Promedica Health Sys., Inc. v. Fed. Trade Comm'n

• Citation: 749 F.3d 559
• Decision Date: 24 July 2014
• Docket Number: No. 12–3583.,12–3583.
• Parties: PROMEDICA HEALTH SYSTEM, INC., Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

749 F.3d 559

PROMEDICA HEALTH SYSTEM, INC., Petitioner,

v.FEDERAL TRADE COMMISSION, Respondent.

No. 12–3583.

United States Court of Appeals,

Sixth Circuit.

Argued: March 7, 2013.

Decided and Filed: April 22, 2014.

Rehearing En Banc Denied July 24, 2014.^*

ARGUED:Douglas R. Cole, Organ Cole + Stock LLP, Columbus, Ohio, for Petitioner. Michele Arington, Federal Trade Commission, Washington, D.C., for Respondent. ON BRIEF:Douglas R. Cole, Erik J. Clark, Organ Cole + Stock LLP, Columbus, Ohio, David Marx, Jr., Stephen Y. Wu, McDermott Will & Emery LLP, Chicago, Illinois, for Petitioner. Michele Arington, John F. Daly, Federal Trade Commission, Washington, D.C., for Respondent. Beth Heifetz, Tara Stuckey Morrissey, Jones Day, Washington, D.C., Mark J. Botti, Hyland Hunt, Akin Gump Strauss Hauer & Feld LLP, Washington, D.C., for Amici Curiae.

Before: KETHLEDGE, WHITE, and STRANCH, Circuit Judges.

OPINION

KETHLEDGE, Circuit Judge.

This is an antitrust case involving a proposed merger between two of the four hospital systems in Lucas County, Ohio. The parties to the merger were ProMedica, by far the county's dominant hospital provider, and St. Luke's, an independent community hospital. The two merged in August 2010, leaving ProMedica with a market share above 50% in one relevant product market (for so-called primary and secondary services) and above 80% in another (for obstetrical services). Five months later, the Federal Trade Commission challenged the merger under § 7 of the Clayton Act, 15 U.S.C. § 18. After extensive hearings, an Administrative Law Judge and later the Commission found that the merger would adversely affect competition in violation of § 7. The Commission therefore ordered ProMedica to divest St. Luke's. ProMedica now petitions for review of the Commission's order, arguing that the Commission was wrong on both the law and the facts in its analysis of the merger's competitive effects. We think the Commission was right on both counts, and deny the petition.

I.

A.

Lucas County is located in the northwestern corner of Ohio, with approximately 440,000 residents. Toledo lies near the county's center; more affluent suburbs lie to the southwest. Two-thirds of the county's patients have government-provided health insurance, such as Medicare or Medicaid. Twenty-nine percent of the county's patients have private health insurance, which pays significantly higher rates to hospitals than government-provided insurance does. (Medicare and Medicaid reimbursements generally do not cover the providers' actual cost of services.) A relatively large proportion of the county's privately insured patients reside in the county's southwestern corner.

This case concerns the market—or markets, depending on how one defines them—for “general acute-care” (GAC) inpatient services in Lucas County. GAC comprises four basic categories of services. The most basic are “primary services,” such as hernia surgeries, radiology services, and most kinds of inpatient obstetrical (OB) services. “Secondary services,” such as hip replacements and bariatric surgery, require the hospital to have more specialized resources. “Tertiary services,” such as brain surgery and treatments for severe burns, require even more specialized resources. And “quaternary services,” such as major organ transplants, require the most specialized resources of all.

Different hospitals offer different levels of these services. There are four hospital providers in Lucas County. The most dominant is ProMedica, with 46.8% of the GAC market in Lucas County in 2009. ProMedica operates three hospitals in the county, which together provide primary (including OB), secondary, and tertiary services. The county's second-largest provider is Mercy Health Partners, with 28.7% of the GAC market in 2009. Mercy likewise operates three hospitals in the county, which together provide primary (including OB), secondary, and tertiary services. The University of Toledo Medical Center (UTMC) is the county's third-largest provider, with 13% of the GAC market. UTMC operates a single teaching and research hospital, just south of downtown Toledo, and focuses on tertiary and quaternary services. It does not offer OB services. The remaining provider is St. Luke's Hospital, which before the merger was an independent, not-for-profit hospital with 11.5% of the GAC market. St. Luke's offers primary (including OB) and secondary services, and is located in southwest Lucas County.

B.

With respect to privately insured patients, hospital providers do not all receive the same rates for the same services. Far from it: each hospital negotiates its rates with private insurers (known as Managed Care Organizations, or MCOs); and the rates themselves are determined by each party's bargaining power.

The parties' bargaining power depends on a variety of factors. An MCO's bargaining power depends primarily on the number of patients it can offer a hospital provider. Hospitals need patients like stores need customers; and hence the greater the number of patients that an MCO can offer a provider, the greater the MCO's leverage in negotiating the hospital's rates. But MCOs compete with each other just as hospitals do. And to attract patients, an MCO's health-care plan must offer a comprehensive range of services—primary, secondary, tertiary, and quaternary—within a geographic range that patients are willing to travel for each of those services. (The range is greater for some services than others.) These criteria in turn create leverage for hospitals to raise rates: to the extent patients view a hospital's services as desirable or even essential—say, because of the hospital's location or its reputation for quality—the hospital's bargaining power increases.

But another important criterion for a plan's competitiveness is its cost. Thus, if a hospital demands rates above a certain level—the so-called “walk-away” point—the MCO will try to assemble a network without that provider. For example, rather than include all four hospital providers in its network, the MCO might include only three. If a provider becomes so dominant in a particular market that no MCO can walk away from it and remain competitive, however, then that provider can demand—and more to the point receive—monopoly rates ( i.e., prices significantly higher than what the MCOs would pay in a competitive market).

Here, before the merger, MCOs in Lucas County had sometimes offered networks that included all four hospital providers, but sometimes offered networks that included only three. From 2001 until 2008, for example, Lucas County's largest MCO, Medical Mutual of Ohio, successfully marketed a network of Mercy, UTMC, and St. Luke's. Since 2000, however, no MCO has offered a network that did not include either ProMedica or St. Luke's—the parties to the merger here.

C.

The likely reason MCOs have historically found it necessary to include either ProMedica or St. Luke's in their networks is that those providers are dominant in southwest Lucas County, where St. Luke's is located. In that part of the county—relatively affluent, and with a high proportion of privately insured patients—ProMedica and St. Luke's were direct competitors before the merger at issue here. Indeed, St. Luke's viewed ProMedica as its “most significant competitor,” while ProMedica viewed St. Luke's as a “[s]trong competitor”—strong enough, in fact, that ProMedica offered to discount its rates by 2.5% for MCOs who excluded St. Luke's from their networks. But in this competition ProMedica had the upper hand. It is harder for an MCO to exclude the county's most dominant hospital system than it is for the MCO to exclude a single hospital that services just one corner of the county—a corner, moreover, that the dominant system also services. And that means the MCOs' walk-away point for the dominant system is higher—perhaps much higher—than it is for the single hospital. Here, the record bears out that conclusion: ProMedica's rates before the merger were among the highest in the State, while St. Luke's rates did not even cover its cost of patient care. That was true even though St. Luke's quality ratings on the whole were better than ProMedica's.

As a result, St. Luke's struggled in the years before the merger, losing more than $25 million between 2007 and 2009. To improve matters, St. Luke's hired Daniel Wakeman, a hospital-turnaround specialist, as its CEO. Wakeman implemented a three-year plan to reduce costs, increase revenues, and regain patient volume from ProMedica. Eventually St. Luke's fortunes began to improve: by August 2010, St. Luke's was out of the red (albeit barely), and Wakeman reported that “this positive margin confirms that we can run in the black if activity stays high.”

By then, however, St. Luke's was contemplating other options. In August 2009, Wakeman presented three options to St. Luke's Board. The first was for St. Luke's to “[r]emain independent” by “cut[ting] major services” until an “accepted margin is realized.” The second was for St. Luke's to “[p]ush the [MCOs] ... to raise St. Luke's reimbursement rates to an acceptable margin.” Under this option, Wakeman noted, “the message [to MCOs] would be [to] pay us now (a little bit more) or pay us later (at the other hospital system contractual rates).” The third option was for St. Luke's to join one of the three other providers in Lucas County—ProMedica, Mercy, or UTMC.

Of all these options, Wakeman believed that a merger with ProMedica “ha[d] the greatest potential for higher hospital rates. A ProMedica-[St. Luke's] partnership would have a lot of negotiating clout.” Wakeman also recognized, however, that an affiliation with ProMedica could “[h]arm the community by forcing higher hospital rates on them.”

Three months later, Wakeman recommended to St. Luke's Board that it pursue a merger with ProMedica. The Board accepted the recommendation the same day. Six months later, on May 25, 2010, ProMedica and St. Luke's...