Question
Richard Smith, Esq.
Thomas Hancock, Esq.
Pre-Merger Notification Office, H-303
Federal Trade Commission
Washington, D.C. 20580
Re: (Redacted)
Dear Mr. Smith and Mr. Hancock:
The purpose of this letter is to request an informal determination in connection with the filing of a pre-merger notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “Act”). The need for a filing arises because (redacted), a (redacted) nonprofit public benefit corporation (the “Foundation”), is acquiring (redacted), (the “Network”), a health-care provider organization consisting of five related entities. It is our view that the Network is a single person for purposes of the Act, and can properly make a single filing on behalf of its constituent entities. The corollary would be that Foundation, and the “acquiring person of which it is a part,” is also obligated to make only one filing.
Background
The Network is a system of commonly-owned health care provider entities, each of which is owned by (redacted) individual physicians (the “Partners”). The Network operates and holds itself out as an integrated organization under the name (redacted). The Network operates a general acute care hospital known as (redacted) (the “Medical Center”), and its associated medical clinics. The Medical Center is a (redacted)-bed proprietary hospital located in (redacted). The Network also operates a number of medical clinics, also located in (redacted), which provide outpatient medical and ancillary services (the “Clinics”). The Network has three constituent entities that are being acquired and are contemplating filing under the Act. 1
The Medical Group. The Medical Center is staffed by the members of (redacted) (the “Medical Group”), a medical partnership consisting of the (redacted) Partners and approximately (redacted) physician employees. Members of the Medical Group also operate and staff the Network’s Clinics. The Medical Center has a closed staff, and only members of the Medical Group and community-based physicians under contract to the Medical Group are permitted to admit patients to its facilities. The Medical Center’s revenues are therefore derived exclusively from services provided to patients of the Medical Group.
The Hospital Corporation. The Medical Center is owned and operated by (redacted), a (redacted) corporation (the “Hospital Corporation”). Under the bylaws of the Hospital Corporation, its shareholders must be partners of the Medical Group and of (redacted) and must hold their interests in these entities in the same proportion. The Network operates the Hospital through a separate corporation in order to insulate the members of the Medical Group from liability for the Hospital’s operations, and to avoid the need to obtain accreditation of the Clinics as hospital facilities. 2 The Hospital Corporation and the Medical Group, however, share common governance and management, as described below.
(Redacted) of (Redacted). (Redacted) of (Redacted) is a (redacted) general partnership which owns the real estate and improvements in which the Medical Center is operated, and leases them to the Hospital Corporation. The partners of (redacted) are the same persons who are the Partners of the Medical Group and shareholders of the Hospital Corporation. The income of (redacted) is derived solely from lease payments received from the Hospital Corporation, the income of which is in turn derived only from services provided to patients admitted to the Medical Center by the Medical Group.
Under the proposed transaction, the Medical Group, the Hospital Corporation and (redacted) will sell or donate all of their assets to the Foundation, which will operate them as a nonprofit hospital and associated outpatient clinics.
Common Ownership and Management
Through their interlocking partnership interests and stock, the Partners are the common owners of the Medical Group, the Hospital Corporation and (redacted). 3 The Partners own identical fractional interests in the three entities. This common ownership is reflected in the governance and management of the three entities, which is completely integrated.
The Partners have elected a group of (redacted) persons from their members, which act as the Executive Committee of the Medical Group and of (redacted) and as the Board of Directors of the Hospital Corporation. The same person is the Chief Executive Officer of all three organizations, and the other senior executive officers (titled “Executive Directors”) function as the executive management for all three organizations. 4
Below the level of executive management, the Medical Group and the Hospital Corporation employ separate staff to perform dedicated functions, but they share common office and other facilities, and use the same staff to perform common services. (Redacted) has no employees - all of its business is performed by employees of the Medical Group or the Hospital Corporation.
Single Financial Interest
The Network is an integrated financial system. Its revenues are derived form services provided to persons who are patients of the Medical Group, and, if hospitalization is required, the Medical Center. These revenues are, in turn, the source of rental payments made by the Hospital Corporation to (redacted), and by the Medical Group to Building Companies I and II. All the constituent entities share a Chief Financial Officer, and their financial statements are presented on a consolidated basis.
Conclusion
If the Partners combined into an organization having a discrete legal existence for the purpose of holding their interest in the Medical Group, the Hospital Corporation and (redacted), there would be no question but that they would constitute a single “ultimate parent entity” for purposes of the anticipated filing. The fact that they hold those interests as individuals is a technical matter, made the more so by the identicality of the organizations from a governance, management and accounting point of view. For all practical purposes, the Network is a single organization, and we hope that you will agree that, in these unique circumstances, the substance of the organization should take precedence over the technicalities of its legal structure.
We look forward to your thoughts, and thank you very much for your assistance. We understand that you will not provide a written response. Please feel free to call me at (redacted).
Very truly yours,
(redacted)
In addition to the entities described below, the Network includes two real estatepartnerships, Building Company I and Building Company II, which own the real property in whichthe Clinics are operated. All the partners of the Medical Group are also partners of thesepartnerships, and they share common management with the Medical Group and the HospitalCorporation. These partnerships are selling their real property to the Foundation in the sametransaction, but they are not filing as acquired persons, because the acquisition of their assets fallswithin the exemption for the acquisition of realty in the ordinary course of business under 16 CFRSec. 802.1. Moreover, with respect to Building Company II, the sale does not meet the size ofthe transaction threshold under 16 CFR Sec. 802.20.
The Medical Center is accredited by the Joint Commission on (redacted), which inspectsand accredits hospital facilities. The Network’s Clinics are accredited by the (redacted), whichaccredits ambulatory care facilities.
The Partners hold their partnership interests and stock as individuals, so there is nosingle owner of the three entities.
As a matter of historical accident, one Executive Director is employed by the HospitalCorporation and the others by the Medical Group, but there are no inter-entity payments orallocations for the cost of the Executive Directors’ services.