Anatomy of a Provider-Merger Antitrust Challenge. Jeff Miles

Transcription

1 I. Introduction and Background Anatomy of a Provider-Merger Antitrust Challenge Jeff Miles There seems to be unprecedented antitrust interest in mergers between health-care providers, particularly by the Federal Trade Commission (FTC or Commission). Why this interest? What triggers governmental interest? What are the concerns? What variables do the enforcement agencies consider when evaluating provider mergers? When are investigations and challenges likely? Isn t the government promoting and incentivizing provider consolidations through the Affordable Care Act to integrate, coordinate care, and reduce costs? Doesn t the government care about the efficiencies, including better quality, that mergers can generate, or the ability of mergers to save financially troubled providers that otherwise would fail and exit the market leading to further market concentration and access problems? What roles should antitrust attorneys and experts play in provider-mergers and when? How can attorneys advising providers considering a merger best protect them from antitrust challenge? In light of the FTC s vigorous enforcement and extraordinary success in challenging provider mergers since 2007, 1 the ability of health-care attorneys, and the specialists they retain, to answer these questions is crucial. With the FTC s 2007 decision in Evanston Northwestern Healthcare Corp., 2 holding unlawful a hospital merger in the north Chicago suburbs, the antitrust- merger rules of the game and the antitrust environment for provider mergers changed drastically from one of pretty much anything goes to one where more mergers between competing hospitals and some between other types of health-care providers will draw at least an investigation if not a challenge. This presentation focuses on mergers among competing hospitals and, to a lesser extent, on mergers of physician practices, whether through hospital acquisition or the merger of practices without hospital involvement. Worth noting, however, is that the FTC has challenged mergers among a plethora of other types of providers as well, including imaging centers, 3 ambulatory surgical centers, 4 pharmaceutical manufacturers, 5 and others. 1 This emphasis on FTC enforcement is not to overlook actions by the Antitrust Division. To a large extent, however, the Division and FTC have allocated the market in such that the FTC has primary responsibility for antitrust issues involving providers and the Division has responsibility for antitrust issues involving health plans Trade Cas. (CCH) 75,814 (FTC 2007) (Evanston Northwestern). 3 E.g., Carilion Clinic, Dkt. No (FTC Nov. 25, 2009) (consent order) (imaging center and ambulatory surgery center). 4 E.g., H.I.G. Bayside Debt & LBO Fund II, L.P. (Surgery Center Holdings, Inc.), Dkt. No. C-4494 (FTC Dec. 22, 2014) (consent order). 5 E.g., FTC v. Lundbeck, Inc., 630 F.3d 1236 (8 th Cir. 2011). 1

2 First, a short history: Hospital-merger antitrust enforcement began in the early 1980s. 6 While the government did experience one loss, 7 it won most of its litigated hospital-merger cases. That was true through the early 1990s. 8 Then, a strange thing happened: The Antitrust Division, FTC, and a state attorneys general lost eight straight litigated cases. 9 Why? For several reasons, but the most important, by far, were the court s findings of relatively large relevant geographic markets, 10 which, of course, resulted in less concentrated post-merger markets and lower merged-firm post-merger market shares. From 1999 through 2004, the agencies were basically out of the hospital-mergerenforcement business. Indeed, the chairman of the FTC effectively admitted that the FTC could not win a hospital-merger case. The FTC went back to the drawing board, carefully examining the reasons for the losses and how the analysis might be tweaked to overcome the problem. At the same time, it instituted a merger retrospective, by which it examined several consummated mergers to study their actual effects on competition with the idea of challenging one or more. 11 Just because a merger has been consummated for a long period of time, even if it was cleared under the Hart-Scott-Rodino (HSR) premerger-notification process, 12 does not mean, of course, that it can t be challenged later. There is no statute-of-limitations problem. As a result of its retrospective study, the FTC determined that it could show that the twohospital Evanston Northwestern Healthcare (ENH) system s acquisition of Highland Park Hospital in 2000 had resulted in ENH s significantly increasing its rates to most area health plans. In 2004, FTC complaint counsel filed an administrative complaint seeking to force Highland Park s divestiture. In 2007, although ultimately determining not to order divestiture, the full Commission, after an extensive, detailed economic analysis, agreed with its administrative law judge that the merger significantly increased ENH s market power and thus was unlawful. 13 Note that the merger had been consummated some four years before the FTC challenge and thus that there was a track record on its actual effect on prices. 6 See United States v. Hosp. Affiliates Int l, Trade Cas. (CCH) 63,721 (E.D. La. 1980) (preliminary injunction blocking psychiatric hospital merger); Am. Med. Int l, Inc., 104 F.T.C. 1 (1984). 7 United States v. Carillion Health Sys., 707 F. Supp. 840 (W.D. Va.), aff d per curiam without published opinion, 892 F.2d 1042 (4 th Cir. 1989). 8 E.g., FTC v. Univ. Health, Inc., 938 F.2d 1206 (11 th Cir. 1991). 9 E.g., United States v. Long Is. Jewish Med. Ctr., 983 F. Supp. 121 (E.D.N.Y. 1997). 10 E.g., FTC v. Tenet Health Care Corp., 186 F.3d 1045 (8 th Cir. 1999). 11 See Timothy J. Muris, Chairman, FTC, Everything Old is New Again: Health Care and Competition in the 21 st Century, Prepared Remarks before the 7 th Annual Competition in Health Care Forum (Nov. 7, 2002). 12 Section 7A of the Clayton Act, 15 U.S.C. 18a. 13 Evanston Northwestern. Because the Commission felt that significant quality improvements from the merger would be lost if divestiture were ordered, it ordered, instead, a conduct remedy requiring the acquiring and acquired 2

3 The Evanston Northwestern decision is interesting and important for a number of reasons. First, it was the FTC s first victory in a litigated hospital merger case since Second, FTC complaint challenged the merger under two theories. One count alleged a traditional antitrust merger case, including allegations of the requisite relevant product and geographic markets. The second count, however, alleged no relevant market and claimed that econometric evidence showing actual significant price increases from the merger (i.e., direct evidence of anticompetitive effects) was itself sufficient to show the merger s unlawfulness even absent formal market definition and calculation of market concentration or the merged hospital s post-merger market share. Third, the Commission relied very heavily on three forms for evidence for its conclusion, which then became paramount in later cases: (1) Pre-merger and post-merger documents and statements of the parties and their consultant indicating that at least one purpose for the merger was to increase ENH s bargaining power and that the transaction actually had that effect; (2) testimony from a number of health plans that, especially because of its acquisition of Highland Park, ENH was a must have hospital system i.e., that health plans, to construct a competitively viable and marketable network, had to contract with ENH in light of the merger; and (3) econometric testimony from experts that, indeed, ENH had raised its prices post-merger and, based on regression analysis controlling for other possible causes of its price increases, they resulted from increased market power from the merger. Fourth, the Commission, for the first time in a hospital-merger case, applied a relatively sophisticated unilateral effects/differentiated products merger analysis (discussed later). Fifth, related to that, the FTC, for the first time in a hospital-merger case, defined the relevant geographic market using the hypothetical monopolist framework (also discussed later), emphasizing the relationship between definition of the relevant market and the merger s effect on competition when evidence shows that the merger actually permitted the merged firm to unilaterally raise prices. Based on the fact that ENH actually did profitably increase rates significantly as result of the merger, the Commission concluded that the relevant geographic hospitals to negotiate health-plan contracts separately. Evanston Northwestern, Trade Cas. (CCH) at 108,602 through -03. The Commission emphasized, however, that our rationale for not requiring divestiture in this case is likely to have little applicability to our consideration of the proper remedy in a future challenge to an unconsummated merger, including a hospital merger. ). In FTC v. OSF Healthcare System, 852 F. Supp. 2d 1069 (N.D. Ill. 2012) (OSF), the court specifically rejected the defendants request that instead of preliminarily enjoining the merger, the court accept a stipulation preventing the merged firm from engaging in certain forms of potentially anticompetitive conduct. OSF, 852 F. Supp.2d at The federal agencies are unalterably opposed to conduct remedies except in extraordinary circumstances. State attorneys general appear much more willing to accept them, thus permitting the transaction to go forward but under agreed-to competitive constraints. See, e.g., Pa. v. Geisinger Health Sys. Found., No. 4:12-cv CCC (M.D. Pa. 2012) (consent decree); Wis. v. Kenosha Hosp. & Med. Ctr., Trade Cas. (CCH) 71,669 (E.D. Wis. 1997) (consent order). Thus, in the case of a merger that likely will be investigated, it may be helpful to work on a remedy with the state attorney general in an attempt to avoid a federal agency investigation and challenge. Recently, however, the Massachusetts Attorney General indicated that she objected to a proposed conduct consent degree with conduct remedies permitting Partners Healthcare System in Boston to acquiring South Shore Hospital. Notice of Positioln of Attorney General Maura Healey Concerning the Pending Consent Judgment Between Partners and the Office of the Attorney General, Mass. v. Partnerss Healthcare System, Inc., No BLS2 (Sup. Ct. Suffolk County, Jan. 26, 2015). 3

4 market included only the area within a triangle formed by the now-three ENH hospitals, in which they were the only hospitals. In effect, the Commission indicated that where the evidence shows an actual price increase from a consummated the merger, it may not be necessary to define a relevant market since the purpose for defining a relevant market is to aid in determining whether a merger is anticompetitive. 14 In any event and most significantly, application of the hypothetical monopolist methodology for defining relevant markets has vastly decreased their size the most troublesome problem the agencies encountered with the courts in their earlier hospital-merger challenges. The Evanston Northwestern decision has resulted in a sea change in the FTC s success in challenging provider mergers. Since 2007, it is undefeated: Two litigated hospital-merger victories FTC v. OSF Healthcare System, 15 preliminarily enjoining the merger of two hospitals in Rockford, Illinois, and ProMedica Health System, Inc. v. FTC, 16 in which the Sixth Circuit upheld the FTC s decision that ProMedica s acquisition of St. Luke s Hospital in the Toledo area was unlawful; consent orders requiring hospital divestitures; Phoebe Putney, an ongoing challenge to the merger of hospitals in Albany Georgia; 17 consent orders requiring hospital divestitures; 18 a victory in a litigated hospital-acquisition-of-physician-practice case St. Alphonsus Medical Center-Nampa v. St. Luke s Health System, Inc., 19 where the district court held that St. Luke s acquisition of a large physician group in Nampa, Idaho, which competed with physicians that St. Luke s already employed, was unlawful; several consent orders in other provider-merger enforcement actions; 20 and several merger abandonments by the parties in the 14 Notwithstanding that, the FTC has indicated that it will continue to allege relevant markets in its merger cases because Section 7 of the Clayton Act, as well as the case law, seems to require it. Section 7 prohibits mergers whose effect... may be substantially to lessen competition in any line of commerce... in any section of the country. 15 U.S.C. 18 (emphasis added). See U.S. Dep t of Justice & Fed. Trade Comm n, Horizontal Merger Guidelines 4 (2010) (Merger Guidelines) ( In any merger enforcement action, the Agencies will normally identify one or more relevant markets in which the merge may substantially lessen competiton ); OSF, 852 F. Supp.2d at 1075 ( 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 market. ) F. Supp.2d 1069 (N.D.Ill. 2012) F.3d 559 (6 th Cir. 2014) (ProMedica), petition for cert. filed, No (Dec. 22, 2014). Also worth reviewing are the district court decision extending a hold-separate agreement the parties had entered, FTC v. ProMedica Health Sys., Trade Cas. (CCH) 77,395 (N.D. Ohio 2011), and the FTC decision reviewed by the Sixth Circuit, ProMedica Health Sys., Trade Cas. (CCH) 77,840 (FTC 2012). 17 FTC v. Phoebe Putney Health Sys., 133 S.Ct (2013) (rejecting application of state-action exemption to hospital merger). 18 E.g., Cmty. Health Sys., Dkt. No. C-4427 (FTC Apr. 11, 2014) (consent order) Trade Cas. (CCH) 78,667 (D. Idaho 2014) (St. Alphonsus). 20 E.g., H.I.G. Bayside Debt & LBO Fund II, L.P (Surgery Center Holdings, Inc.), Dkt. No. C-4494 (FTC Dec. 22, 2014) (consent order) (requiring divestiture of an ambulatory surgery center). 4

5 face of an FTC investigation or complaint. 21 As two commentators recently noted, In the span of less than ten years, the FTC has gone from losing to winning every hospital merger challenge it brings. 22 Or, as Justice Potter Stewart explained during the heyday of merger enforcement in the 1960s, The sole consistency that I can find is that in litigation under 7, the Government always wins. 23 In simple terms, the FTC is on an unprecedented roll. As a result, antitrust advice regarding hospital mergers has become more conservative than it was ten years ago. Interestingly, the agencies showed little interest in physician-practice mergers prior to the Evanston Northwestern decision, seeming to leave antitrust concern about those to state attorneys general, who had brought several cases, 24 and, in one case, to private parties. 25 That appeared to change in 2011 when the FTC threatened to challenge a hospital s plan to acquire two cardiology practices in Spokane, Washington. 26 Shortly thereafter, the Commission sued Renown Health, challenging its acquisition of two cardiology practices in Reno, Nevada, a case settled by consent order. 27 As part of its more recent hospital-merger challenge in OSF, the Rockford case, the Commission also challenged the merger of their primary-care physician groups as part of the merger, but the court, enjoining the hospital merger, did not reach that issue. 28 And most recently, of course, the FTC won the St. Alphonsus case, now on appeal, in which the court ordered a hospital to divest an acquired primary-care physician practice. Prior to Evanston Northwestern, the Antitrust Division had addressed physician-practice mergers in several Business Review Letters, beginning in E.g., Reading Health Sys., Dkt. No (FTC Dec. 7, 2012) (order dismissing complaint); Inova Health Found., Dkt. No (FTC June 17, 2008) (order dismissing complaint). 22 Lisa J. Fales & Paul Feinstein, How to Turn a Losing Streak into Wins: The FTC and Hospital Merger Enforcement, ANTITRUST, Fall 2014 at United States v. Von s Grocery Co., 384 U.S. 270, 301 (1966) (Stewart & Harlan, JJ., dissenting). 24 E.g., Maine v. Cardiovascular & Thoracic Assocs., P.A., Trade Cas. (CCH) 69,985 (Me. Super. Ct. 1992). 25 See HTI Health Servs. v. Quorum Health Group, Inc., 960 F. Supp (S.D. Miss. 1997). 26 See Statement of Bureau of Competition Director Richard Feinstein on Abandonment by Providence Health System & Services of its Plan to Acquire Spokane Cardiology and Heart Clinics Northwest (Apr. 8, 2011). 27 Renown Health, Dkt. No. C-4366 (FTC Nov. 30, 2012) (consent order). 28 OSF, 852 F. Supp.2d at 1076 ( 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 [inpatient general acute-care hospital services] market. ). 29 E.g., Letter from Charles F. Rule, Assistant Attorney General, Antitrust Division, to William L. Trombetta (Aug. 28, 1987) (Business Review Letter to Danbury Surgical Associates); see also Letter from Joel I. Klein, Assistant Attorney General, Antitrust Division, to Donald H. Lipson (Jul. 7, 1997) (Business Review Letter to three gastroenterology practices in Allentown, Pennsylvania). 5

6 II. The Need for Early Legal Advice Given this new and more aggressive environment, the antitrust advisor s role is particularly important. From a practical standpoint, one of the biggest problems I see when competing providers are considering a merger is their failure to involve antitrust counsel when merger considerations begin or at least very early in the process. This is important for a number of reasons: 1. Any time competitors meet to discuss a possible affiliation or consolidation, they should, from the beginning, have antitrust guidance regarding what they should and should not discuss and be admonished not to reach any agreements that might affect competition between them during that process. Otherwise, they run the risk of violating section 1 of the Sherman Act, 30 for example by entering into a per se unlawful price-fixing or market-allocation agreement, an agreement to exchange competitively sensitive information, or an arrangement by which one of the parties begins to exercise some control over the other. Most antitrust counsel have boilerplate written guidelines covering these subjects that they can tailor to the particular situation and provide to the clients. 2. Counsel should determine early-on whether the potential transaction would require reporting to the FTC and Antitrust Division under the HSR premerger-notification requirements. 31 When the transaction is reportable, the guidelines noted above become particularly important. 3. Selection of a structure for the transaction is crucial, and the antitrust attorney can provide helpful advice in choosing the structure that minimizes post-transaction antitrust risk. Ideally, at least for antitrust purposes, the parties will want to select a structure that results in their becoming a single entity for antitrust purposes so section 1 of the Sherman Act will not apply to their internal agreements after the merger. 32 In antitrust jargon, they should want to be Copperwelded. 33 Often, however, the parties want to retain as much autonomy as they can, ceding as little control of themselves to the other (or to a third party) as possible (and, in some situations, integrating as little as possible), sometimes through the use of reserved powers. This can raise the question of whether their transaction results in a merger or merely a joint venture whose actions may remain subject to section 1. If the latter, their negotiation of prices may result in a horizontal price-fixing agreement. Hospital joint operating-type arrangements, for example, U.S.C U.S.C. 18a. 32 See generally Jeff Miles, The Importance of Integration in Health Care Counseling: Yakima and Susquehanna, AHLA HEALTH LAWYERS NEWS, See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) (seminal decision discussing the circumstances under which two nominally separate entities constitute a single entity for purposes of Sherman Act 1.) 6

7 can be suspect, 34 as can loosely integrated physician limited liability companies used to merge physician practices. 35 Early on, the antitrust attorney should work with the parties and their transactions attorney to ensure that the degree of control and integration are sufficient for singleentity status post-merger unless such is not compatible with the business, political, or religious considerations of the transaction. 4. Counsel should provide the parties with an eye-ball antitrust analysis of the transaction s antitrust risk as early as possible. Some mergers are simply non-starters because of their potential antitrust concern, while with others, it may be obvious immediately that the transaction would raise no concern at all. The problem, of course, is that so many horizontal transactions will be in that wide gray area in between. Typically, with the help of map, possible the AGA Guide, discussion with the parties planning departments, review of the services the potential partners provide, and examination of the geography of hospital discharges from hospital documents, the attorney can roughly estimate a somewhat conservative relevant geographic market and then reach some rough conclusions. The basic question is the areas and particularly the hospitals therein to which health plans and patients could turn if the merging hospitals demanded higher prices post-merger. One frequent problem is that hospital officials usually believe that their market is larger than that which would constitute an antitrust relevant market. It s also helpful to ask hospital officials two questions: (1) Hypothetically, if the merged hospital raised prices to health plans five or ten percent, would the plans have to continue to contract with the that hospital at that new higher price or could they exclude it from their networks because they could easily steer their members to other competing hospitals to the extent that the price increase would be unprofitable? If the former, that s a serious danger sign. (2) If the FTC interviewed area health plans about the merger, would they support it or express concern, and, regardless of the conclusion, why? Likely payer opposition to the merger is a serious concern since health plans and self-insured employers are the ones who would feel the brunt of any anticompetitive effects (or the benefits of procompetitive effects) and would be important government witnesses. The potential effect of concern in most hospital and physician-practice merger investigations and challenges is that the merged hospital will, itself, have the power to significantly raise prices post merger so-called unilateral effects. 36 As discussed later, the most important variable to examine in assessing this is the degree of direct competition between the merging providers compared to the degree of competition between them and other area competing providers the degree of substitutability of the merging providers compared to their substitutability with others. If, based on the services they offer, their geographic locations, their reputations, or other variables, the parties are each other s most direct competitor e.g., if they 34 Compare Med. Ctr. v. Premier Health Ptrs., Trade Cas. (CCH) 78,950 (S.D. Ohio 2014) (single entity); New York v. St. Francis Hosp., 94 F. Supp.2d 399 (S.D.N.Y. 2000) (separate entities); HealthAmerica Pa., Inc. v. Susquehanna Health Sys., 278 F. Supp.2d 423 (M.D. Pa. 2003) (single entity). 35 See Surgical Specialists of Yakima, 136 F.T.C. 840 (2003) (consent order). 36 See Evanston Northwestern, Trade Cas. (CCH) at 108,585 through

8 would be the first and second choices for a significant number of patients or health plans there is a definite danger that the merger would generate anticompetitive effects. 37 The likely post-merger market share of the parties is also relevant. There is no magic market-share figure that shows a merger would be anticompetitive, but concern with hospital mergers typically begins to arise where the post-merger share exceeds around 40 percent. A large market share suggests that many patients have a preference for that provider and thus that its inclusion in a health plan s network is important for the plan s marketability. Of course, many hospital markets are already relatively, if not highly, concentrated, with one or more hospitals with substantial market shares, so this is often a concern. The post-merger level of market concentration, as measured by the Herfindahl-Hirschman Index (HHI) is typically of less concern because it says little about the increased market power of the merged firm, itself. Examining these factors should permit counsel to reach a rough preliminary conclusion about the degree of antitrust risk and the probability of an investigation. Unfortunately, it s probably true that most transactions between competing hospitals are somewhere in the middle between non-starter and absolutely no problem. Depending on how close to the middle the transaction appears, the next step may be to retain a consulting economist to conduct a more indepth study, particularly of the geographic market s scope and the degree of substitutability between the potential partners. 5. Some of the FTC s best evidence in hospital-merger investigations and challenges has been the statements and documents of the parties themselves (and those of their consultants) indicating that a major purpose for the merger is to increase the parties bargaining power with health plans and/or that the merger is likely to (or actually did) have that effect. 38 These documents can be suicidal. One early role of counsel is to review the documents the parties have already created and to explain that if an important reason for the merger is their belief that it will permit price increases, the merger may be investigated and challenged. The attorney should warn them against making stupid statements or creating documents suggesting an anticompetitive intent or purpose for the transaction. 6. The major benefit of mergers is the efficiencies they often generate 39 and, at least in theory, the efficiencies effect of a merger may offset its anticompetitive effects. In my experience, however, most hospitals considering a merger begin examining efficiencies late in the process, simply assuming early-on that they would be substantial. Often, efficiencies 37 E.g., ProMedica, 749 F.3d at 569 (noting that unilateral effects are most likely where purchasers of the relevant product consider the merging parties their two best choices for the products). 38 E.g., id. at 571 (noting that the Commission s best witnesses were the merging parties themselves because in regular-course documents they admitted that the merger would generate much negotiating clout with health plans); see also Merger Guidelines 2.2 ( Explicit or implicit evidence that the merging parties intend to raise prices... can be highly informative in evaluating the likely effects of a merger. ) 39 Merger Guidelines 10 ( a primary benefit of mergers... is their potential to generate efficiencies and thus enhance the merged firm s ability to compete, which may result in lower prices, improved quality, enhanced service or new products. ). 8

9 analysis takes an early back seat because the major effort early is overcoming political, cultural, and religious problems between the parties. The parties figure that if they can just get the deal done, they ll worry about the efficiencies later. But if the early antitrust analysis shows the transaction is problematic, delaying a careful plan of how the parties will integrate and the benefits from doing so is a mistake. If the detailed efficiency work comes after the parties decide to merge and particularly if it begins after notice of an investigation, the FTC can legitimately ask how the parties could make a rational decision to do the deal if they had little or no idea of the actual benefits the transaction would generate. In addition, efficiencies work begun late in the process provides the agency and court with the impression the work resulted solely because of the investigation and the efficiencies were cooked up by the parties, their antitrust counsel, and the consultants as a last ditch effort to save a problematic transaction. 40 In the case of a transaction that isn t a nonstarter but appears problematic, efficiencies work should begin as soon as possible. It is almost essential that the parties retain a consultant to aid them is figuring out the most efficient way to integrate the facilities and their operations and then to quantify, to the extent possible, the efficiency savings and other benefits. 7. Somewhat down the road, if the parties decide preliminarily to explore a transaction further (perhaps after a memorandum of understanding but before a definitive agreement), the parties will engage in due diligence. A primary role of the attorney during this period is to help ensure that the parties don t jump the gun in either of two senses. First, if the transaction is reportable under the HSR premerger-notification requirements, the parties violate that statute if one begins to exercise any type of beneficial ownership or control over the other before the transaction is cleared by the agencies. Violations can result in $16,000 per day civil penalties. Second, regardless of whether the transaction is reportable under the HSR requirements, the parties, for purposes of the antitrust laws, remain competitors until the transaction actually closes. Section 1 of the Sherman Act continues to apply to their activities. Thus, if they enter into any type of agreement that unreasonably restrains competition prior to closing, such as some type of agreement not to compete for customers or to exchange of highly competitively sensitive information such as prices, serious problems can arise. 41 Again, antitrust attorneys typically have written guidelines for these problems, which they provide to the parties early-on. Pricing information may be exchanged at some point in the transaction process prior to closing, but the appropriate point is subject to judgment and not all attorneys agree on when it should occur. My advice is that if the transaction is reportable, the exchange of competitively sensitive information should certainly not occur prior to the agency s 40 See FTC v. ProMedica Health Sys., Trade Cas. (CCH) 77,395 (N.D. Ohio 2011) (suggesting that the efficiencies study in the case came late and was the product of antitrust counsel and the parties consultant; also noting that [p]rojections of efficiencies may be viewed with skepticism, particularly if they are generated outside of the usual business planning process ). 41 See United States v. Flakeboard Am., Ltd., Trade Cas. (CCH) 51,029 (N.D. Cal. 2014) (proposed consent decree) ($ 3.8 million civil penalty for violation of premerger-notification requirements; $ 1.15 million disgorgement for violation of Sherman Act 1.) 9

10 clearing the transaction. If the transaction is not reportable, exchange of highly sensitive information should not occur prior to the attorney s strong belief that, indeed, the transaction will close and not crater. 42 III. The Investigatory Process The agencies learn of provider mergers in several ways. Some substantial transactions in terms of their dollar value involving large parties must be reported to both federal agencies prior to consummation pursuant to the Hart-Scott-Rodino premerger notification provisions. 43 The agencies discover some mergers through publications such as Modern Healthcare or newspapers. And some investigations result from complaints, often from the providers customers such as health plans but sometimes from other sources as well. In some cases, the state attorney general may discover the transaction and involve the federal agency in a joint investigation. Indeed, joint investigations and challenges appear to be more frequent today than in the past. Both agencies may investigate the transaction and, in some situations, the federal agency ultimately defer to the state attorney general. 44 It s not difficult to identify those transactions that will generate at least some government interest. Mergers between hospitals in the same town or city; between hospitals that are each the other s most direct competitor; that would result in large post-merger market shares; or that result in high levels of post-merger concentration and significant increases in concentration as shown by calculation of the HHI likely will draw attention. Investigations can begin in several ways. If the transaction is reportable, the Antitrust Division and FTC decide, through their clearance process, which, if either, will look into it. These days, if the transaction is a provider transaction, typically, but not necessarily, it goes to the FTC. If the HSR forms filed by the parties suggest a possible issue, the agency, within 30 days after the filing, issues a Second-Request Letter or request for additional information. Typically, this is a very long, detailed, and broad set of document requests. One of counsel s first jobs is to determine whether the request is overly broad and, if so, to negotiate the scope of 42 For helpful guidance on this subject, see Robert W. McCann, et al, Getting to the Finish Line: Avoiding Gun- Jumping and Other False Starts in Preclosing Antitrust Compliance, Chapter 6 in 2014 HEALTH LAW HANDBOOK at 230 (A. Gosfield ed. 2014); John Roberti & Scott Perlman, Avoiding Antitrust Exposure from Information Exchanges During Transactions, Antitrust & Trade Reg. Rep. (BNA), Apr. 11, 2014; Noah Brumfield, et al., Omnicare: Seventh Circuit Gives Judicial Guidance on Premerger Information Exchanges, Antitrust Source, June 2011 at 1; William Blumenthal, Michael C. Naughton, Gun-Jumping and Premerger Information Exchange: Counseling the Harder Questions, ANTITRUST, Summer 2006, at 66; The Scope of Permissible Coordination Between Merging Entities Prior to Consummation, 63 ANTITRUST L.J. 1 (1994); Willliam Blumenthal, General Counsel, FTC, The Rhetoric of Gun-Jumping, Text of Remarks before the Association of Corporate Counsel Annual Antitrust Seminar of Greater New York Chapter (Nov. 10, 2005); Remarks of Mary Lou Steptoe, Acting Director, Bureau of Competition, FTC, on Premerger Collaboration (Apr. 7, 1994). 43 Connecticut recently enacted a statute requiring reporting of certain physician-practice acquisitions to the state attorney general. See Connecticut Public Law , effective October E.g., Pa. v. Urology of Cent. Pa., No. 1:11-cv JEJ (M.D. Pa. Aug. 2011). 10

11 the demand with FTC staff. The staff has no desire to review a slew of irrelevant documents and thus is normally willing to discuss narrowing the letter s scope. If the parties believe the filing will generate a Second-Request Letter but they believe they have a strong argument that the transaction would raise no antitrust problem, they should consider meeting with the relevant agency prior to filing their HSR forms to present their case. This can have the effect of convincing the agency not to issue a Second-Request Letter or to limit it to certain issues that would be determinative. Compliance with the Second Request Letter is typically quite expensive and timeconsuming and takes substantial employee time from regular work. Much of the gathering and production of documents, usually accomplished on a rolling basis, is electronic, often requiring help from a document vendor. Disruption of business functions is inherent. Compliance can take months, and the parties cannot close the transaction until 30 days after substantial compliance with the demands of the letter. At the end of this second 30-day waiting period, the agency will (1) clear the transaction, permitting the parties to close, (2) request a timing agreement by which the parties voluntarily allow the agency more time to examine transaction, or (3) file suit in federal court for a preliminary injunction to block the transaction. If the transaction is not reportable, the parties first inkling of an investigation might be receipt of a letter from staff asking them to produce certain information voluntarily. The letter will request much of the information that an HSR notification would provide and usually is not overly burdensome. Its scope, too, can be negotiated with the staff. At the same time, the staff may have begun reviewing relevant public information and interviewing others knowledgeable about the potential effect of the transaction, particularly customers of the parties, e.g., health plans. Depending on the conclusion the staff draws from this information, the matter may go nowhere or the staff may request authority from the Commission to issue compulsory process in the form of subpoenas or civil investigative demands. These will request extensive documentary information comparable to a Second Request Letter, include interrogatories, and ultimately usually notice depositions. During this period, counsel for the parties should take every opportunity to meet or talk with the staff in an attempt to discover its specific concerns with the transaction and the particular antitrust questions or issues leading to those concerns. Often, there may be a determinative issue, e.g., scope of the relevant product or geographic market, and thus what would otherwise be an extremely broad investigation can be narrowed substantially or the parties can convince the staff that its concern is unwarranted. When the investigation is complete, the staff formulates a recommendation that goes to the Bureau of Competition Assistant Director in charge of its section or shop (typically, the Mergers IV shop if a hospital merger) looking into the transaction. Prior to this, the staff will have informed the parties whether it s recommending a challenge, and the parties will usually have had several opportunities to discuss the transaction with staff. Some staffs are more forthcoming than others. From there, the recommendation goes to the Director of the Bureau of Competition; if the recommendation is to challenge the merger, the parties usually have the opportunity to meet with the director and his or her staff to argue that no challenge should be forthcoming. If the director agrees with the staff, the recommendation goes to the five commissioners, and the parties may meet with each of the commissioners and his or her advisors 11

12 individually. Ultimately, the commissioners vote whether to challenge the transaction. If the parties haven t consummated the transaction, the FTC typically files suit for a preliminary injunction in federal court and, usually, files an administrative complaint before an FTC administrative law judge. If the transaction has been consummated, the FTC would file suit in federal court for an injunction to force the parties to hold the assets of the merging parties separate and to prevent further integration until the Commission can determine the merger s lawfulness through the administrative process. 45 Much to the chagrin of many defendants, if the transaction is challenged, the procedure differs between the Antitrust Division and FTC. With regard to the FTC, the purpose of its seeking a preliminary injunction is to prohibit the parties from closing and thus scrambling the eggs, prior to a trial on the merits before an FTC administrative law judge and review by the Commission. Thus, parties whose transaction is challenged by the FTC may face (1) litigation in federal court seeking a preliminary injunction, (2) then an administrative trial before an FTC ALJ, (3) then an appeal to the full Commission, and (4) then an appeal of that decision to a federal circuit court of appeals. The FTC s burden in obtaining a preliminary injunction is, frankly, very lenient today. As do private parties seeking a preliminary injunction, it must show a likelihood of success on the merits, but it meets that burden by showing merely that the case raises 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 Commission in the first instance and ultimately by the Court of Appeals, 46 and recent courts have applied that standard very much to the FTC s advantage. 47 When the case is brought by the Antitrust Division, however, the parties often agree to consolidate the motion for preliminary injunction and trial on the merits 48 before a federal-court judge that some believe might be more objective that an FTC administrative judge or the Commissioners themselves. There is an effort in Congress at present to unify the processes. 49 The attorney should always represent his or client zealously before the agency, but 45 For an example, see FTC v. ProMedica Health Sys., Trade Cas.(CCH) 77,395 (N.D. Ohio 2011). 46 E.g., FTC v. Univ. Health, Inc., 938 F.2d 1206, 1218 (11 th Cir. 1991). 47 See, e.g., FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028 (D.C. Cir. 2008); OSF, 852 F. Supp.2d at (noting that, at the preliminary injunction stage, the FTC need not present detailed evidence of anticompetitive effects but only raise substantial doubts about the transaction; also noting that the FTC need not show irreparable harm, that private equities cannot overcome the FTC showing of likelihood of success, and that there is a presumption that the FTC is entitled to preliminary relief). 48 E.g., United States v. H&R Block, Inc., 833 F. Supp.2d 36 (D.D.C. 2011). 49 Brent Kendall, A Challenge to FTC Methods: Republications Want the Agency s Antitrust Process to Be Like Justice Department, WASH. POST, Nov. 17,

13 credibility with and respect towards the staff are crucially important. 50 Always keep in mind that given their pre-complaint discover powers, particularly as they re applied to third parties, the agencies usually know more than you do. Misrepresenting or exaggerating the facts, hiding the ball, treating the staff rudely or in a condescending manner, and making stupid legal or factual arguments that any antitrust attorney would understand lacked merit are big mistakes. Once you lose credibility with the staff, it s very difficult, if not impossible, to regain it. You hurt your client; and you hurt yourself not only with those clients but with those you might represent before the agency in the future. Work against the staff, but also with it. With all that said, how does the agency analyze the transaction and decide whether to challenge it as a merger that may substantially lessen competition? IV. Analysis of the Merger s Likely Effect on Competition A. The general analytical framework of analysis A merger is unlawful under section 7 of the Clayton Act if it may lessen competition substantially. 51 The agency need not prove that it will substantially lessen competition, but rather only a reasonable probability that it will have that effect in the future. 52 Importantly, there is no statute of limitations for challenging the transaction; rather, it can be challenged at any time it appears that it will substantially lessen competition. 53 In the case of an unconsummated transaction, this requires that the court predict its likely effect 54 based on circumstantial evidence. As noted before, it the transaction has been consummated for a period of time, there may be post-acquisition direct evidence of its effect For helpful guidance on how to deal with the FTC, see Maureen Ohlhausen, Commissioner, FTC, Tips for Agency Practitioners (An Interview with Maureen Ohlhausen), Federal Civil Enforcement Newsletter at 2 (ABA Section of Antitrust Law, Oct. 2014). 51 Acquisitions can also be challenged under section 1 of the Sherman Act as resulting from agreements that unreasonably restrain competition, by the FTC under section 5 of the FTC Act, 15 U.S.C. 45, as unfair methods of competition, or, in appropriate circumstances, under section 2 of the Sherman Act as monopolization, attempted monopolization, or conspiracies to monopolize. Section 7 is the operative statute in the vast majority of cases. 52 E.g., United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 607 (1957) (noting that the test of a violation of 7 is whether at the time of suit there is a reasonable probability that the acquisition is likely to result in the condemned restraints ). 53 Id. at E.g., OSF, 852 F. Supp.2d at 1073 (noting that 7 requires a prediction, and doubts are to be resolved against the transaction ). 55 But post-acquisition evidence is a one-way street that favors the government. If the evidence shows no adverse effect, the government will likely argue that it was, or could have been, purposely manipulated because of the chance of subsequent challenge. See, e.g., ProMedica Health Sys., Trade Cas. (CCH) 77,840 at 123,262 (FTC 2012) ( Although Respondent protests that no manipulation was involved in [post-merger health-plan] contract negotiations, an absence of actual manipulation is not determinative post-acquisition evidence is deemed of limited value whenever such evidence could arguably be subject to manipulation. ). 13

14 To understand how the agencies will analyze the potential antitrust ramifications of the transaction, begin by thoroughly understanding the FTC and Department of Justice Horizontal Merger Guidelines. The Guidelines, while not binding on the courts and agency... are highly persuasive authorities as a benchmark of legality. 56 They explain how the agencies go about analyzing the transaction s competitive effects during the investigative stage. Moreover, they are becoming more and more persuasive in the courts, and it is the most unusual modern merger decision that does not cite and rely on them. 57 Of course, a review of recent merger decisions is also important. In broad terms, the Merger Guidelines explain the circumstances under which acquisitions raise potential antitrust concern: mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise. 58 In general, a merger create[s], enhance[s], or entrench[es] market power when it permits the merged firm, by itself, to exercise market power. The transaction facilitate[s] the exercise of market power when it results in a sufficiently concentrated market that multiple firms in that market are likely to engage in interdependent competitive actions, such as an oligopoly would, to exercise market power jointly. Market power results when the transaction permits one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives. 59 More specifically, market power is the ability of a firm, or a group of firms acting jointly, to significantly increase price above the competitive level for a significant period of time without losing so many sales that it or they must rescind the price increase. 60 In general, the courts apply a burden-shifting framework 61 similar to, if not identical to, that applied in a full rule-of-reason analysis in assessing agreements challenged under section 1 of the Sherman Act. The government bears the initial burden of proving likely anticompetitive effects, typically through a quantitative analysis based on post-merger market share and market concentration. Its sustaining this burden means that it s proved a prima facie case i.e., a rebuttable presumption arises that the merger is unlawful Chicago Bridge & Irons Co. v. FTC, 534 F.3d 410, 434 (5 th Cir. 2008). 57 See, e.g., ProMedica, 749 F.3d at 565 (citing and rely on Merger Guidelines, noting that they are useful but not binding upon us. ). 58 Merger Guidelines Id. 60 Richard A. Posner & William M. Landes, Market Power in Antitrust Cases, 94 HARV. L. REV. 937, 937 (1980). 61 E.g., ProMedica Health Sys., Trade Cas. (CCH) 77,840 at 123,240 (FTC 2012) ( Courts have traditionally analyzed Section 7 claims under a burden-shifting framework. ). 62 E.g., United States v. Dairy Farmers of Am., 426 F.3d 850, 858 (6 th Cir. 2005) (explaining that where the government shows that the acquisition... would result in a firm controlling an undue percentage of the relevant market and a significant increase in concentration of firms in that market, a presumption illegality arises because there is a presumption of anticompetitive effects ); see also ProMedica Health Sys., Trade Cas. (CCH) 77,840 at 123,240 (FTC 2012) ( Under this framework, the government can establish a presumption of liability by 14

15 The burden of going forward then shifts to the merging parties to show that these statistics don t accurately forecast the merger s likely effect on competition. The defendants can challenge the government s relevant market or share or concentration statistics, or they can attempt to present evidence of other factors that would negate anticompetitive effects or show that consumer benefits from the transaction would outweigh any anticompetitive effects. Absent sufficient proof, the government wins. If the parties successfully rebut the government s prima facie case, the burden of going forward shifts back to the government to rebut the defendant s proof or to introduce additional evidence that the transaction would be anticompetitive with the ultimate burden of persuasion always on the government. 63 B. Defining the relevant market The analysis normally starts with definition of the relevant product and geographic markets in which competitive effects are likely to be felt. The Merger Guidelines state that the Agencies will normally identify one or more relevant markets in which the merger may substantially lessen competition. 64 The Merger Guidelines make it clear, however, that the competitive analysis need not start with definition of the relevant market 65 since market definition is merely one tool to aid in predicting the transaction s effect on competition. 1. The relevant product market Most broadly, defining the relevant product market requires identifying those products or services (and the firms that provide them) to which a firm s customers could turn if the firm in question were to raise its price by a significant amount that is, alternative products or substitutes. Under the Merger Guidelines, only demand-side factors are considered, 66 even though many antitrust decisions consider supply-side factors as well. 67 In defining the relevant market, one or more relevant product markets must first be defined and then the commensurate relevant geographic markets are delineated each relevant product market has its own relevant geographic market. In defining each, the agencies, and more and more the courts, apply the defining a relevant product and geographic market and showing that the transaction will lead to undue concentration in the relevant market. ) 63 See Chicago Bridge & Iron Co. v. FTC, 534 F.3d 410, 424 (5 th Cir. 2008). 64 Merger Guidelines Id. ( The Agencies analysis need not start with market definition. Some of the analytical tools used by the Agencies to assess competitive effects do not rely on market definition. ). 66 Id. ( Market definition focuses only on demand substitution factors, i.e., on customers ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change such as a reduction in product quality or service. ). 67 E.g., Gulf States Reorg. Group, Inc. v. Nucor Corp., 721 F.3d 1281 (11 th Cir. 2013). Under this analysis, the market would also include firms not producing the product in question at present, but that would quickly begin doing so in light of the price increase, i.e., new entrants into the product market. The Merger Guidelines take this effect, supply-substitutability or cross-elasticity of supply, into account in identifying market participants, Merger Guidelines 5.1, and likely new entry. 15

16 hypothetical monopolist mode of analysis. 68 This is a relatively theoretical construct. In defining the product market, the analyst chooses the narrowest product offered by both merging parties (call it the candidate market ), assumes a true monopolist (a single present and future seller) of those products, and asks whether, if the monopolist raised its prices, say five to ten percent, the price increase would be profitable. The price increase would be profitable if the value of the business lost because of the price increase as customers substituted other products were less than the increase in revenues from customers remaining with the monopolist and paying the higher price. Thus, the question becomes one of available substitute products for the monopolized product and the degree to which the monopolist s customers would divert to them as a result of the price increase. If the price increase would be profitable, the analysis stops and the relevant product market includes only those products. But if the price increase would not be profitable because too many customers would switch to other products to avoid the price increase the product market must be expanded to include the next-best substitute. The analysis is repeated until the market includes sufficient products so a price increase of all would be profitable. Ultimately, the relevant product market includes only those products that would prevent the hypothetical monopolist of them from profitably raising price. So, for example, if an analysis showed that a hypothetical monopolist of hospital services could profitably raise the price of inpatient general acute-care hospital services because health plans could not substitute other services for them, the product market would be limited to inpatient acute-care hospital services. The important point here is that the relevant product market does not necessarily include all products to which customers might switch to avoid the hypothetical price increase, or even all so-called reasonably interchangeable products, 69 as many courts suggest. Rather, under this smallest market principle, it includes only those products that, together, are necessary to prevent a profitable price increase because they are, let s say, substantial substitutes for the product of the merged firm with high cross-elasticity of demand. So, for example, merely because some health-care services can be rendered on either an inpatient or outpatient basis does not mean that they are part of the same product market because they may not be sufficiently substitutable. In some situations, different non-substitutable services can be clustered into one cluster market. Indeed, this has been the case in defining product markets in hospital-merger cases. 70 Removal of a thyroid gland is not substitutable for an appendectomy, but these services would be clustered, with other hospital services, into a single relevant market. Clustering as many services as possible, of course, substantially reduces complications in analyzing the transaction resulting in administrative convenience; instead of the need to potentially analyze the 68 See Merger Guidelines See id. ( Groups of products may satisfy the hypothetical monopolist test without including the full range of products from which customers choose. The hypothetical monopolist test may identify a group of products as a relevant market even if customers would substitute significantly to products outside that group in response to a price increase. ). 70 See, e.g., ProMedica, 749 F.3d at

17 effect of the transaction on a plethora of services, the analysis can focus on a single market. The question becomes the circumstances in which clustering services is appropriate. The FTC s position, and that accepted by the Sixth Circuit in ProMedica, is that services offered under similar competitive conditions can be clustered into a single relevant product market. The Sixth Circuit explained that there is no need to perform separate antitrust analyses for separate product markets when competitive conditions are similar for each. 71 Thus, for example, to the extent that all the relevant firms sell the services, their shares of those services are similar, the geographic markets for the services are the same, and entry barriers are the same, the services can be clustered into a single product market because the antitrust analysis should be similar for each of them. 72 On the other hand, to the extent that different services are not provided under similar competitive conditions, they are excluded from the product market and may need separate analysis. In ProMedica, for example, obstetrical services were broken out of the cluster of inpatient general acute-care hospital services into a separate product market (under what the court called the similar conditions theory) because not all relevant hospitals provided them and their geographic market was likely smaller than that for the cluster of other inpatient general acute-care hospital services. 73 The product market will include only those services provided by both merging hospitals. For example, if one of the hospitals provides tertiary services and the other doesn t, those services are excluded from the market. In addition, the product market will exclude the services of Veterans Administration hospitals, and, typically, specialty hospitals. The former are excluded because they are not substitutes for the general population; if a monopoly non-va hospital raised its prices, health plans could not substitute VA hospitals. In the case of specialty hospitals, their limited services are rarely sufficient to constrain the market power, if any, of general acute-care hospitals. A health plan needing inpatient general acute-care services could not substitute a children s hospital. But if the competitive concern from the merger between general acute-care hospitals were limited to a specialty service, e.g., pediatric hospital services, then the product market might include a children s hospital. Outpatient services, whether provided by the merging hospitals or by freestanding outpatient facilities, are excluded from the product market because outpatient and inpatient services are not substitutable and thus providers of the former could not constrain any market power of providers of the latter. 74 Defining product markets in physician-practice mergers can be slightly more challenging because of the overlap in the services sometimes offered by physicians in different medical specialties. For example, in one Antitrust Division Business Review Letter discussing the 71 Id. at Id. 73 The defendants disagreed with this methodology, arguing that the product market should include the entire package of services sold to health plans, regardless of whether the competitive conditions for them were similar, under what the court called the package-deal theory. ProMedica, 749 F.3d at 567. Both theories are subject to a number of criticisms, but there is case law and commentary supporting both. 74 E.g., Evanston Northwestern, Trade Cas. (CCH) at 182,582 through

18 formation of a network of colon-rectal surgeons, the Division indicated that the product market would not be limited to colon-rectal surgeons, but would include general surgeons as well because they provide many of the services provided by colon-rectal surgeons. 75 But as a general rule, product markets in physician-practice merger cases have been defined based on the medical specialties, e.g., primary-care physicians 76 and cardiologists. 77 In defining both product and geographic markets in provider-merger cases, some question has arisen regarding whether the customer or purchaser of the providers services is the patient or the patient s health plan. The patient obtains the services, but typically, the health plan negotiates and pays for them. Examination of the merger s effect on competition must examine the impact on both. The agencies employ a two-stage model of competition. In the first stage, hospitals compete, based primarily on the reimbursement they re willing to accept, to become participants in the health plan s network. Once the network is set, hospitals compete to attract members of the health plans with which they have contracts. This competition, to a large extent, is based on non-price competitive variables, e.g., the provider s location, reputation, amenities, etc. 78 The competitive analysis of provider mergers has focused on the first stage and whether the merger will likely lead to higher reimbursement. But the latter can t be overlooked, particularly because of its importance when reimbursement is fixed by government fiat, such as with traditional Medicare 2. The relevant geographic market Agencies and the courts also use the hypothetical monopolist framework in defining the relevant geographic market. 79 Thus, in the case of a hospital merger, the analyst assumes, in effect, that the merger would result in a monopolist of inpatient acute-care hospital services, determines the smallest reasonable candidate geographic market, and asks whether a monopolist hospital could profitably raise prices. If it could, the relevant geographic market consists of only the merging hospitals; no other hospitals constrain the ability of the merged hospital to profitably raise price and thus, under the hypothetical monopolist/smallest market principle, the merged hospital is the only hospital in the relevant geographic market. 80 But if that hospital could not profitably raise price because health plans could do without it and send sufficient members to 75 Letter from Anne K. Bingaman, Assistant Attorney General, Antitrust Division, to Randall S. Yavitz (Jul. 1, 1996) (Business Review Letter to Allied Colon and Rectal Specialists). 76 See St. Alphonsus, Trade Cas. (CCH) at 129,251 (parties agreed relevant product market was Adult Primary Care Services sold to commercially insured patients). 77 E.g., Renown Health, Dkt. No. C-4366 (FTC Nov. 30, 2012) (consent order). 78 See generally Gregory Vistnes, Hospitals, Mergers, and Two-Stage Competition, 67 ANTITRUST L.J. 671 (2000). 79 See St. Alphonsus, Trade Cas. (CCH) at 129, Evanston Northwestern, Trade Cas. (CCH) at 108,586 ( Thus, if a merger enables the combined firm unilaterally to raise prices... due to the loss of competition between the merging parties, the merger is plainly anticompetitive, and the merging firms comprise the relevant antitrust market because the merged entity is considered to be a monopolist under the Guidelines. ) 18

19 other areas hospitals, the candidate market is too small and must be expanded to include the next-best geographic alternative. 81 As in the case of product-market definition, this process is reiterated until the geographic market includes just those hospitals sufficient such that a price increase would be profitable because too little business would divert to yet more distant hospitals. The extent to which more distant alternatives are reasonable substitutes to health plans depends, of course, in large part, on the extent to which the health plan s members are willing to use more distant hospitals. A health plan s forcing members to use more distant hospital may adversely effect is competitive viability; members may drop the plan if forced to travel significant distances. Patient-discharge data can provide some indication of the willingness of area patients to use more distant hospitals or physicians and thus some insight into the scope of the geographic market but it is, at most, only a starting point. While older hospital-merger cases relied heavily on Elzinga-Hogarty analysis examining patient in-migration and out-migration from a given candidate geographic market, that mode of geographic market definition has been heavily criticized, even by one of its authors, in the context of hospital mergers, and the FTC rejects it. 82 Patient in-migration and out-migration, however, remain relevant because it provides some indication to health plans of the value of having particular hospitals in their networks. 83 The ultimate question is the identity of alternative facilities and their locations available to health plans that would permit them to circumvent a price increase by the merged hospital, rendering its price increase unprofitable. Just because other hospitals are not in the relevant geographic market because they are not necessary to constrain the merging hospitals from raising price, they are not irrelevant. To the extent that they serve patients located in the geographic market, the Merger Guidelines deem them market participants, and in calculating the merged hospital s post-merger market share and the level of market concentration, those hospitals have market shares. 84 For example, although the merged hospitals in Evanston Northwestern were the only hospitals in the geographic market because other hospitals did not prevent ENH from raising price, ENH was not a monopoly in the sense of having a 100 percent market share. Rather, other hospitals, located outside the relevant geographic market served patients residing within the area and thus had market shares as well. 81 St. Alphonsus, Trade Cas. at 129,251 ( If it is likely that the insurers would reject [the merged firm s price demand] drop those PCPs from their network, and depend on PCPs in adjacent regions to provide care for their insureds, the definition of the relevant market would need to be broadened to include those adjacent regions. ). 82 See Evanston Northwestern, Trade Cas. at 108,594 through Id. at 108,596 ( [Health plan] demand for hospital services is a partially a derived demand based on patient preferences and the percentage of patients in a given area who use a hospital can, in certain circumstances, provide some rough indication of [health plan] preferences when they form a network.... [B]ut at best, we should use it as one potentially very rough benchmark in the context of evaluating other types of evidence. ). 84 Merger Guidelines

20 In defining relevant geographic markets, I ve always found it helpful to focus not on attempting to delineate a geographic area but to identify those firms that, based on their locations, would prevent the merged firm from profitably raising price. A number of hospital merger decisions in the 1980s and 1990s, relying primarily on patient discharge data showing that some area residents used or could use distant hospitals if the merged hospital raises prices, delineated quite broad relevant geographic markets including in some cases, hospitals 100 miles distant from the merging hospitals. That s changed drastically. When the hypothetical monopolist framework is applied including in the geographic market only those hospitals, if any, that would prevent the merging hospitals from profitably increasing price rather than all hospitals that any area residents might use relevant geographic markets for hospital mergers are normally local, for example, a city, a county, 85 or parts of several counties at most. 86 Because of the strong preference of patients to be hospitalized close to their homes, they eschew more distant hospitals, meaning that health plans must include more nearby hospitals to remain competitively viable. This shrinkage in the scope of relevant geographic markets has resulted in a sea change in the FTC s success in challenging hospital mergers. The scope of relevant geographic markets in physician-merger cases depends to a large extent on the sophistication of the specialty involved in the transaction. The relevant geographic market for primary-care services is obviously smaller than that for more complicated tertiary types of medical services. That patients may be willing to travel farther for more complicated services may mean that health plans can substitute more distant physicians, thus avoiding a price increase by the local merging practices. Still, however, given their choice, patients would prefer to use more local physicians. Particularly regarding primary-care physicians, the geographic market will be quite local. For example, the court in St. Alphonsus found that the relevant geographic market for primary-care physician services there was limited to a single town. There, the court relied primarily on patient flow data and health-plan testimony. Regarding the former, the court noted that 68 percent of the town s residents obtained primary-care physician services from providers located in the town and that many of those obtaining services outside that area did so because they worked outside the area. Regarding the latter, the court found, from healthplan testimony, that health plans could not construct marketable networks without primary-care physicians located in the town. 87 In assessing the scope of the relevant geographic market, the four most important types of evidence seem to be the parties own documents indicating the scope of their coverage, the location of possible substitutes for the merging parties such as where patients in the candidate 85 E.g. ProMedica, 749 F.3d at 565 (parties agreed that relevant geographic market was limited to one county). 86 E.g., OSF, 852 F. Supp.2d at 1077 (accepting plaintiff s expert s testimony that the relevant geographic market was the area within 30 miles of the merging hospitals, which included parts of several counties). 87 St. Alphonsus, Trade Cases (CCH) at 129,251 ( Because Nampa patients strongly prefer access to local PCPs, commercial health plans need to include Nampa PCPs in their networks to offer a competitive product.... Given this dynamic that health plans must offer Nampa Adult PCP services to Nampa residents to compete Nampa PCPs could band together and successfully demand a 5 to 10% price increase (or reimbursement increase) from health plans. ) 20