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April 30, 2014

Two lessons from ProMedica vs. FTC on consolidation

Daily Briefing

Hospital CFOs need to ensure that potential mergers and acquisitions "keep [patient] costs low and competition high," given last week's ruling in the case of ProMedica Health System vs. the Federal Trade Commission (FTC), Joe Burns reports in Healthcare Finance News.

Details of the case

In last week’s ruling, a federal appeals court ordered that ProMedica, a major not-for-profit health care system in Ohio, dissolve its merger with a local community hospital on grounds that it was anticompetitive.

The dispute originated with Toledo-based ProMedica's 2010 acquisition of St. Luke's Hospital in Maumee. Months after the hospitals signed the deal, the FTC attempted to block the merger, arguing that the deal was "likely to substantially lessen competition and increase prices."

FTC said the merger would give ProMedica almost 60% of the acute-care inpatient service market and more than 80% of the inpatient obstetrical services market.

In a unanimous decision, a three-judge panel of the Sixth U.S. Circuit Court of Appeals in Cincinnati agreed that the FTC "had every reason to conclude that, as ProMedica's dominance in the relevant markets increases ... so too does ProMedica's leverage in demanding higher rates."

FTC's mixed merger message: Hospitals parse antitrust, reform requirements

Implications for hospitals

"This case shows that for hospitals, there is a real tension between the benefits of consolidation—better integration of care—and the costs related to market power," says Robert Hansen, a business administration professor at Dartmouth College.

Hansen added that the case shares similarities with Idaho-based St. Luke's attempted acquisition of Saltzer Medical Group. FTC argued that St. Luke's would gain too much market power on the Herfindahl–Hirschman Index (HHI)—a measure of market concentration FTC used in the ProMedica case.

"Among the similarities, the increase in the HHI and the level of the HHI post-merger are in the same ballpark," Hansen says, adding that "[i]n Idaho, there is a history of St. Luke's having higher prices than other hospitals, and the appeals court in the [ProMedica] case pointed to evidence showing that higher market shares in Ohio led to higher prices."

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Therefore, merged entities should demonstrate how their alliance will benefit the public, Hansen says.

"Most important, the appeals court says ProMedica did not even try to justify the merger on the basis of consumer welfare—meaning how the merger might reduce cost or improve quality. This kind of 'efficiency defense' is critical to mounting a credible argument," Hansen says (Burns, Healthcare Finance News, 4/29).

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