In what appears to be an emerging trend, the Federal Trade Commission (FTC) persuaded a district court to enjoin preliminarily a hospital merger for the second time in a month. Federal Trade Commission v. OSF Healthcare System, No. 11 C 50344 (N.D. Ill. Apr. 5, 2012). The FTC victory is notable for several reasons. First, between the late 1980s and 1990s, neither the FTC nor the Department of Justice had been able to persuade a court to enjoin a hospital merger. Here, the FTC has successfully persuaded a district court to enjoin two of the last three hospital mergers. The OSF challenge is also notable because the FTC succeeded in challenging a hospital merger in Rockford, Illinois, but failed in an attempt to challenge a Rockford hospital merger in 1990. Combining these FTC victories with those of the Department of Justice (successfully challenging H&R Block's acquisition of TaxAct and the abandonment of AT&T's acquisition of T-Mobile in the face of a Department of Justice challenge), there appears to be a discernible trend toward government victories in merger challenges. Further, in the health care arena, the FTC victories suggest that hospital mergers in highly concentrated markets likely will face significant hurdles before the federal antitrust agencies.
Discussion
Defendant OSF is a not-for-profit health care system that owned several general acute-care hospitals, one of which was St. Anthony Medical Center in Rockford, Illinois. OSF proposed to enter into an affiliation agreement with the owners of Rockford Memorial Hospital, a general acute care hospital.
To obtain preliminary relief, the FTC must demonstrate there is: (1) a likelihood that the FTC will prevail and (2) the equities weigh in favor of granting preliminary relief. Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b). The court highlighted that its role in determining likelihood of success was not to determine if there is a violation of law, but to determine whether, based on all the evidence, the FTC raised questions going to the merits so "serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals." The FTC may make a prima facie showing that a merger violates the antitrust laws by showing the parties have a share of the market of over 30 percent. The defendants may rebut the FTC prima facie case by coming forward with evidence showing the shares are not reliable.
The traditional merger analysis involves defining markets and concentration and evaluating the competitive effects from the merger, the likelihood of entry, and the efficiencies arising from the transaction. The parties did not dispute the relevant market and the court evaluated the transaction in the Rockford, Illinois, general acute care market (a 30-minute car ride from Rockford). The FTC submitted share data showing the merged entity would account for 59.4 percent and 64.2 percent of the market based on patient admissions and patient days, respectively. The FTC also submitted market concentration levels that, under the 2010 Department of Justice and Federal Trade Commission Horizontal Merger Guidelines (Merger Guidelines), created a presumption that the merger was unlawful.
The parties argued that shares and concentration levels were not sufficient to establish a prima facie showing because courts had denied the FTC's request for a preliminary injunction based on shares and concentration levels higher than those in the case at bar. The court rejected this argument because those cases did not find high shares; they found the FTC failed to demonstrate a geographic market where the shares were high enough to establish a prima facie case.
To rebut the prima facie case, the parties provided several arguments, all of which were rejected by the court. The parties argued that the other general acute care competitor in the market was larger than either of the merging parties, had expanded and would compete aggressively, thus preventing the merged firm from increasing prices. The court cited the Merger Guidelines stating, "the elimination of competition between two firms that results from their merger may alone constitute" an antitrust violation. The court went on to note that the merger would reduce competition from three general acute care hospitals to two and that the FTC did not have to show that all competition was eliminated.
The parties also argued that the merged entity could not increase prices because managed care organizations could form a network with just one hospital. The court noted that prior attempts to create single-hospital networks proved unsuccessful in Rockford. There was also evidence in the record that consumers preferred networks with two hospitals. The court also did not agree that the merger would not alter the number of hospital network configurations. Before the merger a network could have: (1) all three hospitals, (2) a network of St. Anthony's and Rockford Memorial, or (3) a network that contained only the third rival. The court rejected this argument, in part because it had concluded that single hospital networks were not competitive. Thus, a managed care organization would have to contract with one of the two merging hospitals to form a network. This dynamic, according to the court, would give OSF bargaining leverage.
The parties also attempted to rebut the FTC's prima facie case using a novel approach: that is, by stipulating to restrictions on the operations of the business. In particular, the parties offered to stipulate that: (1) they would not require any managed care organization to exclude the third party rival from a network and (2) they would not require a managed care organization to contract with OSF on a system-wide basis. The court noted that part 1 of the stipulation did limit some of the concerns by ensuring that managed care organizations could have a three-hospital network. The court noted, however, that the stipulation did not "limit the ability of OSF [] to seek higher prices." According to the court, OSF could raise prices to those seeking a three-hospital network because "a network with all three hospitals reduces the [managed care organization's] bargaining power because they can no longer provide the hospitals with any steering of patients." In addition, part 1 of the stipulation did not obviate the problem that those seeking a multi-hospital network had to negotiate with OSF. The court then explained that the second stipulation mitigated some concern but did not address the ability of OSF to increase prices in Rockford.
The court then rejected OSF's argument that the FTC failed to conduct a merger simulation and only conducted a "willing-to-pay" analysis. The court believed that its role was limited to determining whether there were serious, substantial, difficult and doubtful issues to make them fair ground for study. As such, the absence of a study was not persuasive, and the defendants had not provided any authority explaining that such a study was required.
The defendants then argued there was no evidence that the merger would lead to "coordinated" effects. The FTC had produced some evidence of prior coordination and discussions between the merging parties relating to managed care negotiations. The court would not rely on rebuttal testimony of OSF executives that they would not collude or allow such collusion because "they would be expected to publicly disavow any improper conduct and not condone such conduct in the future." Accordingly, the court found sufficient evidence of a risk of coordination.
The court also rejected the defendant's efficiency claims. Before analyzing the efficiency claims, the court explained that it has the responsibility to undertake a rigorous analysis of the efficiencies to ensure they are more than "mere speculation." The court cautioned that 6 high market shares require "extraordinary efficiencies." For the most part, the court found the savings claims to be too uncertain to rebut the FTC's case. The court cited examples of efficiency claims that were not sufficient. Defendant's expert identified savings from combining trauma centers but noted that such consolidation was difficult and the defendants had not studied the feasibility of actually combining the centers. The court rejected savings based on saved capital expenditures because in some cases it was not clear that absent the merger the parties would have made the investment, and in other cases it was not clear that the investment would not be necessary even if the merger closed. Finally, the court noted that sharing of best practices was not merger specific. The same was true for the claims of improved care and creations of "centers for excellence."
Finally, the court turned to a balancing of the equities. The court noted that there is a presumption in favor of granting the FTC relief and also highlighted that "no court has denied relief to the FTC in a 13(b) proceeding in which the FTC has demonstrated a likelihood of success on the merits."
As discussed above, the decision is notable because it reflects an FTC victory that until recently had been rare. Moreover, it reflects a relatively lenient standard for the FTC to obtain a preliminary injunction.
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