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Federal Trade Commission v. Osf Healthcare System

April 5, 2012

FEDERAL TRADE COMMISSION PLAINTIFF,
v.
OSF HEALTHCARE SYSTEM, AND ROCKFORD HEALTH SYSTEM DEFENDANTS.



The opinion of the court was delivered by: Frederick J. Kapala, District Judge

MEMORANDUM OPINION AND ORDER

Currently before the court is a motion by plaintiff, the Federal Trade Commission ("FTC"), pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), for a preliminary injunction enjoining defendants, OSF Healthcare System ("OSF") and Rockford Health System ("RHS"), from consummating their affiliation agreement executed on January 31, 2011, or otherwise acquiring each other's assets or interests. After a thorough review, the court grants the FTC's motion and will order the parties to maintain the status quo and not proceed with the proposed merger until such time as the FTC has concluded its administrative trial on the merits of the underlying antitrust claims.

I. BACKGROUND*fn1

Defendant OSF is a not-for-profit health care system that owns and operates several acute care hospitals in Illinois, including St. Anthony Medical Center ("SAMC") in Rockford, Illinois.

PX2501 ¶ 17. Defendant RHS is a not-for-profit health care system that owns and operates Rockford Memorial Hospital ("RMH"), also located in Rockford, Illinois. Id. ¶ 20. Defendants first began discussing a possible affiliation of the two Rockford hospitals in the spring of 2009, and by May 2010, they had executed a letter of intent. Tr. at 592-93. After performing "intensive due diligence," defendants entered into an affiliation agreement on January 31, 2011. Tr. at 593; PX0037. Under the terms of the affiliation agreement, OSF will acquire all of the operating assets of RHS and will become the sole corporate member of RHS. PX0037 § 2.1. OSF will then combine the hospital and physician operations associated with SAMC and RMH to create a new health care system with the name OSF Northern Region. Id. § 2.4.

On November 17, 2011, after having investigated the proposed merger in this case, the FTC found reason to believe that the acquisition would violate Section 7 of the Clayton Act, 15 U.S.C. § 18, and initiated an administrative proceeding to determine the legality of the acquisition. See Doc. 1 ¶ 26. On November 18, 2011, the FTC filed its complaint and motion for preliminary injunction with this court.*fn2 Docs. 1, 5.

On February 1-3, 2012, following expedited discovery, the court held an evidentiary hearing on the FTC's motion, in which each side was permitted to present four witnesses during an equal allotment of time. The FTC presented two witnesses from managed care organizations ("MCOs"), Michelle Lobe, a regional vice president for network management with UnitedHealthcare, and Todd Petersen, CEO for Coventry Healthcare of Illinois, as well as two expert witnesses, Dr. Patrick Romano, M.D., M.P.H., a Professor of Medicine and Pediatrics at the University of California Davis School of Medicine, and Dr. Cory Capps, Ph.D., an economist with Bates White Economic Consulting. Defendants presented their own executives, David Schertz, President and CEO of OSF Healthcare System at SAMC, and Gary Kaatz, President and CEO of RHS; a local employer, Dean Olson of Rockford Acromatic Products Company; and an expert witness, Dr. Susan Manning, Ph.D., an economic consultant with Compass Lexecon. At the conclusion of the hearing, the parties moved for the admission of over 2,000 exhibits,*fn3 and neither side indicated any objection. See Tr. at 948-49. At the time, the court did not admit the exhibits, but rather directed the parties to specify in their post-hearing submissions the exhibits upon which they were relying. Tr. at 949.

In addition to the transcript of the evidentiary hearing and the exhibits identified by the parties as relevant to this proceeding, the court has reviewed and considered the complaint, Doc. 1; the motion for preliminary injunction and supporting memorandum, Doc. 5, and defendants' response thereto, Doc. 50; the parties' pre-hearing memoranda, Docs. 150, 155; defendants' post-hearing brief, Doc. 176, and proposed findings of fact and conclusions of law, Doc. 177; the plaintiff's post-hearing brief, Doc. 182, proposed findings of fact, Doc. 183, and proposed conclusions of law, Doc. 184; and the parties' reply briefs, Docs. 188, 191.*fn4 Based on this review, the court makes the following findings of fact and conclusions of law.

II. ANALYSIS

Section 7 of the Clayton Act prohibits acquisitions, including mergers, "where in any line of commerce or in any activity affecting commerce . . . the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." 15 U.S.C. § 18. Section 7 is "designed to arrest in its incipiency . . . the substantial lessening of competition from the acquisition by one corporation" of the assets of a competing corporation. United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 589 (1957). Accordingly, "Congress used the words 'may be substantially to lessen competition' to indicate that its concern was with probabilities, not certainties." Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962); see also FTC v. Elders Grain, Inc., 868 F.2d 901, 906 (7th Cir. 1989) ("Section 7 forbids mergers and other acquisitions the effect of which 'may' be to lessen competition substantially. A certainty, even a high probability, need not be shown."). Although "ephemeral possibilities" of anticompetitive effects are not sufficient to establish a violation of Section 7, United States v. Marine Bancorp., Inc., 418 U.S. 602, 623 (1974) (quotation marks omitted), the statute nevertheless requires "a prediction, and doubts are to be resolved against the transaction," Elders Grain, 868 F.2d at 906.

Whenever the FTC has reason to believe that "any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission," including Section 7 of the Clayton Act, it is authorized by § 13(b) of the FTC Act to "bring suit in a district court of the United States to enjoin any such act or practice." 15 U.S.C. § 53(b). The district court may grant the request for a preliminary injunction "[u]pon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest." Id. Therefore, "in determining whether to grant a preliminary injunction under section 13(b), a district court must (1) determine the likelihood that the FTC will ultimately succeed on the merits and (2) balance the equities." FTC v. Univ. Health, Inc., 938 F.2d 1206, 1217 (11th Cir. 1991).

It is important to bear in mind that, when ruling on a request for a preliminary injunction pursuant to § 13(b), "[t]he district court is not authorized to determine whether the antitrust laws have been or are about to be violated. That adjudicatory function is vested in FTC in the first instance." FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1342 (4th Cir. 1976); see also FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1035 (D.C. Cir. 2008) (explaining that, in a § 13(b) preliminary injunction proceeding, "a district court must not require the FTC to prove the merits" of its underlying antitrust claim); Univ. Health, 938 F.2d at 1218 ("[O]ur present task is not to make a final determination on whether the proposed acquisition violates section 7 . . . ." (alterations and quotation marks omitted)). Rather, "[t]he only purpose of a proceeding under [§ 13(b)] is to preserve the status quo until FTC can perform its function." Food Town, 539 F.2d at 1342.

A. Likelihood of Success

"To show a likelihood of ultimate success, the FTC must raise questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals."*fn5 Univ. Health, 938 F.2d at 1218 (alteration and quotation marks omitted). "[T]he district court must evaluate the FTC's chance of success on the basis of all the evidence before it, from the defendants as well as from the FTC." Whole Foods, 548 F.3d at 1035. Although the district court may not "simply rubber-stamp an injunction whenever the FTC provides some threshold evidence," the FTC "does not need detailed evidence of anticompetitive effect at this preliminary phase." Id. Instead, "at this preliminary phase it just has to raise substantial doubts about a transaction." Id. at 1036; see also Univ. Health, 938 F.2d at 1218 ("[T]he government must show a reasonable probability that the proposed transaction would substantially lessen competition in the future."); FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 116 (D.D.C. 2004) ("[T]he FTC need only show that there is a reasonable probability that the Acquisition may substantially lessen competition." (quotation marks omitted)); but cf. FTC v. Tenet Health Care Corp., 186 F.3d 1045, 1051 (8th Cir. 1999) ("A showing of a fair or tenable chance of success on the merits will not suffice for injunctive relief.").

After first determining the relevant market, which "consists of two components: a product market and a geographic market," Tenet Health, 186 F.3d at 1051, courts often employ a burden-shifting approach to help determine if the FTC has shown a likelihood of success on the merits of its Section 7 claim, see, e.g., FTC v. H.J. Heinz Co., 246 F.3d 708, 715 (D.C. Cir. 2001). Initially, the FTC must make a prima facie showing that the proposed merger would result in "a firm controlling an undue percentage share of the relevant market" as well as "a significant increase in the concentration of firms in that market." United States v. Phila. Nat'l Bank, 374 U.S. 321, 363 (1963). The Supreme Court has explained that a merger with these characteristics "is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects." Id. Therefore, "[i]f the government makes this [prima facie] showing, a presumption of illegality arises." Univ. Health, 938 F.2d at 1218.

Once the FTC makes its prima facie showing, in order to rebut the presumption of illegality that arises, "the defendants must produce evidence that shows that the market-share statistics give an inaccurate account of the merger's probable effects on competition in the relevant market." Heinz, 246 F.3d at 715 (alteration and quotation marks omitted). To meet this burden, "the defendants may rely on nonstatistical evidence which casts doubt on the persuasive quality of the statistics to predict future anticompetitive consequences." Id. at 715 n.7 (alteration and quotation marks omitted). Additionally, "the defendants may demonstrate unique economic circumstances that undermine the predictive value of the government's statistics," id. (quotation marks omitted), or present "evidence showing that the intended merger would create significant efficiencies in the relevant market," Univ. Health, 938 F.2d at 1222. "If the defendant successfully rebuts the presumption of illegality, the burden of producing additional evidence of anticompetitive effect shifts to the government, and merges with the ultimate burden of persuasion, which remains with the government at all times." Heinz, 246 F.3d at 715 (alteration and quotation marks omitted).

1. Relevant Markets

As noted above, the first step in the court's analysis is to determine the relevant product and geographic markets that are applicable in this case. "It is . . . essential that the FTC identify a credible relevant market before a preliminary injunction may properly issue" because a merger's effect on competition cannot be properly evaluated without a well-defined relevant market. Tenet Health, 186 F.3d at 1051. In fact, "[a] monopolization claim often succeeds or fails strictly on the definition of the product or geographic market." Id. at 1052. In this case, however, defendants do not meaningfully dispute the relevant market definitions proposed by the FTC. See, e.g., Doc. 150 at 2 ("The structure of the healthcare market in Rockford is not in dispute.").

a. Product market

A relevant product market is one in which a hypothetical monopolist could increase prices profitably by a "small but significant" amount for a meaningful period of time. U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (2010) § 4.1.1 ("Merger Guidelines"). A relevant product market defines the product boundaries within which competition meaningfully exists. United States v. Cont'l Can Co., 378 U.S. 441, 449 (1964). "The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it." Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962).

i. GAC market

The primary product market advanced by the FTC in this case is general acute care inpatient services ("GAC") sold to commercial health plans. See PX2501 § V.A.2; Tr. at 344-46; see also PX2263 ¶¶ 22-23. This is a "cluster market" of services that courts have consistently found in hospital merger cases, even though the different types of inpatient services are not strict substitutes for one another. See FTC v. ProMedica Health Sys., Inc., No. 3:11 CV 47, 2011 WL 1219281, at *54 (N.D. Ohio Mar. 29, 2011) (collecting cases); see also United States v. Rockford Mem'l Corp., 898 F.2d 1278, 1284 (7th Cir. 1990) (upholding a similar GAC product market). In this case, the FTC defines the GAC market to "encompass a broad cluster of medical and surgical diagnostic and treatment services that include an overnight hospital stay, including, but not limited to, many emergency services, internal medicine services, and surgical procedures." Doc. 1 ¶ 33. The GAC market does not include outpatient services, rehabilitation services, psychiatric services, or complex tertiary and quarternary services, as these services are offered by a different set of competitors. Id. ¶ 34; Tr. at 8, 346-47. In their post-hearing submissions, defendants do not dispute that GAC services, as defined by the FTC, is a relevant product market.*fn6

ii. PCP market

The FTC has also alleged that primary care physician services ("PCP") is another relevant product market in which the proposed merger is likely to have anticompetitive effects. Without expressing any opinion on the ultimate merits of this claim, the court observes that the FTC's likelihood of success on its claim involving the PCP market is distinctly lower than its claim involving the GAC market for a number of reasons. For example, the post-merger market concentration level in the PCP market is not as high as the concentration level would be in the GAC market. Compare PX2501 App. H (PCP market) with PX2501 § V.B.1 (GAC market). According to the Merger Guidelines, the proposed merger would only yield a moderately concentrated market for PCP services that would "potentially raise significant competitive concerns," whereas in the GAC market the merger would result in a highly concentrated market and a presumption that the merger would "likely . . . enhance market power." Merger Guidelines § 5.3. In addition, the PCP market is not subject to the same prohibitive barriers to entry that exist in the GAC market, and the bargaining leverage held by large insurance companies with respect to physician contracting is different than what would exist in contracting for GAC services if the merger were to take place. All of these distinguishing features make it less likely that the FTC will prevail on its claim involving the PCP market compared to its chance of success on its claim involving the GAC market.

Based on the foregoing considerations and the fact that the FTC is not required "to settle on a market definition at this preliminary stage," Whole Foods, 548 F.3d at 1036, the court asked the parties to address in their post-hearing submissions what consequences would occur if the court were to find that the FTC met its burden only with respect to one of the proposed markets. In their briefing, the parties agree that a finding that the FTC met its burden with respect to the GAC market only would result in issuance of a preliminary injunction and, at least as a practical matter, would preclude defendants from consummating the transaction and implementing the affiliation in all respects, including the merger of physician services. Given these circumstances, the court finds it unnecessary to analyze the PCP market at this time, and instead will focus its analysis solely on the merger's potential impact in the GAC market.

b. Geographic market

"A geographic market is the area in which consumers can practically turn for alternative sources of the product and in which the antitrust defendants face competition." Tenet Health, 186 F.3d at 1052. "Defining the geographic market is a pragmatic undertaking," ProMedica, 2011 WL 1219281, at *55 (quotation marks omitted), and the relevant geographic market should "correspond to the commercial realities of the industry," Brown Shoe, 370 U.S. at 336.

According to plaintiff's expert, Dr. Capps, "[t]he relevant geographic market applicable to the proposed merger is the area contained within a roughly 30-minute drive of downtown Rockford."*fn7 PX2501 ¶ 149. This geographic area includes all three hospitals in Rockford, but it excludes smaller hospitals from the outlying areas. Id. This definition is consistent with defendants' expert, Dr. Monica G. Noether, Ph.D., who stated generally that the "geographic area spans at least Winnebago and Boone Counties as well as parts of Ogle County." DX0005 ¶ 12.*fn8 The court notes that this geographic area is somewhat smaller than the "Winnebago--Ogle--Boone area" that was adopted by this court in a prior case. See United States v. Rockford Mem'l Corp., 717 F. Supp. 1251, 1277 (N.D. Ill. 1989); see also PX2501 § V.A.3, Figure 19. However, both experts agree that slight changes to the precise contours of the geographic area (i.e. including or excluding certain zip codes from the geographic market) would not have any significant effect on market share and concentration calculations. See PX2501 ¶ 148; DX0364 ¶ 101. Likewise, defense counsel indicated at the hearing that defendants are not contesting the relevant geographic market in this case. See Tr. at 54. Therefore, the court finds that the area encompassing a 30-minute drive-time radius from Rockford is an appropriate geographic market to use in this case.

2. Prima Facie Case

To establish a prima facie case, the FTC must show that the proposed merger would result in the merged entity controlling a large percentage share of the relevant GAC market and that the merger also would yield a significant increase in market concentration. See Phila. Nat'l Bank, 374 U.S. at 363. If this showing is made, then the proposed merger is presumed to be unlawful. See Univ. Health, 938 F.2d at 1218; see also ProMedica, 2011 WL 1219281, at *56 ("A duopoly . . . is presumptively unlawful in and of itself.").

According to plaintiff's expert, Dr. Capps, the proposed merger in this case would result in the merged entity controlling a substantial share of the GAC market and would yield a significant increase in market concentration. Defendants do not specifically challenge these calculations. Rather, defendants argue that the court must consider more than just market share statistics in order to determine whether the affiliation would be anticompetitive. The court recognizes that the Supreme Court has "cautioned that statistics concerning market share and concentration, while of great significance, [are] not conclusive indicators of anticompetitive effects," United States v. Gen. Dynamics Corp., 415 U.S. 486, 498 (1974), and the court will address all of defendants' rebuttal arguments in detail in § II.A.3 below. However, the first step in the court's analysis is to determine if the FTC has made its prima facie showing.

a. Percentage of market

In Philadelphia National Bank, the Supreme Court concluded that a merger resulting in a single firm controlling at least 30% of the relevant market was sufficient to "raise an inference that the effect of the contemplated merger . . . may be substantially to lessen competition." 374 U.S. at 364-65. The Court further explained that, "[w]ithout attempting to specify the smallest market share which would still be considered to threaten undue concentration, we are clear that 30% presents that threat." Id. at 364; see also FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 52 (D.D.C. 1998) ("[A] prima facie case can be made if the government establishes that the merged entities will have a significant percentage of the relevant market--enabling them to raise prices above competitive levels.").

In this case, Dr. Capps measured the market shares of the participants in the GAC market on two bases: patient admissions and patient days. PX2501 ΒΆ 162. Both measures "provide information relevant to predicting the likely competitive effects of the merger." Id. "Patient admissions are informative because they indicate the degree of consumer preference for a particular hospital," and as a result, "higher shares give a hospital or hospital system more leverage in negotiations with health plans." Id. "Computing market shares on the basis of patient days is also ...


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