A U.S. appeals court dealt a major setback to federal antitrust regulators last week when it gave a green light to the merger of the only two private acute-care hospitals in a small Missouri town.
And in doing so, the court effectively declared invalid the methodology the government uses to analyze the potential anti-competitive effects of hospital consolidations.
In a closely watched case, a three-judge panel of the 8th U.S. Circuit Court of Appeals in St. Louis reversed a lower-court ruling blocking the $40.5 million acquisition of 187-bed Doctors Regional Medical Center in Poplar Bluff, Mo., by Santa Barbara, Calif.-based Tenet Healthcare Corp. Tenet also owns 185-bed Lucy Lee Hospital, also in Poplar Bluff.
In the unanimous decision, the justices rejected assertions by the Federal Trade Commission that the merger would be monopolistic. They said the FTC's argument that the two for-profit hospitals competed in a narrow geographic market was erroneous.
The stinging FTC defeat means the agency hasn't won a hospital merger case at the federal appellate level since 1991, when it successfully fought the merger of two Augusta, Ga., facilities: University Hospital and St. Joseph Hospital.
The ruling "should encourage those organizations looking at mergers that they should be able to get the merger through, even though it's an expensive process," said Fredric Entin, a former American Hospital Association general counsel now in private practice in Chicago.
In a 19-page opinion that surprised many antitrust lawyers, the appeals court said the merger would not necessarily be anti-competitive even though it was between the only two nongovernment acute-care hospitals in the southeastern Missouri community of 17,000. There is also a veterans hospital in Poplar Bluff.
The FTC contended that the two hospitals would control 78% of the market, effectively stifling competition in price and quality and likely increasing healthcare costs.
U.S. District Judge Catherine Perry in Cape Girardeau had issued a preliminary injunction barring the merger. The appeals court said she should have rejected the FTC's argument that the two hospitals competed in a narrow geographic market with only five other hospitals.
Instead, the appeals panel argued, the lower court should have analyzed the market in a broader sense, considering competition from hospitals miles away and the patients who travel for health services. The court accepted Tenet's argument that the appropriate market included 20 hospitals in addition to Lucy Lee and Doctors Regional.
The appeals court also said Perry failed to adequately consider the economic efficiencies that would be created by the merged facilities.
Charles James, an antitrust lawyer with the Washington office of Jones, Day, Reavis and Pogue who represented Tenet, said he was delighted by the ruling. He said the appeals court agreed with Tenet's argument that Poplar Bluff could not support two independent, competing hospitals.
"If you took the average daily census of both hospitals combined you'd still end up with less than the total capacity of Lucy Lee alone," James pointed out.
Former FTC official Mark Horoschak, now a healthcare lawyer with the Charlotte, N.C., firm of Womble, Carlyle, Sandridge & Rice, said he found the ruling "unbelievable."
"I don't know what the government has to do to prove its case," said Horoschak. He added that the ruling reflects a continuing judicial discomfort in predicting how hospital and healthcare markets will evolve. "There has been a willingness from the courts to give hospitals the benefit of a doubt."
Debra Valentine, the FTC's general counsel, said commission staff were disappointed in the ruling. She declined to predict whether the government would appeal the decision to the full 8th U.S. Circuit Court of Appeals or the U.S. Supreme Court.