OCR Text |
Show Much Ado About Nothing: Recent Criticism of the Federal Trade Commission Decision to Order Columbia/HTI to Divest Three Hospitals by Mark Glick, Ph.D., J.D. and David Mangum, J.D. On April 21, 1995, the Federal Trade Commission (FTC) approved a request by Columbia/HCA Healthcare Corporation (Columbia) and Healthtrust, Inc. (HTI) to divest three Utah hospitals: Pioneer Valley, Jordan Valley, and Davis Hospital, in connection with the merger between Columbia and HTI. The FTC had previously informed Columbia/HTI that such a request would be required in order to obtain regulatory approval to close the transaction. The divestiture order has been widely misunderstood and unfairly criticized. The FTC reports that it received over one thousand letters protesting the divestiture, and received personal visits from both Governor Leavitt and a representative from the Attorney General's office. This hue and cry is hard to understand; the ordered divestiture is supported by decades of antitrust law and by established antitrust enforcement agency guidelines. This article attempts to explain the logic behind the FTC's decision and evaluates the claims of those opposing the FTC's order in light of the structure of Utah's health care market. Initially, however, some background on the legal framework applicable to mergers, and particularly hospital mergers, is instructive. When Mergers Are Legal Proposed mergers are subject to scrutiny under Section 7 of the Clayton Act, 15 U.S.C. § 18, which was passed in 1914. Section 7 provides in part that a merger is illegal "where, in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition ..." Courts have interpreted Section 7 to mean that, absent offsetting factors, significant increases in concentration in a relevant market are sufficient to render a merger illegal.1 Concentration measures domination of a market by large firms. Economists have developed several empirical tools to measure the degree of concentration in a given market and the effects of any contemplated merger on that concentration. The two most common concentration ratios are the Herfindahl-Hirschman Index (HHI), which calculates the sum of squares of the market shares of the firms in the market, and the four firm concentration ratio (CR4), which mea- sures the percent of total output contributed by the top four firms. By way of example, suppose following a merger there are five firms in a market, each with a 20 percent market share. The HHI would be 202 + 202 + 202 + 202 + 202, or 2000. The change in concentration as a result of the merger is calculated as double the product of the merging firms' pre-merger market shares. According to the 1992 Horizontal Merger Guidelines (1992 Merger Guidelines) jointly issued by the Department of Justice and the Federal Trade Commission, mergers resulting in an HHI above 1800 (with a change of 50 or more from the premerger HHI) are "likely to create or enhance market power or facilitate its exercise."2 In the same example, the CR4 would be 80 percent (20% + 20% + 20% + 20%). The Supreme Court has held that a post-merger CR4 of above 30 percent is presumptively illegal {United States v. Philadelphia Bank, 1963).3 Application to the Columbia/HTI Merger In hospital merger situations, market share is measured by the percentage of total hospital beds owned by a particular hospital or hospital chain in the relevant market, or by the proportion of total admissions accounted for by a particular hospital chain in the relevant market. The term "relevant market" consists of both a product market (line of commerce) and a geographic market (section of the country). A relevant product market under Section 7 is defined by the "reasonable interchangeability of use ... between the product itself and substitutes for it" {Brown Shoe Co. v. United States, 1962). While most hospitals provide some in-patient services for which there may be non-hospital substitutes, no substitutes exist for the core cluster of services offered by these hospitals. Most courts in hospital merger cases have held that acute-care inpatient hospital services constitute a relevant "line of commerce" within the meaning of Section 7 {FTC v. University Health, Inc., 1991; United States v. Rockford Memorial Corp., 1990). In its merger analysis of the Columbia/HTI transaction, the FTC (consistent with its earlier analysis of the Holy Cross/HTI merger) found that the relevant geographic market consisted of three counties along the Wasatch Front: Salt Lake, Davis, and Weber (the Wasatch Front). The FTC's finding concerning the geographic Utah's Health: An Annual Review 1995 |