successive

hospital merger cases.

8

In addition, in 1999, California sued to enjoin a

merger of two hospitals in San Francisco’s East Bay and lost, and the Ninth

Circuit upheld that outcome.

9

The predominant reason for all of these losses

was that courts rejected the relatively compact geographic markets—and thus

the high shares—alleged by the government.

10

For instance, in Freeman, the

Second, estimate the actual loss that would occur in response to the specified price increase. If

the actual loss exceeds the critical loss, then the hypothesized price increase would not be profit-

able and the putative market must be expanded. However, in hospital cases, high patient flows

formed the main basis for arguments that the actual loss was likely to exceed the critical loss.

Thus, CLA tended to produce geographic markets similar to those identified by E-H because

both rely on patient flows to accept or reject a proposed geographic market.

There are important theoretical limitations to critical loss analysis. See, e.g., Kenneth L. Dan-

ger & Harry E. Frech, Critical Thinking About “Critical Loss” in Antitrust, 46 A

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B

ULL

.

339 (2001); Michael L. Katz & Carl Shapiro, Critical Loss: Let’s Tell the Whole Story, A

NTI-

TRUST

, Spring 2003, at 49; James Langenfeld & Wenqing Li, Critical Loss Analysis in Evaluat-

ing Mergers, 46 A

NTITRUST

B

ULL

. 299 (2001); Daniel P. O’Brien & Abraham L. Wickelgren, A

Critical Analysis of Critical Loss Analysis, 71 A

NTITRUST

L.J. 161 (2004). For a response to

some of these critiques, see David T. Scheffman & Joseph J. Simons, The State of Critical Loss

Analysis: Let’s Make Sure We Understand the Whole Story, A

NTITRUST

S

OURCE

(Nov. 2003),

www.americanbar.org/content/dam/aba/publishing/antitrust_source/03/11/scheffman.authcheck

dam.pdf.

7

Cory S. Capps et al., Antitrust Policy and Hospital Mergers: Recommendations for a New

Approach, 47 A

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B

ULL

. 677, 678–80, (2002). See also, e.g., United States v. Rockford

Mem’l Corp., 717 F. Supp. 1251, 1267 (N.D. Ill. 1989), aff’d, 898 F.2d 1278 (7th Cir. 1990));

FTC v. Freeman Hosp., 911 F. Supp. 1213 (W.D. Mo. 1995), aff’d, 69 F.3d 260 (8th Cir. 1995);

FTC v. Butterworth Health, 946 F. Supp. 1285 (W.D. Mich. 1996), aff’d mem., 121 F.3d 708

(6th Cir. 1997); United States v. Mercy Health Servs., 902 F. Supp. 968 (N.D. Iowa 1995),

vacated as moot, 107 F.3d 632 (8th Cir. 1997).

8

Adventist Health Sys.-West, No. 9234, 117 F.T.C. 224 (1994); FTC v. Freeman Hosp., 911

F. Supp. 1213 (W.D. Mo. 1995), aff’d 69 F.3d 260 (8th Cir. 1995); FTC v. Butterworth Health,

946 F. Supp. 1285 (W.D. Mich. 1996), aff’d mem., 121 F.3d 708 (6th Cir. 1997); United States v.

Mercy Health Servs., 902 F. Supp. 968 (N.D. Iowa 1995), vacated as moot, 107 F.3d 632 (8th

Cir. 1997); United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121 (E.D.N.Y. 1997);

FTC v. Tenet Healthcare, 186 F.3d 1045 (8th Cir. 1999). In another loss, though on different

grounds, the Eleventh Circuit in 1994 upheld a Florida district court ruling that the acquisition of

Cape Coral Medical Center by Lee Memorial Hospital was immune under the state action doc-

trine from FTC scrutiny. FTC v. Hosp. Bd. of Dirs. of Lee Cty., 38 F.3d 1184 (11th Cir. 1994).

9

California v. Sutter Health Sys., 84 F. Supp. 2d 1057 (N.D. Cal.), aff’d mem., 2000-1 Trade

Cas. (CCH) ¶ 87,665 (9th Cir. 2000), revised, 130 F. Supp. 2d 1109 (N.D. Cal. 2001).

10

Although both the government and the parties used E-H, the courts favored the so-called

strong market version of the E-H test, in which both the inflow and outflow percentages must be

less than 10%. The smaller markets proposed by the government, with inflow and outflow statis-

tics up to 25%, are the so-called weak market version of the E-H test. See David Dranove &

Andrew Sfekas, The Revolution in Health Care Antitrust: New Methods and Provocative Impli-

cations, 87 M

ILBANK

Q. 607, 611 (2009); see also H.E. Frech, James Langenfeld & R. Forrest

McCleur, Elzinga-Hogarty Tests and Alternative Approaches for Market Share Calculations in

Hospital Markets, 71 A

NTITRUST

L.J. 921 (2004); Martin Gaynor et al., A Structural Approach to

Market Definition with an Application to the Hospital Industry, 61 J. I

NDUS

. E

CON

. 243 (2013).