Citing Likely Anticompetitive Effects, FTC Requires ProMedica Health System to Divest St. Luke's Hospital in Toledo, Ohio, Area

The Federal Trade Commission ruled that ProMedica Health System's August 2010 acquisition of rival St. Luke's Hospital was anticompetitive and likely to substantially lessen competition and increase prices for general acute-care inpatient hospital services and inpatient obstetric services sold to commercial health plans in the Toledo, Ohio area. In a 4-0 decision, the Commission ordered ProMedica to divest St. Luke's Hospital to an FTC-approved buyer within six months after the Commission order becomes final and effective. The Commission today made public provisionally redacted public versions of its Final Order and the Commission Opinion.

The Commission challenged the acquisition in January 2011 out of concern that it would significantly harm patients, employers, and employees in the Toledo area by eliminating significant, beneficial competition between ProMedica and St. Luke's through the creation of a combined hospital system with an increased ability to obtain supra-competitive reimbursement rates from commercial health plans, and, ultimately, from their members. The Commission's Opinion concluded that those anticompetitive effects are likely, resulting in higher health care costs for patients, employers, and employees in the Toledo area.

The FTC issued its Opinion and Final Order on March 22, 2012, meeting a self-imposed deadline designed to expedite the agency's administrative trial process. Under FTC Rules of Practice which the Commission finalized in 2009, a final Commission decision should be issued within 45 days after the case was argued before the Commission.

The FTC's decision upholds in large part a December 2011 Initial Decision by Chief Administrative Law Judge D. Michael Chappell, with some variations related to market definition, in particular.

ProMedica is a non-profit healthcare system headquartered in Toledo, Ohio. Excluding St. Luke's, ProMedica operates three general acute-care hospitals in Lucas County, Ohio: 1) The Toledo Hospital; 2) Flower Hospital; and 3) Bay Park Hospital. It also provides healthcare services throughout northwestern and west-central Ohio and southeastern Michigan.

On August 31, 2010, ProMedica acquired control of St. Luke's, formerly an independent, not-for-profit general acute-care hospital in Maumee, Ohio, in the southwest Toledo area, pursuant to the terms of a Joinder Agreement that the parties had entered into several months earlier. At the time of the acquisition, St. Luke's was widely recognized as a high-quality, low-cost hospital. Although ProMedica consummated the acquisition, it did so under a hold separate agreement designed to preserve St. Luke's as an independent competitor while the FTC investigated the potential anticompetitive effects of the transaction. Under the agreement, ProMedica agreed to refrain from certain actions – for example, terminating St. Luke's health-plan contracts, and eliminating, transferring, or consolidating St. Luke's clinical services.

The administrative complaint, which was issued in January 2011, alleged that ProMedica's acquisition of St. Luke's threatened to substantially harm competition in two relevant service markets in Lucas County, Ohio: 1) general acute-care inpatient hospital services, and 2) inpatient obstetrical services. In the general acute-care inpatient hospital services market, the complaint alleged that the acquisition reduced the number of competitors in Lucas County from four to three, leaving ProMedica to face only Mercy Health Partners and The University of Toledo Medical Center, and giving it a market share approaching 60 percent.

In the market for inpatient obstetrical services in Lucas County (in which The University of Toledo Medical Center does not compete) the complaint charged that the acquisition reduced the number of competitors from three to two, leaving ProMedica to face only Mercy Health Partners, and giving it a market share of more than 80 percent.

The complaint charged that ProMedica's acquisition of St. Luke's eliminated significant competition between the two firms in both the general acute-care inpatient hospital services and the inpatient obstetrical services markets. Finally, the complaint alleged that the acquisition gave ProMedica the ability to demand higher rates for services performed at both St. Luke's and at ProMedica's other hospitals, where ProMedica has been widely recognized as having the highest rates in Lucas County.

At the time the administrative complaint was issued, the FTC, along with the Ohio Attorney General, filed a separate complaint in federal district court in Ohio seeking an order requiring ProMedica to preserve St. Luke's as a separate independent competitor during the FTC's administrative proceeding and any subsequent appeals. In March 2011, the United States District Court for the Northern District of Ohio granted the FTC's and the Ohio Attorney General's request and issued a preliminary injunction pending resolution of the administrative litigation.

In an Initial Decision issued December 5, 2011, the ALJ found that ProMedica's acquisition of St. Luke's eliminated competition between the two firms and reduced the number of competing hospitals in the Lucas County market for general acute-care inpatient hospital services from four to three. The ALJ found that the acquisition would increase ProMedica's bargaining power with commercial health plans, which would lead to higher reimbursement rates. The ALJ also found that those higher rates would likely be passed on to the commercial health plans' customers, including employers and employees, to the detriment of consumers. Accordingly, the ALJ ordered ProMedica to divest St. Luke's to an FTC-approved buyer within 180 days.

The FTC's Opinion and Final Order. In its Opinion, the Commission affirmed the ALJ's decision on liability, but defined the market for general acute-care (GAC) inpatient hospital services somewhat differently, by excluding sophisticated "tertiary" services from its scope. The Commission also concluded that the combination of the two hospital providers is likely to substantially lessen competition in a separate market consisting of inpatient obstetrical services sold to commercial health plans.

"Ultimately," wrote Commissioner Julie Brill in the Opinion on behalf of the Commission, "whether we accept Complaint Counsel's or Respondent's definition of the relevant markets does not affect our analysis of this transaction's likely competitive effects. As the ALJ found, regardless of which market definition is used, market shares and concentration levels exceed the thresholds for presumptive illegality provided in the 2010 Horizontal Merger Guidelines and the case law. Respondent does not dispute this."

The Commission found that: 1) the Joinder between ProMedica and St. Luke's is presumptively illegal; 2) ProMedica's claim that St. Luke's is a weakened competitor did not provide support for allowing the Joinder to proceed; and 3) substantial evidence buttresses the presumption that the Joinder will substantially lessen competition, leading to a significant increase in ProMedica's bargaining leverage with insurers and an increase in prices -- both at St. Luke's and at ProMedica's legacy hospitals -- for both GAC inpatient hospital services and obstetrical services. "The anticompetitive effects of Joinder will, if anything, be even more severe in the OB services market than in the overall GAC market," the Commission wrote.

Having found liability, the Commission issued an Order requiring ProMedica to divest St. Luke's to an approved buyer within 180 days of the date its Order becomes final and effective. Specifically, it ordered ProMedica, among other things, to:

• Restore to St. Luke's any assets that were removed from it under the Joinder;
• Grant the acquirer of St. Luke's a license to use all of St. Luke's assets;
• Take all actions necessary to ensure that the acquirer can conduct the St. Luke's business in substantially the same manner as it has operated under the Joinder;
• Place no restrictions on the acquirer's use of the St. Luke's assets and contracts;
• Provide transitional services to the acquirer, if requested, for up to 12 months after it acquires St. Luke's;
• Allow the acquirer to recruit and employ any St. Luke's employee, so it can establish an independent, complete, full-service medical and hospital staff; and
• Allow the acquirer to recruit, contract with, and otherwise extend medical staff privileges to any St. Luke's hospital staff member, so the acquirer can establish an independent, complete, full-service medical staff.

Finally, if ProMedica has not divested St. Luke's within the time required, the FTC may appoint a trustee to sell the assets in a manner that complies with the terms of the Final Order.

The Commission vote approving the Opinion and Final Order was 4-0, with Commissioner J. Thomas Rosch issuing a separate concurring opinion. Commissioner Rosch concurred with the majority as to liability and the remedy but took issue with the majority's product market definition and its use of econometric evidence. In particular, he would have affirmed the ALJ's findings that the general acute-care inpatient hospital services product market includes tertiary services and that there is not a separate market for inpatient obstetrical services. In addition, he would not have relied on a "willingness-to-pay" economic model as evidence of likely post-merger unilateral effects.

ProMedica can file a petition for review with a U.S. circuit court of appeals within 60 days of service of the Final Order.

The FTC's Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read Competition Counts. Like the FTC on Facebook and follow us on Twitter.