FTC Obtains Relief for Health Care Consumers in California County

The Federal Trade Commission today announced a settlement of charges that the proposed acquisition by Tenet Healthcare Corp. of OrNda Healthcorp would threaten competition for hospital care in San Luis Obispo County, California. The FTC charged that the proposed acquisition would deny the benefits of free and open competition--lower prices and better quality of service--to patients, physicians, third-party payers, and other consumers of inpatient acute care hospital services in that county. The proposed settlement would resolve the agency’s concerns by requiring Tenet to divest an OrNda hospital and related assets in San Luis Obispo County within a short time frame. Tenet and OrNda are respectively the second and third-largest for-profit general acute care hospital chains in the nation. According to the FTC, however, the proposed acquisition creates antitrust concerns only in the San Luis Obispo, California, area.

"As a result of the Commission’s actions in this case, consumers in San Luis Obispo County will be able to benefit from lower prices and better quality health care," said William J. Baer, Director of the FTC’s Bureau of Competition. "This settlement requires that Tenet divest OrNda’s hospital in only six months. That is the shortest divestiture period ever for a hospital merger order, and is in keeping with the Commission’s emphasis on swift, strong antitrust relief for anticompetitive mergers."

Tenet operates more than 75 acute care hospitals nationwide. In San Luis Obispo County, Tenet operates two acute care hospitals, Sierra Vista Regional Medical Center in the city of San Luis Obispo, and the smaller Twin Cities Community Hospital in Templeton, a town about 22 miles north of San Luis Obispo. OrNda operates more than 50 acute care hospitals nationwide including French Hospital Medical Center in the city of San Luis Obispo. OrNda also operates Valley Community Hospital in Santa Maria in northern Santa Barbara County about 30 miles south of San Luis Obispo.

According to the FTC’s complaint detailing the charges in the case, the proposed combination of Tenet’s Sierra Vista and Twin Cities hospitals with OrNda’s French hospital, the three largest of the five hospitals in the county, would substantially lessen competition in the San Luis Obispo County inpatient acute hospital services market, thereby violating antitrust laws. Sierra Vista and French hospitals offer broader service complements than any of the other hospitals in the county, and are each other’s principal and most direct competitor, the FTC said. The complaint also alleges that the remaining two acute care hospitals in the county are much smaller than Sierra Vista and French.

The FTC also alleged it is unlikely that new hospital entry would significantly lessen the merger’s anticompetitive dangers due to, among other factors, the lengthy lead times required to build a hospital. In sum the complaint alleges that the proposed acquisition may: substantially lessen competition for inpatient acute care hospital services in San Luis Obispo County; result in less favorable prices and other terms for health plans that contract for such services in the county; increase the possibility of collusion or interdependent coordination by the remaining market competitors; deny consumers of inpatient acute care hospital services the benefits of competition; and deny the opportunity for the San Luis Obispo County government to purchase, on competitive terms, the hospital care it must provide to certain indigent county residents, as a potentially less costly alternative to providing these services at San Luis Obispo County government-owned San Luis Obispo General Hospital.

In order to resolve the FTC charges, Tenet has agreed to divest French Hospital Medical Center and related OrNda assets in San Luis Obispo County by August 1, 1997. The related assets include, among others, OrNda’s interests in an outpatient surgery center, two urgent care centers, two medical office buildings, a subacute care facility, and a home health care agency in the county. If the divestitures are not completed by August 1, the FTC would be able to appoint a trustee who would have 12 additional months to effect the divestitures and who may divest not only French and related assets, but also OrNda’s Valley Community Hospital in Santa Maria, California, and related assets.

Under the terms of the proposed consent order, Tenet must make these divestitures to an acquirer approved by the Commission. The approval requirement allows the Commission to make sure that Tenet’s divestitures fulfill their purpose of ensuring the continuation of French as an ongoing, independent and viable acute care hospital, and remedying the lessening of competition resulting from Tenet’s acquisition of OrNda.

Tenet also would be required to divest OrNda’s interest in Monarch Health Systems, an integrated health delivery system operating in San Luis Obispo and Santa Barbara Counties. Monarch assembles, through contracts, a network of hospitals and physicians in those counties, and resells those providers’ services to health plans that do not have their own provider networks in the region. Monarch is about one-third owned by OrNda and has a long-term exclusive contract with, and is a major customer of, French.

Tenet has agreed, effective immediately, to maintain French and Valley hospitals, related assets, and the Monarch stock separate from Tenet’s other operations until the divestitures are completed. As part of the agreement, Tenet also has agreed to transfer control of those assets to a three-member board (only one of whom will be a Tenet employee) to ensure that Tenet receives no competitive information about those assets, and to preserve those assets’ viability and competitive strength pending divestiture.

For 10 years after the order is made final, the proposed settlement would prohibit Tenet from combining its acute care hospitals in San Luis Obispo County with any other acute care hospital in that area or from acquiring Monarch stock without giving prior notice to the FTC. The proposed order also contains provisions concerning its continued application to future owners of Tenet and OrNda’s acute care hospitals in San Luis Obispo County.

The same market and the same principal hospitals involved in this proposed merger were at issue in a previous Commission hospital merger case, American Medical International, Inc., 104 F.T.C. 1, 617 (1984). That case required divestiture of the same hospital, French, that would be divested under today’s proposed settlement order.

The Commission vote to approve the settlement was 5-0. The investigation was conducted by the Commission’s Health Care Division and the Los Angeles Regional Office.

An analysis of the proposed consent agreement will be published in the Federal Register shortly and will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, proposed consent agreement and analysis of the agreement to assist the public in commenting are available on the FTC’s web site at http://www.ftc.gov and also from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 202- 326-2502. Consent agreements subject to public comment also can be obtained by calling 202-326-3627. To find out the latest FTC news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 971-0024)