FTC v. Freeman Hosp.

• Decision Date: 09 June 1995
• Docket Number: No. 95-5015-CV-SW-1.,95-5015-CV-SW-1.
• Citation: 911 F. Supp. 1213
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. FREEMAN HOSPITAL and Tri-State Osteopathic Hospital Association, Inc. d/b/a Oak Hill Hospital, Defendants.
• Court: U.S. District Court — Western District of Missouri

911 F. Supp. 1213

FEDERAL TRADE COMMISSION, Plaintiff, v. FREEMAN HOSPITAL and Tri-State Osteopathic Hospital Association, Inc. d/b/a Oak Hill Hospital, Defendants.

No. 95-5015-CV-SW-1.

United States District Court, W.D. Missouri, Southwestern Division.

June 9, 1995.

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Janice Charter, Denver, Colorado, for plaintiff.

Antonio deBlasio, Thomas Campbell, Chicago, IL, David L. Taylor and Paul G. Taylor, Webb City, MO, for defendants.

ORDER

WHIPPLE, District Judge.

Pending before the Court is Plaintiff's motion for preliminary injunction. Said motion together with Plaintiff's suggestions in support, Defendants' suggestions in opposition, Plaintiff's reply suggestions, and all proposed findings of fact and conclusions of law were reviewed by the Court. After due consideration of the above and all of the evidence submitted at the evidentiary hearing held on March 23 and 24, 1995, for the reasons set forth below, the motion is denied.

I. FACTUAL BACKGROUND

A. Procedural History

The City of Joplin, Missouri, which has a population of approximately 40,000, is located in the extreme southwestern corner of Missouri, roughly five miles from the Kansas state line, twelve miles from the northeast corner of Oklahoma, and 40 miles from the northwest corner of Arkansas. On February 28, 1994, Freeman Hospital ("Freeman") and Tri-State Osteopathic Hospital Association, Inc. d/b/a Oak Hill Hospital ("Oak Hill"), two general acute care hospitals located within the Joplin city limits, entered into an agreement to consolidate their operations. Under the planned consolidation,¹ all of the assets, liabilities, activities, and management of the two hospitals will be combined to form a new nonprofit corporation to be known as Health Southwest Alliance of Missouri, Inc.

At present, Freeman is a nonprofit Missouri corporation that operates a 158-bed general acute care hospital and is the second-largest of the three hospitals located within the Joplin city limits. Freeman also owns Freeman-Neosho Hospital in Neosho, Missouri ("Freeman-Neosho"), a 67-bed facility located approximately 15 miles southeast of Joplin. Both Freeman and Freeman-Neosho have historically been allopathic, as opposed to osteopathic, hospitals. Oak Hill, the smallest hospital in the city of Joplin, is a nonprofit Missouri corporation that operates a 96-bed general acute care facility staffed primarily by osteopathic physicians. Joplin's third and largest general acute care hospital is St. John's Regional Medical Center ("St. John's"), an allopathic hospital with 331 beds. There are a number of other hospitals nearby, however, the parties dispute which of them should be considered relevant in analyzing the competitive impact of this proposed consolidation. All other hospitals in the markets proposed by the parties are allopathic.

Defendants filed the necessary pre-merger notification form with the Federal Trade Commission ("FTC") as required by Section 7A of the Clayton Act, 15 U.S.C. § 18a, on July 21, 1994. This provision imposes a statutory waiting period of thirty days before any merger may be consummated to allow the FTC an opportunity to review the consequences of the transaction. On August 19, 1994, the FTC issued a second request for information to Defendants. After a response to the second request was submitted, the parties agreed to several extensions of the waiting period during which time the FTC continued to investigate the proposed transaction and its expected competitive effects. The last agreed extension expired at 11:59 p.m. on February 22, 1995. On February 24, 1995, the FTC filed the complaint in this action.

The FTC seeks injunctive relief to prohibit this consolidation pending final disposition of administrative proceedings that will determine whether this transaction violates section 7 of the Clayton Act. 15 U.S.C. § 18. Initially, the FTC sought a temporary restraining order ("TRO") to restore and maintain Oak Hill as an independent hospital. After conducting a TRO hearing on February 22, 1995, the Court denied the FTC's request for a temporary restraining order.² The Court then held a preliminary injunction hearing on March 23 and 24, 1995.

B. The Relevant Geographic Market

At the preliminary injunction hearing, the establishment of the relevant geographic market for the merging hospitals boiled down to a battle of the experts with the combatants as follows: Professor Keith Leffler for the FTC versus Dr. William Lynk for Defendants. In their respective analyses, both experts relied on the Elzinga-Hogarty test.³ The Elzinga-Hogarty test is comprised of two measures of historical service flows into or out of a proposed geographic market. The first measure, Little Out From Inside ("LOFI"), represents the percentage of patients served by area hospitals who reside within the area. The second measure, Little In From Outside ("LIFO"), represents the percentage of patients who remain in the area for hospital services rather than go outside the area.

Both experts spent considerable time debating the proper cut-off percentage to use in establishing an accurate geographic market. Generally, applying the Elzinga-Hogarty test at a 75 percent inclusion criterion results in a "weak" market definition. By contrast, an inclusion criterion of 90 percent is considered the minimum standard necessary to have a "strong" market definition that accounts for all important competitive influences. Although the authors of the Elzinga-Hogarty test initially suggested a 75 percent cutoff criterion, they now suggest that 90 percent is the more appropriate cutoff threshold.⁴ See Elzinga & Hogarty, The Problem of Geographic Market Delineation Revisited: the Case of Coal, 23 Antitrust Bulletin 1 (1978); In re Adventist Health System/West, (available on WESTLAW, FATR-FTC database), 1994 FTC LEXIS 54, at *19. The FTC has not officially endorsed the use of either the 75 or 90 percent figure.

1. Determining service area

The first step in evaluating the relevant geographic market is to determine where the patients of the Joplin hospitals come from. It is undisputed that the following hospitals in the immediate Joplin area are in competition with one another: Freeman, Oak Hill, St. John's, Freeman-Neosho, and McCune-Brooks Hospital. The area from which these hospitals get their patients is referred to as their "service area." Regardless of which inclusion percentage is used, the measurement of service area requires a choice of geographic units to construct and define the area. Such units can be comprised of, for example, cities, zip codes, or entire counties. Whatever the building blocks, the service area is constructed by adding successive geographic units until they cumulatively account for enough of the hospitals' patients to meet the specified inclusion percentage.

a. Professor Leffler's service area

Although Professor Leffler proposed several alternatives, he expressed his preference for a service area consisting of all zip codes within a 27-mile radius of Joplin. Plaintiff's Exhibit 111. In 1993, his proposed service area, consisting of 44 zip codes in Jasper, Newton, and McDonald Counties in Missouri, Cherokee County in Kansas, and Ottowa County in Oklahoma, collectively accounted for 80.8 percent of the Joplin area hospitals' 24,336 patient admissions. While this criterion exceeds the 75 percent "weak market" inclusion criterion, it is closer to a "weak" than a "strong" market standard. However, the accuracy of Professor Leffler's proposed service area is questionable for several reasons.

First, Professor Leffler's preferred service area ignores several cities and zip codes that contribute significant numbers of patients to the Joplin area hospitals. For example, Professor Leffler's service area excludes zip code 66762 in Crawford County, Kansas, which contributed 533 patients to the Joplin area hospitals in 1993 according to his own tabulation. Plaintiff's Exhibit 111. If ranked according to the number of patients contributed, this zip code, which encompasses the city of Pittsburg, Kansas, would have ranked ahead of 35 other zip codes that Professor Leffler did include. By excluding Pittsburg, Kansas, Professor Leffler excluded Mt. Carmel Medical Center, an 82-bed facility, from his proposed geographic market. Professor Leffler's service area also excluded zip code 64759 in Barton County, Missouri that contributed 317 patients to the Joplin area hospitals in 1993. In addition, Professor Leffler's service area includes zip codes that provided as few as seven patients to the Joplin area hospitals, Jasper County zip code 64833, and nine patients, Ottawa County zip code 74358. Plaintiff's Exhibit 111.

Second, the initial service area proposed by Professor Leffler was based on whole counties rather than specific zip codes. Plaintiff's Exhibit 108, at 8. However, after learning of Dr. Lynk's zip-code based service area, Professor Leffler altered his approach and acknowledged that a zip code-based analysis provides a greater degree of accuracy than a service area based solely on counties. Furthermore, in making his initial service area determination, Professor Leffler relied upon a data diskette supplied by the Hospital Industry Data Institute ("HIDI"), which initially indicated that the Joplin area hospitals had a total of 19,879 patient admissions in 1993. Plaintiff's Exhibit 108, at table 1. However, there is some question as to the accuracy of this number, as HIDI's published numbers report that the 1993 patient total was 24,336, not 19,879.⁵ Defense Exhibit 19. Professor Leffler's use of this erroneous data casts doubt on the reliability of his calculations.

b. Dr. Lynk's service area

Dr. Lynk used a 90 percent standard to define his service area, which utilized zip codes and towns as geographic building blocks. Using data for 1993 published by HIDI, Dr. Lynk added towns to the service area in...