Continuing the Federal Trade Commission’s string of wins in hospital merger cases, the United States Court of Appeals for the Sixth Circuit this week upheld an FTC decision ordering the largest hospital provider in the Toledo, Ohio area to divest a smaller independent community hospital acquired in 2010 due to the acquisition’s likely anticompetitive effects. ProMedica Health System’s purchase of St Luke’s Hospital gave ProMedica a market share above 50% for primary and secondary services, and above 80% for obstetrical services. In January 2011, the FTC challenged the merger under Section 7 of the Clayton Act, 15 U.S.C. § 18. Following a lengthy hearing, an Administrative Law Judge, and subsequently, the FTC, found that the merger would allow ProMedica to unilaterally increase its prices above a competitive level, and that the merger did not create any efficiencies sufficient to offset its anticompetitive effects. Accordingly, the FTC concluded that the merger would have substantial anticompetitive effects, and ordered ProMedica to divest St Luke’s to an FTC-approved buyer within 180 days of the order becoming final.
In upholding the FTC’s decision, the Sixth Circuit found a strong correlation between ProMedica’s prices and its market share. The court noted that, prior to the merger, ProMedica’s share of one relevant market was 46.8%, with the other three hospital providers in the county possessing a market share of 28.7%, 13%, and 11.5%, respectively. The court further noted that ProMedica’s prices reflected the respective market shares held by the hospital providers in the county—ProMedica’s prices were on average 32% higher than one hospital, 51% higher than another hospital, and 74% higher than St Luke’s. The court found that, in ProMedica’s case, the higher prices were not explained by the quality of ProMedica’s services or by its underlying costs, but by its bargaining power over private insurers. The court noted that “a network which does not include a hospital provider that services almost half the county’s patients in one relevant market, and more than 70% of the county’s patients in another relevant market, would be unattractive to a huge swath of potential members.” Accordingly, the court held, the FTC had every reason to conclude that, as ProMedica’s dominance in the relevant market were to increase, so would the need for insurers to include ProMedica in their network, allowing ProMedica leverage in demanding still higher rates.
The court further held that the merger would further concentrate markets that were already concentrated, and that the merger would enhance ProMedica’s market power to presumptively illegal levels “rarely tolerated in antitrust law.” The court found that ProMedica had not rebutted the presumption that the merger was substantially anticompetitive, and that ProMedica failed to cite any efficiencies that would result from the merger. To the contrary, the court noted, the St Luke’s CEO admitted that a merger with ProMedica had “the greatest potential for higher hospital rates” and would bring “a lot of negotiating clout.” Consequently, the court found that the FTC did not abuse its discretion in choosing divestiture as a remedy and denied ProMedica’s petition for review. ProMedica has announced its intention to appeal the ruling.