Antitrust Law Daily Wrap Up, ACQUISITIONS & MERGERS NEWS: High Court asked to consider decision unwinding hospital merger, (Jan 6, 2015)

By Jeffrey May, J.D.

The U.S. Supreme Court has not issued a substantive decision interpreting Section 7 of the Clayton Act in the last four decades, and Ohio-based hospital operator ProMedica Health System, Inc. would like to see an end to the drought. ProMedica recently petitioned the Supreme Court to review a decision of the U.S. Court of Appeals in Cincinnati concluding that the company's consummated acquisition of St. Luke's Hospital in Toledo would adversely affect competition in violation of Section 7 of the Clayton Act. The appellate court upheld an FTC opinion and order requiring ProMedica to unwind the 2010 hospital acquisition (ProMedica Health System, Inc. v. FTC, Dkt. 14-762).

ProMedica is calling for reversal of the Sixth Circuit's decision, which the company contends will have a substantial chilling effect on procompetitive and beneficial mergers, particularly hospital mergers that are necessitated by the Affordable Care Act. According to ProMedica, if the High Court does not act, the FTC will have “virtually unbridled discretion to block hospital mergers across the nation.”

The FTC improperly analyzed ProMedica's acquisition of St. Luke's, which was “struggling to survive in light of new mandates imposed by the Affordable Care Act and other federal statutes,” according to the petitioner. Both the FTC and the Sixth Circuit focused their analysis on market-share statistics, even though the agency challenged the merger solely on grounds that it would cause anticompetitive “unilateral effects.”

The focus of “unilateral effects” analysis is the elimination of competition between the merged entities. On the other hand, the concern under a traditional theory of anticompetitive “coordinated effects” is that a merger reduces competition among the competitors, increasing market concentration and fostering collusion. ProMedica argues that the “market-share analysis may have been appropriate in a 'coordinated effects' case, but was misplaced and distortive in a purely unilateral-effects case like the one here.” ProMedica suggests that unilateral effects concerns arise only when the merger participants offer close substitutes. Instead of focusing on substitutability, the FTC relied on “market-share-based presumptions [of harm], coupled with gerrymandered product markets,” ProMedica argues.

In addition, the Sixth Circuit rejected ProMedica's defense based on the financial weakness of St. Luke's. ProMedica asserted that St. Luke's was a diminished competitor and that its current market share overstated its competitive significance. However, the appellate court adopted a market-share-based approach to financial weakness evidence, even though the FTC's unilateral effects theory turned solely on substitutability rather than market share, according to ProMedica.

In its petition for certiorari, filed on December 22, ProMedica raises three questions for review:

1. whether the FTC, in defining the relevant market for merger analysis, is permitted to ignore the group of services that market participants actually negotiate for and purchase as a package, and instead define the product market based on supply-side considerations, thus allowing the FTC to gerrymander the product market to artificially inflate market shares;

2. whether a presumption of anticompetitive harm based on market-share statistics should apply where the FTC relies exclusively on a unilateral effects theory in challenging the merger; and

3. whether the FTC can rely on market-share statistics to preclude consideration of a merger target's financial weakness to rebut a presumption of harm based in market-share statistics in a unilateral-effects case.

Noting that there is a dearth of Clayton Act, Section 7 cases, ProMedica contends that this case is a “rare and uniquely apt vehicle for consideration of the issues based on a fully-developed record.” The Court was urged to take the opportunity to provide a substantive merger decision for the first time in 40 years.

The petition raises the issue of the potential conflict between the consolidation in the health care industry precipitated by the Affordable Care Act (ACA) and the role of the antitrust laws. FTC Chairwoman Edith Ramirez has taken the position that antitrust laws are compatible with the ACA. A potential conflict between the laws was also identified last year in the FTC's challenge to St. Luke’s Health System, Ltd.’s acquisition of Saltzer Medical Group physician practice in Idaho. The federal district court in Boise ordered St. Luke’s—the largest health care system in Idaho—to divest Saltzer—the state’s largest independent, multi-specialty physician practice. The parties in the St. Luke’s/Saltzer matter had argued that the transaction was in line with the policy objectives of the ACA.

Attorneys: Paul D. Clement (Bancroft PLLC) and David Marx, Jr. (McDermott, Will & Emery LLP) for ProMedica Health System, Inc.

Companies: ProMedica Health System, Inc.

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