F.T.C. v. Freeman Hosp.

• Decision Date: 01 November 1995
• Docket Number: Nos. 95-1448,95-2882,s. 95-1448
• Citation: F.T.C. v. Freeman Hosp., 69 F.3d 260 (8th Cir. 1995)
• Parties: , 1995-2 Trade Cases P 71,167 FEDERAL TRADE COMMISSION, Appellant, v. FREEMAN HOSPITAL; Tri-State Osteopathic Hospital Association, d/b/a Oak Hill Hospital, Inc., Appellees. American Hospital Association, Amicus Curiae.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 260

69 F.3d 260

64 USLW 2306, 1995-2 Trade Cases P 71,167

FEDERAL TRADE COMMISSION, Appellant, v.FREEMAN HOSPITAL; Tri-State Osteopathic Hospital Association, d/b/a Oak Hill Hospital, Inc., AppelleesAmerican Hospital Association, Amicus Curiae.

Nos. 95-1448, 95-2882.

United States Court of Appeals Eighth Circuit.

Submitted Sept. 12, 1995.

Decided Nov. 1, 1995.

Ernest J. Isenstadt of the Federal Trade Commission, Washington, DC, argued (Stephen Calkins, Jay C. Shaffer and Melvin H. Orlans of the FTC, Washington, DC; Janice L. Charter, Norris E. Washington, Jonathan L. Kessler, and Pamela M. Cole, of the FTC, Denver, CO, on the brief), for appellant.

Thomas Campbell, Chicago, IL, argued (Deborah H. Bornstein, Daniel McDevitt and John T. Roache, Chicago, IL and David L. Taylor and Paul G. Taylor, Joplin, MO, on the brief), for appellee.

Before WOLLMAN, BEAM, and MURPHY, Circuit Judges.

BEAM, Circuit Judge.

The United States Federal Trade Commission(FTC), sought a preliminary injunction from the district court to prevent the merger of two hospitals in Joplin, Missouri, contending the transaction would have anticompetitive effects in violation of Section 7 of the Clayton Act,15 U.S.C. Sec. 18.The district court denied the requested relief and the FTC appeals.Because the FTC has failed to meet its burden for obtaining preliminary injunctive relief, we affirm.

I.BACKGROUND

The city of Joplin, Missouri, a community of approximately 40,000 people, is located in the southwest corner of Missouri near the confluence of four states.Joplin is situated just five miles from the Kansas state line, forty miles from the northwest corner of Arkansas, and twelve miles from the northeast corner of Oklahoma.Joplin is also located within a few hours of several larger metropolitan centers, including Kansas City, Missouri, Springfield, Missouri, and Tulsa, Oklahoma.

Joplin is currently home to three general acute care hospitals.The largest of these hospitals is St. John's Regional Medical Center, a nonprofit, allopathic hospital with 331 beds.The other two hospitals are significantly smaller.Freeman Hospital, also a nonprofit allopathic institution, houses 158 beds.Oak Hill Hospital is a 96-bed hospital and the only hospital in Joplin with an osteopathic, rather than an allopathic, orientation.¹Surrounding Joplin are several smaller communities, many of which have their own acute care hospitals ranging from eighteen to 161 beds.

In February 1994, Freeman Hospital and Oak Hill Hospital (the Hospitals) agreed to consolidate their assets and form a new nonprofit organization, Health SouthWest Alliance of Missouri, Inc. Oak Hill had been experiencing financial difficulties, and its trustees believed a merger with Freeman would strengthen Oak Hill's financial standing and enable it to better compete in a changing health care market.Accordingly, on July 21, 1994, pursuant to the Hart-Scott-Rodino Act, 15 U.S.C. Sec. 18a, ² the Hospitals filed a premerger notification form with the FTC outlining the transaction.On August 19, 1994, the FTC requested more information about the transaction.It sought to determine whether the proposal violated Section 7 of the Clayton Act,15 U.S.C. Sec. 18, which prohibits certain mergers and acquisitions if "in any line of commerce ... in any section of the country, the effect of such acquisition may be substantially to lessen competition."The Hospitals promptly complied with this request.Under the Premerger Notification Act, however, the FTC's issuance of a request for more information suspended the statutory waiting period for completing the transaction ³ and prevented the Hospitals from merging as planned.

While the Hospitals awaited the FTC's clearance for the merger, the FTC suggested that Oak Hill's trustees determine whether any other entities were interested in acquiring Oak Hill.Oak Hill subsequently solicited other offers for the hospital to be submitted by early January 1995.Two for-profit health care companies submitted bids for Oak Hill.A group of physicians from Joplin also expressed interest in acquiring it.In January 1995, however, Oak Hill announced that it had decided to pursue its earlier arrangement with Freeman Hospital rather than accept another bid.⁴

Shortly after Oak Hill's announcement, the FTC filed a complaint alleging that the Hospitals' consolidation would lessen competition for acute care inpatient hospital services in the Joplin area.Pursuant to Section 13(b) of the Federal Trade Commission Act (FTC Act), 15 U.S.C. Sec. 53(b), ⁵ the FTC sought a temporary restraining order and a preliminary injunction to enjoin the Hospitals from merging pending an administrative determination of whether the merger would violate Section 7 of the Clayton Act.

The following day, the parties appeared and presented arguments to the district court on the FTC's request for a temporary restraining order.After hearing the arguments, the district court orally denied the motion for a temporary restraining order, stating:

I'm denying the TRO because based upon the pleadings filed here, I don't feel that the Federal Trade Commission has shown sufficient factual basis that they are entitled to a TRO....I don't think you've got any business being in here.I don't see how the Federal Trade Commission can claim there is lack of competition when there [are] four or five hospitals in the area, and reducing it by one is not going to wipe out competition.

....

It looks to me like Washington D.C. once again thinks they know better what's going on in southwest Missouri.I think they ought to stay in D.C.

Temp.Restraining Order Hrg.Tr.at 27-29(Febr. 22, 1995).On February 28, 1995, without holding an additional evidentiary hearing, the district court issued a written order reiterating its oral denial of the temporary restraining order and denying, in addition, the FTC's application for a preliminary injunction.

By order of March 1, 1995, in the midst of various procedural maneuvers, this court considered the FTC's notice of appeal of the district court's decision.We noted that the district court had not held an evidentiary hearing on the issue of the preliminary injunction, and declined to address the substantive issues raised by the parties without a fully developed record.Accordingly, we entered a stay order, retained jurisdiction of the appeal and remanded the matter to the district court for an evidentiary hearing.

A.Preliminary Injunction Evidentiary Hearing

On March 23 and 24, 1995, the district court held an evidentiary hearing to determine whether to grant the FTC's requested preliminary injunction.Each side was permitted to present three witnesses and offer additional deposition testimony and exhibits.A voluminous record resulted, in which the parties attempted to establish the Hospitals' area of competition and to predict the competitive effects of the proposed merger.

At this hearing, both sides relied heavily on expert testimony.Dr. Keith Leffler, an economist at the University of Washington, appeared for the FTC.Dr. Leffler testified that the Hospitals were part of a market for acute care inpatient hospital services which encompassed Joplin, Missouri, and areas located within a twenty-seven-mile radius of the city.⁶To reach this conclusion, Dr. Leffler applied the Elzinga-Hogarty test, a method devised by professors of economics Kenneth G. Elzinga and Thomas F. Hogarty to analyze patterns of consumer origin and destination and to identify relevant competitors of the merging entities.SeeUnited States v. Rockford Memorial Corp., 717 F.Supp. 1251, 1266(N.D.Ill.1989), aff'd, 898 F.2d 1278(7th Cir.), cert. denied, 498 U.S. 920, 111 S.Ct. 295, 112 L.Ed.2d 249(1990).

The first prong of the Elzinga-Hogarty test requires a determination of the merging hospitals' "service area," the area from which they attract their patients.⁷To determine the service area, Dr. Leffler examined the zip codes of patients discharged from the three hospitals in Joplin.After accounting for approximately eighty percent ⁸ of the patient population at those hospitals, he arranged them in order of distance from Joplin and developed a preliminary map of the service area.Within that area were other hospitals, and Dr. Leffler performed the same analysis for those hospitals to complete a map of the collective service area of all the hospitals.

The second step in the Elzinga-Hogarty test requires an analysis of where patients within the collective service area currently go to receive their health care.⁹In undertaking this analysis, Dr. Leffler again used patient zip code information and determined that approximately ninety percent of hospital admissions of people residing in the proposed service area were admissions to hospitals within the service area.

Relying on his test results and statements of various market participants regarding the nature of the health care market in southwest Missouri, Dr. Leffler delineated his geographic market spanning twenty-seven miles in every direction from Joplin, Missouri, and encompassing seven acute care facilities.To this market, Dr. Leffler applied the Herfindahl-Hirschmann Index (HHI), an economic index designed to provide a numerical measure of concentration in a given market.Dr. Leffler found that within his proposed market the HHI indicated a highly concentrated industry which presumptively raises antitrust concerns.

The Hospitals' expert, Dr. William Lynk, ¹⁰ presented a much different picture of the geographic market in which the Hospitals compete.Dr. Lynk also performed the first prong of the Elzinga-Hogarty test to determine the Hospitals' "service area," but his method differed from Dr. Leffler's approach in two important respects.First, Dr. Lynk used a ninety percent inclusion criterion to account for a greater percentage of patient business.Second, he arranged the zip codes contributing patients to the...