FTC rules against Promedica
Promedica to test merger guidelines in federal court
An antitrust battle in Ohio appears poised to test the Federal Trade Commission’s momentum in hospital merger cases. Promedica, based in Toledo, said last week that it would turn to the 6th U.S. Circuit Court of Appeals to challenge an order that Promedica divest a hospital acquired in 2010. The FTC voted 4-0 last week to uphold an administrative law judge’s ruling that Promedica gained too much market clout with the additional hospital. Commissioners said Promedica had six months to divest 216-bed St. Luke’s Hospital of Maumee, Ohio.
The case would be the first in years to move beyond the administrative process to the courts on the merits of a challenge. The FTC’S successful antitrust challenge of Evanston (Ill.) Northwestern Healthcare in 2004 was resolved in 2007 through the administrative process.
The Evanston Northwestern win invigorated antitrust regulators’ hospital merger enforcement, and the FTC would be further emboldened if the court upholds the Promedica order, said healthcare lawyer Charles Wright, a partner in Davis Wright Tremaine in Seattle.
Jeff Miles, a former FTC trial attorney now with the health law group of Ober Kaler in Washington, said hospitals are sensitive to the commission’s heightened enforcement of antitrust laws and revised merger guidelines that favor regulators compared with the ones in effect when the FTC lost a series of cases in the 1990s. “The environment is something that hospitals thinking about merging consider,” he said.
Miles said the Promedica case would be the first test in a federal appeals court of the merger guidelines, which were updated in 2010. Courts often look to them as a framework for interpreting the law, although the guidelines are intended to explain the government’s approach to the industry and don’t bind judges (April 26, 2010, p. 14).
Promedica acquired St. Luke’s Hospital in May 2010 but agreed in August that year, after the FTC began an investigation, to freeze some efforts to integrate. A federal judge in Toledo issued a preliminary injunction extending that freeze. Last December, an administrative law judge ruled that the deal would substantially lessen competition.
Notably, the FTC rejected Promedica’s argument that St. Luke’s weak operations justified the acquisition because the stand-alone hospital offered limited competition for the health system and St. Luke’s lacked capital and scale needed to be more efficient, Wright said.
St. Luke’s financial condition improved and it gained market share ahead of its acquisition by Promedica. It also operated in an affluent and growing suburb and had a reputation for high quality, which would have allowed the hospital to negotiate for higher reimbursement rates without joining Promedica, the opinion said.
“What they have made clear” by rejecting Promedica’s argument, Wright said, is that “healthcare reform is not going to be a fig leaf” for consolidation that will reduce competition.
Jeffrey Kuhn, chief legal officer and general counsel for Promedica, said the system’s officials were “not thrilled” with their situation, but they believe an appeal to federal courts is “the right thing to do.”
Promedica has 60 days from March 22 to file its appeal.
Kuhn disputed the commission’s conclu- sion that the St. Luke’s acquisition would be anti-competitive. “We have a formidable competitor in the market in Mercy Health System,” he said, in reference to another player in Toledo’s healthcare market.
The FTC concluded in the opinion, however, that reducing the number of Toledo hospital competitors to three from four would result in “higher healthcare costs for patients, employers and employees in the Toledo area.”
The acquisition gives Promedica 58.3% of the general acute-care inpatient hospital markets share based on patient days, according to the opinion. For inpatient obstetrical services, Promedica holds 80.5% of the market share based on patient days after the acquisition.
Promedica has six months to spin off or sell the hospital under the order. The FTC may appoint a trustee to sell St. Luke’s if Promedica fails to divest the hospital by the deadline.
Under the order, Promedica must meet certain conditions when it sells the hospital, including provide transitional services for up to one year after the sale and allow a new buyer to recruit St. Luke’s employees “so it can establish an independent, complete, full-service medical and hospital staff,” the FTC said.
Kuhn said he believes the system should not be forced to divest the hospital, even if courts ultimately side with antitrust regulators. Promedica has invested in St. Luke’s information technology, as agreed under the merger agreement, even if broader integration has been on hold during legal proceedings. “We treat them as part of the family,” he said. “It would be very painful to do a separation.”
Kuhn said a requirement that Promedica and St. Luke’s negotiate with insurers separately, as was required to resolve the Evanston Northwestern antitrust challenge, would be appropriate and address FTC fears that prices would rise.
The FTC is embroiled in other legal challenges over hospital deals. The FTC filed an appeal last month to the U.S. Supreme Court in its case against Phoebe Putney Health System’s acquisition of Palmyra Medical Center—the parties closed the deal in December after the 11th U.S. Circuit Court of Appeals sided with the Albany, Ga., hospitals. The FTC also is attempting to block the acquisition of 305-bed Rockford (Ill.) Memorial Hospital by OSF Healthcare System, Peoria, Ill., and is awaiting a district judge’s decision on a preliminary injunction.
Promedica has been ordered to divest St. Luke’s, above, because, the FTC says, the acquisition will hurt competition and raise prices.