Appendix — Hospital Corp. of America v. Federal Trade Commission

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MAR 16 1987

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

HOSPITAL CORPORATION OF AMERICA,

Petitioner,

V.

FEDERAL TRADE COMMISSION,

Respondent.

. APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Of Counsel: PETER J. NICKLES *

DONALD W. FISH WILLIAM D. IVERSON

MARGARET MAZZONE MICHAEL A. ROTH

HOSPITAL CORPORATION OF ELLIOTT SCHULDER

AMERICA COVINGTON & BURLING

One Park Plaza 1201 Pennsylvania Ave.; N.W.

Nashville, Tennessee 87208 P.O. Box 7566

Washington, D.C. 20044

(202) 662-6000

Attorneys for

Hospital Corporation of

America

* Counsel of Record

WILSON - Epes PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

-

APPENDIX TABLE OF CONTENTS

. Opinion of the Court of Appeals for the Seventh

Circuit in Hospital Corporation of America v. Fed-

eral Trade Commission, No. 85-3185, December 18,

1986 sissies iiliaidealiginens aabbautindgmiekigaibiiaanien

. Order of the Court of Appeals for the Seventh Cir-

cuit in Hospital Corporation of America v. Federal

Trade Commission, No. 85-3185, December 18,

a RATES PITS Fie od Ce OO a OT

. Opinion and Order of the Federal Trade Commis-

sion in Matter of Hospital Corporation of America,

Docket No. 9161, October 25, 1985 ...........................

. Initial Decision of Lewis F. Parker, Administrative

Law Judge, in the Matter of Hospital Corporation

of America, Docket No. 9161, October 10, 1984 ........

Page

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24a

26a

139a

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APPENDIX A

UNITED STATES COURT OF APPEALS

SEVENTH CIRCUIT

No. 85-3185

HOSPITAL CORPORATION OF AMERICA,

Petitioner,

Vv.

FEDERAL TRADE COMMISSION,

Respondent.

Argued Sept. 12, 1986

Decided Dec. 18, 1986

William D. Iverson, Covington & Burling, Washington,

D.C., for petitioner.

Melvin H. Orlans, F.T.C., Washington, D.C., for re-

spondent.

Before POSNER and FLAUM, Circuit Judges, and

CAMPBELL, Senior District Judge.*

POSNER, Circuit Judge.

Hospital Corporation of America, the largest propri-

etary hospital chain in the United States, asks us to set

aside the decision by the Federal Trade Commission that

it violated section 7 of the Clayton Act, as amended, 15

* Hon. William J. Campbell of the Northern District of Illinois,

sitting by designation.

2a

U.S.C. § 18, by the acquisition in 1981 and 1982 of two

corporations, Hospital Affiliates International, Inc. and

Health Care Corporation. Before these acquisitions

(which cost Hospital Corporation almost $700 million),

Hospital Corporation had owned one hospital in Chat-

tanooga, Tennessee. The acquisitions gave it ownership

of two more. In addition, pursuant to the terms of the

acquisitions it assumed contracts, both with four-year

terms, that Hospital Affiliates International had made

to manage two other Chattanooga-area hospitals. So

after the acquisitions Hospital Corporation owned or

managed 5 of the 11 hospitals in the area. Later one of

the management contracts was cancelled; and one of the

lesser issues raised by Hospital Corporation, which we

might as well dispose of right now, is whether the Com-

mission should have disregarded the assumption of that

contract. We agree with the Commission that it was not

required to take account of a post-acquisition transaction

that may have been made to improve Hospital Corpora-

tion’s litigating position. The contract was cancelled

after the Commission began investigating Hospital Cor-

poration’s acquisition of Hospital Affiliates, and while

the initiative in cancelling was taken by the managed

hospital, Hospital Corporation reacted with unaccus-

tomed mildness by allowing the hospital to withdraw

from the contract. For it had sued three other hospitals

that tried to get out of their management contracts

with Hospital Affiliates when Hospital Corporation as-

sumed the contracts—only none of these hospitals was in

a market where Hospital Corporation’s acquisition of

Hospital Affiliates was likely to be challenged. Post-

acquisition evidence that is subject to manipulation by

the party seeking to use it is entitled to little or no

weight. Cf. Lektro-Vend Corp. v. Vendo Co., 660 F.2d

255, 276 (7th Cir. 1981). The Commission was entitled

to give it no weight in this case, both to simplify the

adjudication of merger cases generally and because ex-

3a

cluding this one hospital would not have altered the mar-

ket share figures significantly.

If all the hospitals brought under common ownership

or control by the two challenged acquisitions are treated

as a single entity, the acquisitions raised Hospital Cor-

poration’s market share in the Chattanooga area from

14 percent to 26 percent. This made it the second largest

provider of hospital services in a highly concentrated

market where the four largest firms together had a 91

percent market share compared to 79 percent before the

acquisitions. These are the FTC’s figures, and Hospital

Corporation thinks they are slightly too high (quite

apart from the question what to do with either or both

management contracts) ; but the discrepancy is too slight

to make a legal difference. Nor would expressing the

market shares in terms of the Herfindahl index alter the

impression of a highly concentrated market.

The administrative law judge concluded that the acqui-

sitions violated section 7 because of their probable anti-

competitive effects in the Chattanooga hospital market.

While modifying some of his findings, the Commission

agreed that the acquisitions were unlawful and ordered

Hospital Corporation to divest the hospitals acquired in

Chattanooga and to notify the Commission, in advance,

of any similar acquisitions planned for anywhere in the

country. The Clayton Act allows Hospital Corporation to

seek judicial review of the Commission’s order in any

circuit in which it does business, see 15 U.S.C. § 21(c),

and for unexplained reasons it has chosen this circuit.

It makes three arguments to us: there is no reasonable

probability that its acquisitions in Chattanooga will les-

sen competition substantially; anyway the Federal Trade

Commission has no constitutional power to bring an en-

forcement action, because the members of the Commis-

sion do not serve at the pleasure of the Presiden‘; fail-

ing all else, Hospital Corporation should at least not be

4a

required to give the Commission advance notice of all

future acquisitions.

The first 79 pages of Hospital Corporation’s 85-page

opening brief are devoted to the first argument, yet they

make no mention of the standard of judicial review of

- the Federal Trade Commission’s findings of fact and no

effort to show that the findings are vulnerable under it.

The standard is the familiar substantial-evidence stand-

ard: findings of fact that are supported by substantial

evidence on the record considered as a whole bind the

reviewing court. See 15 U.S.C. §§ 21(e), 45(c); FTC v.

Indiana Federation of Dentists, —— U.S. , 106

S.Ct. 2009, 2015-16, 90 L.Ed.2d 445 (1986) ; FTC v. Al-

goma Lumber Co., 291 U.S. 67, 73, 54 S.Ct. 315, 318, 78

L.Ed. 655 (1934); Kaiser Aluminum & Chem. Corp. v.

FTC, 652 F.2d 1824, 1329 (7th Cir. 1981); Fruehauf

Corp. v. FTC, 603 F.2d 345, 351 (2d Cir. 1979) ; Ster-

ling Drug, Inc. v. FTC, 741 F.2d 1146, 1149 (9th Cir.

1984). When the FTC pointed out this omission Hos-

pital Corporation replied: “The decisive question on this

appeal is . . . whether Chattanooga hospitals are likely

to collude because of these acquisitions. This is a matter

of economic analysis, not a dispute of underlying facts.”

The first sentence is wrong: the issue for this court is

not whether the acquisitions create a danger of collusion

but whether the Commission’s conclusion that they do is

supported by substantial evidence on the record as a

whole. The second sentence is irrelevant, because the

substantial evidence rule (like the clearly erroneous rule,

see Mucha v. King, 792 F.2d 602, 604-06 (7th Cir. 1986) )

applies to ultimate as well as underlying facts, including

economic judgments. This is implicit in the many cases

that hold that the ultimate question under the Clayton

Act—whether the challenged transaction may substantially

lessen competition—is governed by the substantial evi-

dence rule. See, e.g., National Dairy Products Corp. v.

5a

FTC, 412 F.2d 605, 616, 620 (7th Cir. 1969); Dean

Milk Co. v. FTC, 395 F.2d 696, 709, 711-13 (7th Cir.

1968) ; Yamaha Motor Co., Ltd. v. FTC, 657 F.2d 971,

977 and n.7 (8th Cir. 1981); Fruehauf Corp. v. FTC,

supra, 603 F.2d at 355; RSR Corp. v. FTC, 602 F.2d

1317, 1320, 1325 (9th Cir. 1979); Ash Grove Cement

Co. v. FTC, 577 F.2d 1368, 1377-79 (9th Cir. 1978).

(All but the first two of these decisions were section 7

cases, like this one.) Hospital Corporation has argued

the case to us as if we were the FTC, which assuredly

we are not. Our only function is to determine whether

the Commission’s analysis of the probable effects of these

acquisitions on hospital competition in Chattanooga is so

implausible, so feebly supported by the record, that it

flunks even the deferential test of substantial evidence.

The Commission’s detailed analysis of those effects fills

most of a 117-page opinion that, whatever its substantive

merits or demerits, is a model of lucidity. The Commis-

sion may have made its task harder (and opinion longer)

than strictly necessary, however, by studiously avoiding

reliance on any of the Supreme Court’s section 7 deci-

sions from the 1960s except United States v. Philadel-

phia Nat'l Bank, 374 U.S. 321, 83 S.Ct. 1715, 10 L.Ed.

2d 915 (1963), which took an explicitly economic ap-

proach to the interpretation of the statute. The other de-

cisions in that decade—in particular Brown Shoe Co. v.

United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d

510 (1962) ; United States v. Aluminum Co. of America,

377 U.S. 271, 84 S.Ct. 1283, 12 L.Ed.2d 314 (1964);

United States v. Von’s Grocery Co., 384 U.S. 270, 86

S.Ct. 1478, 16 L.Ed.2d 555 (1966), and United States v.

Pabst Brewing Co., 384 U.S. 546, 86 S.Ct. 1665, 16 L.Ed.

2d 765 (1966)—seemed, taken as a group, to establish

the illegality of any nontrivial acquisition of a competi-

tor, whether or not the acquisition was likely either to

bring about or shore up collusive or oligopoly pricing.

6a

The elimination of a significant rival was thought by

itself to infringe the complex of social and economic

values conceived by a majority of the Court to inform

the statutory words “may . . . substantially . . . lessen

competition.”

None of these decisions has been overruled. Although

both United States v. General Dynamics Corp., 415 U.S.

486, 94 S.Ct. 1186, 39 L.Ed.2d 530 (1974), and United

States v. Citizens & Southern Nat’l Bank, 422 U.S. 86,

95 S.Ct. 2099, 45 L.Ed.2d 41 (1975) (both discussed in

our recent decision in Ball Memorial Hospital, Inc. v.

Mutual Hospital Ins., Inc., 784 F.2d 1325, 1336-37 (7th

Cir.1986) ), refused to equate the possession of a signifi-

cant market share with a significant threat to competi-

tion, these cases involved highly unusual facts, having

no counterpart in this case, that required discounting

large market shares. In General Dynamics the shares

were of current sales (of coal) made pursuant to long-

term contracts entered into a long time ago; future sales

would depend on uncommitted reserves, and one of the

acquired firms had no uncommitted reserves. In Citizens

& Southern the acquired banks were already under the

effective control of the acquirer (they were its “de facto

branches”), so that the formal merger had little competi-

tive significance.

These cases show that market share figures are not

always decisive in a section 7 case, but it can be argued

that the cases themselves carve only limited exceptions

to the broad holdings of some of the merger decisions of

the 1960s. General Dynamics was like a failing-company

case; in Citizens & Southern the merger was a mere

furmality—like a marriage ceremony between common

law spouses. The most important developments that cast

doubt on the continued vitality of such cases as Brown

Shoe and Von’s are found in other cases, where the

Supreme Court, echoed by the lower courts, has said

repeatedly that the economic concept of competition,

Tieninceenenienmmamenaetilieiaisine|

a

7a

rather than any desire to preserve rivals as such, is the

lodestar that shall guide the contemporary application

of the antitrust laws, not excluding the Clayton Act.

For recent discussions of this point, citing the relevant

precedents, see Fishman v. Estate of Wirtz, 807 F.2d

520, 535-536 (7th Cir. 1986); id. at 565-567 (separate

opinion); Morrison v. Murray Biscuit Co., 797 F.2d

1430, 1437 (7th Cir.1986). See also Cargill, Inc. v.

Montfort of Colorado, Inc., —— U.S. ——, 107 S.Ct.

484, —— L.Ed.2d —— (1986). Applied to cases

brought under section 7, this principle requires the dis-

trict court (in this case, the Commission) to make a

judgment whether the challenged acquisition is likely

to hurt consumers, as by making it easier for the firms

in the market to collude, expressly or tacitly, and thereby

force price above or farther above the competitive level.

So it was prudent for the Commission, rather than rest-

ing on the very strict merger decisions of the 1960s, to

inquire into the probability of harm to consumers. In

any event, even if we thought those decisions still au-

thoritative, we could not uphold the Commission’s decision

on a rationale different from its own. See FTC v. In-

diana Federation of Dentists, supra, 106 S.Ct. at 2016;

SEC v. Chenery Corp., 318 U.S. 80, 87-88, 63 S.Ct. 454,

4594-460, 87 L.Ed. 626 (1943); Illinois v. ICC, 722 F.2d

1341, 1348-49 (7th Cir.1983).

When an economic approach is taken in a section 7

ease, the ultimate issue is whether the challenged acqui-

sition is likely to facilitate collusion. In this perspective

the acquisition of a competitor has no economic signifi-

cance in itself; the worry is that it may enable the ac-

quiring firm to cooperate (or cooperate better) with

other leading competitors on reducing or limiting out-

put, thereby pushing up the market price. Hospital

Corporation calls the issue whether an acquisition is

likely to have such an effect “economic,” which of course

8a

it is. But for purposes of judicial review, as we have

said, it is a factual issue subject to the substantial evi-

dence rule, not a legal issue on which review usually is

plenary and invariably is much less deferential than is

the review of findings of fact. One of the main reasons

for creating the Federal Trade Commission and giving

it concurrent jurisdiction to enforce the Clayton Act was

that Congress distrusted judicial determination of anti-

trust questions. It thought the assistance of an admin-

istrative body would be helpful in resolving such ques-

tions and indeed expected the FTC to take the leading

role in enforcing the Clayton Act, which was passed at

the same time as the statute creating the Commission.

See Henderson, The Federal Trade Commission, ch. 1

(1924). In the present case the underlying facts are,

as Hospital Corporation asserts, largely undisputed. The

dispute is over the inferences of competitive consequence

to be drawn from them. But the drawing of those in-

ferences is a matter within the Commission’s primary

responsibility too. There is plenty of evidence to support

the Commission’s prediction of adverse competitive ef-

fect in this case; whether we might have come up with

a different prediction on our own is irrelevant.

The acquisitions reduced the number of competing

hospitals in the Chattanooga market from 11 to 7. True,

this calculation assumes that the hospitals that came

under the management although not ownership of Hos-

pital Corporation should be considered allies rather than

competitors of Hospital Corporation; but the Commis-

sion was entitled to so conclude. The manager (Hos-

pital Corporation) sets the prices charged by the man-

aged hospitals, just as it sets its own prices. Although

the pricing and other decisions that it makes in its man-

agement role are subject to the ultimate control of the

board of directors of the managed hospital, there is sub-

stantial evidence that the board usually defers to the

manager’s decisions. If it were not inclined to defer, it

9a

would not have a management contract; it would do its

own managing, through officers hired by it. A hospital

managed by Hospital Corporation is therefore unlikely

to engage in vigorous or perhaps in any price competi-

tion with Hospital Corporation—or so at least the Com-

mission was entitled to conclude.

The reduction in the number of competitors is sig-

nificant in assessing the competitive vitality of the

Chattanooga hospital market. The fewer competitors

there are in a market, the easier it is for them to co-

ordinate their pricing without committing detectable vio-

lations of section 1 of the Sherman Act, which forbids

price fixing. This would not be very important if the

four competitors eliminated by the acquisitions in this

case had been insignificant, but they were not; they

accounted in the aggregate for 12 percent of the sales

of the market. As a result of the acquisitions the four

largest firms came to control virtually the whole market,

and the problem of coordination was therefore reduced

to one of coordination among these four.

Moreover, both the ability of the remaining firms to

expand their output should the big four reduce their own

output in order to raise the market price (and, by ex-

panding, to offset the leading firms’ restriction of their

own output), and the ability of outsiders to come in and

build completely new hospitals, are reduced by Tennes-

see’s certificate-of-need law. Any addition to hospital

capacity must be approved by a state agency. The par-

ties disagree over whether this law, as actually en-

forced, inhibits the expansion of hospital capacity. The

law may indeed be laxly enforced. Not only is there

little evidence that it has ever prevented a hospital in

Chattanooga from making a capacity addition it wanted

to make, but empirical studies of certificate of need reg-

ulation nationwide have found little effect on hospital

expenditures. See Joskow, Controlling Hospital Costs:

The Role of Government Regulation, ch. 7 (1981). Yet

10a

the Tennessee law might have some effect under the con-

ditions that would obtain if the challenged acquisitions

enabled collusive pricing of hospital services. Should

the leading hospitals in Chattanooga collude, a natural

consequence would be the creation of excess hospital ca-

pacity, for the higher prices resulting from collusion

would drive some patients to shorten their hospital stays

and others to postpone or reject elective surgery. If a

noncolluding hospital wanted to expand its capacity so

that it could serve patients driven off by the high prices

charged by the colluding hospitals, the colluders would

have not only a_strong incentive to oppose the grant of

a certificate of need but also substantial evidence with

which to oppose it—the excess capacity (in the market

considered as a whole) created by their own collusive

efforts. At least the certificate of need law would en-

able them to delay any competitive sally by a noncol-

luding competitor. Or so the Commission could conclude

(a refrain we shall now stop repeating). We add that

at the very least a certificate of need law forces hos-

pitals to give public notice, well in advance, of any plans

to add capacity. The requirement of notice makes it

harder for the member of a hospital cartel to “cheat”

on the cartel by adding capacity in advance of other

members; its attempt to cheat will be known in advance,

and countermeasures taken.

All this would be of little moment if, in the event that

hospital prices in Chattanooga rose above the competi-

tive level, persons desiring hospital services in Chatta-

nooga would switch to hospitals in other cities, or to

nonhospital providers of medical care. But this would

mean that the Chattanooga hospital market, which is to

say the set of hospital-services providers to which con-

sumers in Chattanooga can feasibly turn, see United

States v. Philadelphia Nat’l Bank, supra, 374 U.S. at

358-61, 83 S.Ct. at 1738-40; Tampa Elec. Co. v. Nash-

ville Coal Co., 365 U.S. 320, 327-28, 81 S.Ct. 623, 627-

lla

29, 5 L.Ed.2d 580 (1961), includes hospitals in other

cities plus non-hospital providers both in Chattanooga

and elsewhere; and we do not understand Hospital Cor-

poration to be challenging the Commission’s market defi-

nition, which is limited to hospital providers in Chatta-

nooga. Anyway, these competitive alternatives are not

important enough to deprive the marketshare statistics

of competitive significance. Going to another city is out

of the question in medical emergencies; and even when

an operation or some other hospital service can be de-

ferred, the patient’s doctor will not (at least not for

reasons of price) send the patient to another city, where

the doctor is unlikely to have hospital privileges.

Finally, although hospitals increasingly are providing

services on an out-patient basis, thus competing with

nonhospital providers of the same services (tests, minor

surgical procedures, ete.), most hospital services cannot

be provided by nonhospital providers; as to these, hos-

pitals have no competition from other providers of medi-

cal care.

In showing that the challenged acquisitions gave four

firms control over an entire market so that they would

have little reason to fear a competitive reaction if they

raised prices above the competitive level, the Commission

went far to justify its prediction of probable anticom-

petitive effects. Maybe it need have gone no further.

See United States v. Philadelphia Nat'l Bank, supra,

374 U.S. at 362-63, 83 S.Ct. at 1740-41; Monfort of Col-

orado, Inc. v. Cargill, Inc., 761 F.2d 570, 580 (10th

Cir.1985), rev’d on other grounds, —— U.S. , 107

S.Ct. 484, L.Ed.2d (1986). But it did. First

it pointed out that the demand for hospital services by

patients and their doctors is highly inelastic under com-

petitive conditions. This is not only because people

place a high value on their safety and comfort and be-

cause many of their treatment decisions are made for

them by their doctor, who doesn’t pay their hospital

12a

bills; it is also because most hospital bills are paid

largely by insurence companies or the federal govern-

ment rather than by the patient. The less elastic the

demand for a good or service is, the greater are the

profits that providers can make by raising price through

collusion. A low elasticity of demand means that rais-

ing price will cause a relatively slight fall in demand,

with the result that total revenues will rise sharply.

For example, if the price elasticity of demand through-

out the relevant portion of the demand curve is —.2,

meaning that within that area every 1 percent increase

in price will result in a two-tenths of 1 percent decrease

in the quantity demanded, then a 10 percent increase in

price will cause only a 2 percent reduction in quantity

sold, and hence an almost 8 percent increase in total

revenue. And since less is being produced, costs will

fall at the same time that revenue is rising, resulting in

an even greater percentage increase in profit than in

revenue.

Second, there is a tradition, well documented in the

Commission’s opinion, of cooperation between competing

hospitals in Chattanooga. Of course, not all forms of

“operation between competitors are bad. See, eg.,

Broadcast Music, Inc. v. Columbia Broadcasting System,

Inc., 441 U.S. 1, 99 S.Ct. 1551, 60 L.Ed.2d 1 (1979).

But a market in which competitors are unusually dis-

posed to cooperate is a market prone to collusion. The

history of successful cooperation establishes a precondi-

tion to effective collusion—mutual trust and forbearance,

without which an informal collusive arrangement is un-

likely to overcome the temptation to steal a march on a

fellow colluder by undercutting him slightly. That

temptation is great. A seller who makes a profit of $10

on each sale at the cartel price, and then cuts price by

$1 and thereby (let us suppose) doubles his output, will

increase his total profits by 180 percent.

13a

The management contracts between Hospital Affiliates

(itself an owner as well as manager of -hospitals) and

two other hospitals in Chattanooga—contracts that when

taken over by Hospital Corporation gave it virtual con-

trol over the pricing and other decisions of two of its

competitors, at least for a time—illustrate the unusual

degree of cooperation in this industry; imagine Ford’s

signing a management contract with General Motors

whereby General Motors installed one of its officers (who

would remain an officer of GM) as Ford’s manager.

Hospitals routinely exchange intimate information on

prices and costs in connection with making joint appli-

cations to insurers for higher reimbursement schedules.

Such cooperation may be salutary but it facilitates col-

lusion and therefore entitles the Commission to worry

even more about large horizontal acquisitions in this

industry than in industries where competitors deal with

each other at arm’s length.

Third, hospitals are under great pressure from the

federal government and the insurance companies to cut

costs. One way of resisting this pressure is by present-

ing a united front in negotations with the third-party

payors—which indeed, as we have just said, hospitals in

Chattanooga have done. See also United States v. North

Dakota Hospital Ass’n, 640 F. Supp. 1028 (D.N.D. 1986).

The fewer the independent competitors in a _ hospital

market, the easier they will find it, by presenting an

unbroken phalanx of representations and requests, to

frustrate efforts to control hospital costs. This too is a

form of collusion that the antitrust laws seek to dis-

courage, though within the limitations of the Noerr-Pen-

nington doctrine, which insulates some cooperative ef-

forts to obtain government benefits from attack under

antitrust law. See, eg., Eastern Railroad Presidents

Conference v. Noerr Motor Freight, Inc., 365 U.S. 127,

81 S.Ct. 523, 5 L.Ed.2d 464 (1961); Grip-Pak, Ine. v.

Illinois Tool Works, Inc., 694 F.2d 466, 471-73 (7th Cir.

14a

1982); Fischel, Antitrust Liability for Attempts to In-

fluence Government Action: The Basis and Limits of the

Noerr-Pennington Doctrine, 45 U.Chi.L.Rev. 80 (1977).

Not all third-party payors, however, are governmental;

not all cooperative efforts to influence government are

immunized by the doctrine, see, e.g., California Motor

Transport Co. v. Trucking Unlimited, 404 U.S. 508, 92

S.Ct. 609, 30 L.Ed.2d 642 (1972); most important, the

doctrine does not forbid enforcement efforts designed to

make such efforts less effective by preserving a sub-

stantial number of competitors.

All these considerations, taken together, supported—

we do not say they compelled—the Commission’s conclu-

sion that the challenged acquisitions are likely to foster

collusive practices, harmful to consumers, in the Chat-

tanooga hospital market. Section 7 does not require

proof that a merger or other acquisition has caused

higher prices in the affected market. All that is neces-

sary is that the merger create an appreciable danger of

such consequences in the future. A predictive judgment,

necessarily probabilistic and judgmental rather than de-

monstrable (see United States v. Philadelphia Nat’l Bank,

supra, 374 U.S. at 362, 83 S.Ct. at 1740), is called for.

Considering the concentration of the market, the ab-

sence of competitive alternatives, the regulatory barrier

to entry (the certificate of need law), the low elasticity

of demand, the exceptionally severe cost pressures under

which American hospitals labor today, the history of

collusion in the industry, and the sharp reduction in the

number of substantial competitors in this market

brought about by the acquisition of four hospitals in a

city with only eleven (one already owned by Hospital

Corporation), we cannot say that the Commission’s pre-

diction is not supported by substantial evidence.

But of course we cannot just consider the evidence

that supports the Commission’s prediction. We must

consider all the evidence in the record. We must there-

15a

fore consider the significance of the facts, pressed on us

by Hospital Corporation, that hospital services are com-

plex and heterogeneous, that the sellers in this market

are themselves heterogeneous because of differences in

the services provided by the different hospitals and dif-

ferences in the corporate character of the hospitals (some

are publicly owned, some are proprietary, and some are

private but nonprofit), that the hospital industry is

undergoing rapid technological and economic change,

that the payors for most hospital services (Blue Cross

and other insurance companies, and the federal govern-

ment) are large and knowledgeable, and that the FTC’s

investigation which led to this proceeding was touched

off by a complaint from a competitor of Hospital Cor-

poration. Most of these facts do detract from a conclu-

sion that collusion in this market is a serious danger,

but it was for the Commission—it is not for us—to

determine their weight.

The first fact is the least impressive. It is true that

hospitals provide a variety of different services many of

which are “customized” for the individual patient, but

the degree to which this is true seems no greater than

in other markets. Although collusion is more difficult

the more heterogeneous the output of the colluding firms,

there is no established threshold of complexity beyond

which it is infeasible and Hospital Corporation made no

serious effort to show that hospital services are more

complex “sor products and services in other markets,

such as steel, building materials, and transportation,

where collusion has been frequent.

The heterogeneity of the sellers has two aspects: the

hospitals in Chattanooga offer different mixtures of

services; and they have different types of ownership—

private for-profit (“proprietary”), private not-for-profit,

public. The significance of these features is unclear.

Concerning the first, if one assumes that collusion is

practiced on a service-by-service basis, the fact that hos-

16a

pitals provide different mixtures of service seems irrele-

vant to the feasibility of collusion. True, since different

types of service may not be substitutable—open-heart

surgery is not a substitute for setting a broken leg—

specialized hospitals might not compete with one an-

other. But that is not Hospital Corporation’s argument.

Its argument is that the different mixture of services in

the different hospitals would make it difficult for their

owners to fix prices of competing services, and this we

don’t understand.

Different ownership structures might reduce the like-

lihood of collusion but this possibility is conjectural and

the Commission was not required to give it conclusive

weight. The adoption of the nonprofit form does not

change human nature, see Clark, Does the Nonprofit

Form Fit the Hospital Industry?, 93 Harv.L.Rev. 1416,

1447, 1465 (1980), as the courts have recognized in

rejecting an implicit antitrust exemption for nonprofit

enterprises. National Collegiate Athletic Ass’n v. Board

of Regents, 468 U.S. 85, 100 n. 22, 104 S.Ct. 2948, 2960

n. 22, 82 L.Ed.2d 70 (1984). (There is a possible gap

in the FTC’s jurisdiction over acquisitions involving

nonprofit corporations, compare 15 U.S.C. §18 with 15

U.S.C. $§ 44, 45(a) (2), but it doesn’t affect this case,

since the acquired and acquiring firms are all proprie-

tary.) Non-profit status affects the method of financing

the enterprise (substituting a combination of gift and

debt financing for equity and debt financing) and the

form in which profits (in the sense of the difference be-

tween revenue and costs) are distributed, and it may

make management somewhat less beady-eyed in trying to

control costs, see Clarkson, Some Implications of Prop-

erty Rights in Hospital Management, 15 J.Law & Econ.

363 (1972). But no one has shown that it makes the

enterprise unwilling to cooperate in reducing competi-

tion (some contrary evidence is presented in Hersch,

Competition and the Performance of Hospital Markets, 1

17a

Rev.Ind.Org. 324 (1984) )—which most enterprises dis-

like and which nonprofit enterprises may dislike on

ideological as well as selfish grounds. “Nonprofit hos-

pitals, in fact, make rather sizable profits and these

profits have been growing over time.” Davis, Economic

Theories of Behavior in Nonprofit, Private Hospitals, 24

Econ. & Bus.Bull. at 1, 12 (Win.1972). See also Havig-

hurst, Regulation of Health Facilities and Services by

“Certificate of Need’, 59 Va.L.Rev. 1143, 1149 n. 23

(1973). True, nonprofit hospitals, private and public,

harbor considerable antipathy toward proprietary hos-

pitals, regarding them as “cream skimmers” who lure

away the affluent patients that nonproprietary hospitals

need to defray the costs of serving the less affluent. This

antipathy may retard the emergence of the mutual trust

and forbearance that informal collusive schemes depend

on for their effectiveness. But the other side of this coin

is that the nonproprietaries fear the competition of the

proprietaries (that is the source, or = source, of their

antipathy to them)—-and what better foundation for a

collusive arrangement than fear of competition?

Political pressures might inhibit publicly owned hos-

pitals from raising prices. But similar pressures might

inhibit them from expanding capacity to take on addi-

tional patients attracted by lower prices. A _ seller’s

refusal to join a cartel is significant only insofar as the

seller can expand output if and when the cartel, by rais-

ing prices, drives consumers to search for sellers who

are not part of the cartel and are willing to undersell

it. A publie hospital that in order to expand its capacity

must seek governmental appropriations is in a poor po-

sition to take advantage of the competitive opportunities

created by the presence of a cartel in its market. More-

over, compelled as they are to treat charity cases while —

minimizing the cost to the taxpayers of supporting the

hospital, public hospitals are under added pressure to

charge high prices to their paying (or insured) patients,

18a

which may make collusion particularly attractive to

these hospitals.

The economic and technological ferment in the hospital

industry may make collusion more difficult, but also

more urgent, since risk-averse managers may be strongly

inclined to stabilize, if necessary through collusion, what-

ever features of an uncertain environment they are able

to bring under their control. Regarding the weighing of

such imponderables as this, much must be left to the

judgment of the Commission.

The concentration of the buying side of a market does

inhibit collusion. The bigger a buyer is, the more easily

and lucratively a member of the cartel can cheat on his

fellows; for with a single transaction, he may be able

to increase his sales and hence profits dramatically. But

with all the members thus vying for the large orders of

big buyers, the cartel will erode. See Stigler, A Theory

of Oligopoly, in Stigler, The Organization of Industry

39, 43-44 (1968). Hospital Corporation argues that the

effective buyers of most hospital services are large and

knowledgeable institutions rather than the patients who

are the nominal buyers. But the role. of the third-party

payor is not quite that of a large buyer. The explicit

contract between the insurance companies and their pa-

tients, and the statutory and regulatory obligations of

government to Medicare and Medicaid recipients, re-

quire reimbursing patients for hospital services. Of

course the insurer is not required to, and no insurer

does, reimburse the insvred for whatever services are

consumed, regardless of price. But as a practical matter

Blue Cross could not tell its subscribers in Chattanooga

that it will not reimburse them for any hospital services

there because prices are too high. As a practical matter

it could not, if the four major hospital owners in the

city, controlling more than 90 percent of the city’s hos-

pital capacity, raised their prices, tell its subscribers

that they must use the remaining hospitals—whose ag-

19a

gregate capacity would be completely inadequate and,

for reasons discussed earlier, could not readily, or at

least rapidly, be expanded—if they want to be reim-

bursed. The insurers are in a better position to detect

violations of the Sherman Act than the patients are but

if the challenged acquisitions enable the major hospital

owners in Chattanooga to collude without violating the

Sherman Act, that is, collude tacitly rather than ex-

pressly, there would be no violations to detect and report.

Hospital Corporation’s most telling point is that the

impetus for the Commission’s complaint came from a

competitor—a large nonprofi: hospital in Chattanooga.

A rational competitor would not complain just because

it thought that Hospital Corporation’s acquisitions would

facilitate collusion. Whether the competitor chose to

join a cartel or stay out of it, it would be better off

if the cartel were formed than if it were not formed.

For the cartel would enable this seller to raise its price,

whether or not to the cartel level. By staying out of the

cartel and by pricing just below the cartel price, the

competitor might, as we noted earlier, do even better

than by joining the cartel.

The hospital that complained to the Commission must

have thought that the acquisitions would lead to lower

rather than higher prices—which would benefit con-

sumers, and hence, under contemporary principles of

antitrust law, would support the view that the acquisi-

tions were lawful. But this is just one firm’s opinion.

It was not binding on the Commission, which having

weighed all the relevant facts concluded that the acqui-

sitions had made collusion in this market siguificantly

more likely than before. Since, moreover, the complain-

ant was a nonprofit hospital, in attributing the com-

plaint to fear of lower prices Hospital Corporation is

contradicting its argument that the non-profit sector of

the hospital industry does not obey the laws of economic

self-interest.

20a

This completes our discussion of liability and we turn

to the constitutional question. Hospital Corporation’s

argument that the FTC is unconstitutional because its

members exercise executive powers (e.g., by filing the

complaint in this case) yet can be removed by the Presi-

dent only for cause occupies three pages of its opening

brief and one page of its reply brief. Although we are

not aficionados of long briefs and wordy arguments, we

cannot be forced to consider far-reaching constitutional

contentions presented in so offhand a manner. See

Hershinow v. Bonamarte, 735 F.2d 264, 266 (7th Cir.

1984); Carducci v. Regan, 714 F.2d 171, 177 (D.C.

Cir.1983). Hospital Corporation is asking us to adopt

a principle that would make every independent federal

administrative agency unconstitutional; for the logic of

its argument is not limited to the Federal Trade Com-

mission but extends to the Interstate Commerce Com-

mission, the Federal Communications Commission, the

Federal Reserve Board, and the other well known, long

established federal agencies whose members the Presi-

dent selects but cannot remove (before their terms ex-

pire) without cause. Hospital Corporation thus is ask-

ing us to decree a fundamental change in the structure

of American government. Four pages is not an adequate

presentation of the case for this revolutionary result.

Brevity may be the soul of wit, but seismic constitutional

change is not a laughing matter.

Among other omissions from Hospital Corporation’s

argumentation on the issue is any discussion of its

standing to raise the issue and whether the issue is ripe

in this proceeding. Supposing that the Constitution re-

quires that the President be empowered to remove mem-

bers of an agency such as the Federal Trade Commis-

sion which issues complaints of violation of federal law,

Hospital Corporation has made no effort to show that

the President wants to remove any member of the FTC

who voted for the complaint in this case, or that the

2la

complaint would not have been issued if the President

had plenary removal power, or that the concept of

“cause” is too restrictive to satisfy the constitutional

provisions vesting executive power in the President, or

that the allegedly unconstitutional limitation on the

President’s power to remove FTC commissioners can’t

be severed from the Commission’s power to file com-

plaints (cf. Glidden v. Zdanok, 370 U.S. 530, 583, 82

S.Ct. 1459, 1490, 8 L.Ed.2d 671 (1962)). We are not

even told whether the commissioners who voted for the

complaint were appointed by President Reagan; if they

were, it becomes somewhat implausible to suppose that

the complaint would not have been issued if the Presi-

dent had the power to remove them. Although the Jus-

tice Department, which enforces section 7 of the Clayton

Act concurrently with the FTC, reviewed the acquisi-

tions that the FTC later challenged, and decided to take

no action, Hospital Corporation does not deny the FTC’s

assertion in its brief that the Department’s investiga-

tion had not focused on the effects of the acquisitions in

Chattanooga. So there is no showing that the FTC is

acting at cross purposes with the President in this

matter. There just is no reason to think the complaint

would not have been issued but for the allegedly uncon-

stitutional feature of the FTC’s structure.

Whatever the anomalies of that structure, Hospital

Corporation has not laid a proper foundation for its

assault on it. We have reminded the bar in recent cases

that issues cannot be preserved in this court merely by

being raised, see Hershinow v. Bonamarte, supra, and

National Metalcrafters v. McNeii, 784 F.2d 817, 825 (7th

Cir.1986), or by being developed inadequately, see Bonds

v. Coca-Cola Co., 806 F.2d 1324, 13828 (7th Cir.1986),

and that incorporation by reference of briefs filed in

-other cases (Hospital Corporation invited us to send for

briefs filed in a case in another circuit in which the

FTC’s constitutionality has been challenged) will not

22a

preserve an issue either, see Hunter v. Allis-Chalmers

Corp., 797 F.2d 1417, 1480 (7th Cir.1986). Of course,

to mount a proper constitutional attack Hospital Corpo-

ration might have needed to file a brief even longer than

85 pages; but if it needed additional pages, it should

have requested leave to file a longer brief. (Actually, it

had asked for and been granted leave to file a 90-page

brief.) Or it could have compressed its discussion of the

issue of liability, which didn’t really require 79 pages.

In its opening brief it volunteered to file a supplemental

brief, but this request came too late, and is denied.

After asking and being granted a request to file an

oversized brief, a party cannot come back later and say,

“Oh, by the way, 85 pages wasn’t enough, and could we

file another brief, of unspecified length, to address an

issue we have just discovered could not be covered in an

85-page or even 90-page brief, after all?” We decline

to consider the merits of Hospital Corporation’s consti-

tutional complaint.

The last point raised by Hospital Corporation relates

to the remedy decreed by the Commission, in particular

the provision for advance notification of future acquisi-

tions. Hospital Corporation argues that there is no

justification for such relief. But as the Commission has

a broad discretion, akin to that of a court of equity, in

deciding what relief is necessary to cure a violation of

law and ensure against its repetition, see Herzfeld v.

FTC, 140 F.2d 207 (2d Cir.1944) (L. Hand, J.), the

issue for us is not whether the Commission was right

but whether it was reasonable. “It has wide latitude for

judgment and the courts will not interfere except where

the remedy selected has no reasonable relation to the

unlawful practices found to exist.” Jacob Siegel Co. v.

FTC, 327 U.S. 608, 613, 66 S.Ct. 758, 760, 90 L.Ed. 888

(1946). Hospital Corporation has not shown that the

Commission’s order is unreasonable. There is no merit

to the suggestion that the order is punitive. Burden-

1 iatitaiiaaeaainae einai

23a

some, yes; more burdensome than the requirements of

premerger notification that the law imposes on firms

that have not been found to have made an unlawful

acquisition, yes. But “respondents must remember that

those caught violating the Act must expect some fencing

in.” FTC v. National Lead Co., 352 U.S. 419, 431, 77

S.Ct. 502, 510, 1 L.Ed.2d 488 (1957).

The Commission’s order is affirmed and enforced. 15

U.S.C. § 21(c).

24a

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Chicago, Illinois 60604

December 18, 1986

Before

HON. RICHARD A. POSNER, Circuit Judge

HON. JOEL M. FLAUM, Circuit Judge

HON. WILLIAM J. CAMPBELL, Senior District Judge*

No. 85-3185

HOSPITAL CORPORATION OF AMERICA,

Petitioner,

v.

FEDERAL TRADE COMMISSION,

Respondent.

Petition for Review of an Order of the

Federal Trade Commission

* The Honorable William J. Campbell, Senior District Judge for

the Northern District of Illinois, sitting by designation.

25a

JUDGMENT—ORAL ARGUMENT

This cause was heard on the record from the Federal

Trade Commission, and was argued by counsel.

On consideration whereof, IT IS ORDERED AND

ADJUDGED by this Court that the order of the Com-

mission in this cause appealed from be, and the same

is hereby, AFFIRMED, with costs, in accordance with

the opinion of this Court filed this date.

26a

APPENDIX C

UNITED STATES OF AMERICA BEFORE THE

FEDERAL TRADE COMMISSION

Commissioners: James C. Miller III, Chairman

Patricia P. Bailey

George W. Douglas

Terry Calvani

Mary L. Azcuenaga

[Docket No. 9161]

In the Matter of

HOSPITAL CORPORATION OF AMERICA,

a corporation.

FINAL ORDER

I

This matter has been heard by the Commission upon

the appeals of Complaint Counsel and respondent Hos-

pital Corporation of America from the Initial Decision

and upon briefs and oral argument in support of and in

opposition to the appeals. For the reasons stated in the

accompanying Opinion, the Commission has determined

to affirm in part and reverse in part the Initial Decision.

Accordingly, the Commission enters the following Order.

Definitions

IT IS ORDERED that for pi.»yoses of this Order the

following definitions shall apply:

27a

A. “HCA” means Hospital Corporation of America,

a cornoration organized under the laws of Tennessee,

with its principal executive office at One Park Plaza,

Nashville, Tennessee 37203, and its directors, officers,

agents, employees, and representatives, and its subsidi-

aries, «.ivisions, affiliates, successors, and assigns.

B. “HAI” means Hospital Affiliates International,

Inc.

C. “County” also includes a county equivalent, such

as a parish in Louisiana.

D. “Acute care hospital,” herein referred to as “hos-

pital,” means a health facility, other than a federally

owned facility, having a duly organized governing body

with overall administrative and professional responsibil-

ity and an organized professional! staff that provides 24-

hour inpatient care, as well as outpatient services, and

which has as a primary function the provision of inpa-

tient services for medical diagnosis, treatment, and care

of physically injured or sick persons with short-term or

episodic health problems or infirmities.

E. “Acquire any hospital’ means to directly or indi-

rectly acquire all or any voart of the stock or assets of any

hospital, or enter into any arrangement by which HCA

obtains direct or indirect ownership, management or con-

trol of any hospital or any unit of such hospital, includ-

ing a lease of or management contract for any such hos-

pital or unit of such hospital.

F. “Operate a hospital” means to own, lease or man-

age an acute care hospital.

G. “MSA” and “PMSA” mean, respectively, a Metro-

politan Statistical Area, and a Primary Metropolitan

Statistical Area, as defined as of July 1, 1983, by the

Office of Information and Regulatory Affairs, Office of

Management and Budget, Executive Office of the Presi-

dent.

28a

H. The “Chattanooga Urban Area” means that geo-

graphic area comprising Hamilton County, Tennessee and

Dade, Walker and Catoosa counties in Georgia.

I. “Person” means any natural person, partnership,

corporation, company, association, trust, joint venture, or

other business or legal entity, including any governmental

agency.

II

A. IT IS ORDERED that, within twelve (12) months

from the date this Order becomes final, HCA shall divest,

absolutely and in good faith, at no minimum price:

(1) North Park Hospital in Hamilton County, Ten-

nessee, and all assets, properties, lands, licenses,

leases, and other rights and privileges in con-

nection with the hospital, both tangible and

intangible. The divestiture required by this pro-

vision of this Order specifically shall include any

medical office building owned by HCA that is

adjacent to, affiliated with, or operated in con-

nection with, North Park Hospital, as well as

the plot of land on which each such medical of-

fice building is situated. The purpose of this

divestiture is to establish North Park Hospital

as a viable competitor, and to restore competi-

tion in the area. The divestiture shall be subject

to the prior approval of the Federal Trade ‘Com-

mission ;

(2) Diagnostic Center Hospital in Hamilton County,

Tennessee, and all assets, properties, lands, li-

censes, leases, and other rights and privileges in

connection with the hospital, both tangible and

intangible, that HCA acquired from HAI, to-

gether with any subsequent improvements in, or

additions to, any such assets or properties. The

divestiture required by this provision of this

Order specifically shall include any medical office

29a

building owned by HCA that is adjacent to,

affiliated with, or operated in connection with,

Diagnostic Center Hospital, as well as the plot

of land on which each such medical office build-

ing is situated. The purpose of this divestiture

is to reestablish Diagnostic Center Hospital as

a viable competitor, and to restore competition

in the area. The divestiture shall be to a person

other than the person to whom divestiture is

made under Section II., paragraph A. (1) of

this Order, and shall be subject to the prior

approval of the Federal Trade Commission.

Pending divestiture, HCA shall take all measures nec-

essary to maintain North Park Hospital and Diagnostic

Center Hospital in their present conditions and to pre-

vent any deterioration, except for normal wear and tear,

of any of the assets to be divested, so as not to impair

the present operating abilities or market value of the hos-

pitals or the other assets to be divested.

B. IT IS ORDERED that, within twelve ( 12) months

from the date this Order becomes final, HCA shall divest

any and all interest in, and divest or terminate all con-

tracts or arrangements whereby it manages, Downtown

General Hospital in Hamilton County, Tennessee, to-

gether with all assets, properties, lands, licenses, leases,

and other rights and privileges in connection with the

hospital, both tangible and intangible, that HCA acquired

from HAI, together with any subsequent improvements

in, or additions to, such assets or properties. The divesti-

ture required by this provision of this Order specifically

shall include the plot of land on which Downtown General

Hospital is situated, as well as the medical office building

owned by HCA that is adjacent to Downtown General

Hospital, and the plot of land on which such medical office

building is situated. The purpose of this provision is to

reestablish Downtown General Hospital as a viable com-

petitor, and to restore competition in the area. Any

30a

divestiture purusant to this provision, other than simple

and unconditional termination of management contracts,

leases, or other similar arrangements, shall be subject to

the prior approval of the Federal Trade Commission.

Pending divestiture or termination, HCA shall take all

measures necessary, within its responsibilities and au-

thority, to maintain Downtown General Hospital in its

present condition and to prevent any deterioration, ex-

cept for normal wear and tear, of any assets to be di-

vested, so as not to impair the present operating abilities

or market value of the hospital or the other assets to be

divested.

III

A. If HCA has not divested all of the properties,

assets, contracts, arrangements or enterprises required to

be divested pursuant to Section II of this Order within

the 12-month period provided therein, the Federal Trade -

Commission may select a trustee to effect any ordered

divestitures yet to be accomplished. The trustee shall be

a person with experience and expertise in acquisitions

and divestitures. If the Federal Trade Commission should

elect to appoint a trustee, it shall not be precluded from

seeking civil penalties and other relief available to it for

any failure by HCA to comply with this Order. If the

Federal Trade Commission should not elect to appoint a

trustee under this Section III of this Order, it shall not

be precluded from seeking civil penalties, the appoint-

ment by the courts of a trustee to effect the divestitures,

and other relief available to it, for any failure by HCA

to comply with this Order.

B. Any trustee appointed by the Federal Trade Com-

mission pursuant to this Section shall have the following

powers, authority, duties, and responsibilities:

(1) The trustee shall have the exclusive power and

authority to divest any properties, assets, or en-

terprises required to be divested pursuant to

(2)

(3)

(4)

3la

Section II of this Order that have not been di-

vested by HCA within the time period for the

divestitures provided therein. The trustee shall

have twelve (12) months from the date of ap-

pointment to accomplish the divestitures, which

shall be subject to the prior approval of the Fed-

eral Trade Commission. If, however, at the end

of the twelve-month period the trustee has sub-

mitted a plan of divestiture or believes that di-

vestiture can be achieved within a reasonable

time, the divestiture period may be extended by

the Federal Trade Commission. In addition, any

delays in divestiture caused by HCA shall extend

the time for divestiture in accordance with the

delay caused.

The trustee shall have full and complete access

to the personnel, books, records, and facilities of

any property, asset, or enterprise that the trus-

tee has the duty to divest, and HCA shall develop

such financial or other information relevant to

the properties, assets, or enterprises to be di-

vested as such trustee may reasonably request.

HCA shall cooperate with the trustee, and shall

take no action to interfere with or impede the

trustee’s accomplishment of the divestitures.

The power and authority of the trustee to divest

shall be at the most favorable price and terms

available consistent with this Order’s absolute

and unconditional obligation to divest at no

minimum price, and the purposes of the di-

vestitures as stated in Section II of this Order.

The trustee shall serve, without bond or other

security, at the cost and expense of HCA on such

reasonable and customary terms and conditions

as the Federal Trade Commission may set. The

trustee shall have authority to retain, at the

(5)

(6)

(7)

32a

cost and expense of HCA, such consultants, at-

torneys, investment bankers, business brokers,

accountants, appraisers, and other representa-

tives and assistants as are reasonably necessary

to assist in the divestitures. The trustee shall

account for all monies derived from the sale and

all expenses incurred. After approval by the

Federal Trade Commission of the account of the

trustee, including fees for his or her services, all

remaining monies shall be paid to HCA and the

trustee’s power shall be terminated. The trus-

tee’s compensation shall be based at least in sig-

nificant part on a commission arrangement con-

tingent on the trustee divesting the trust prop-

erty.

HCA shall indemnify the trustee and hold the

trustee harmless against any losses, claims, dam-

ages, or liabilities to which the trustee may be-

come subject, arising in any manner out of, or

in connection with, the trustee’s duties under

this Order, unless the Federal Trade Commis-

sion determines that such losses, claims, dam-

ages, or liabilities arose out of the misfeasance,

gross negligence, or the willful or wanton acts

or bad faith of the trustee.

Promptly upon appointment of the trustee and

subject to the approval .~ the Federal Trade

Commission, HCA shall, subject to the Federal

Trade Commission’s prior approval and consist-

ent with provisions of this Order, execute a trust

agreement that transfers to the trustee all rights

and powers necessary to permit the trustee to

cause the divestitures.

If the trustee ceases to act or fails to act dili-

gently, the Federal Trade Commission shal! ap-

point a substitute trustee.

33a

(8) The trustee may ask the Federal Trade Com-

mission to issue, and the Federal Trade Commis-

sion may issue, such additional orders or direc-

tions as may be necessary and appropriate to

accomplish the divestitures required under this

Order.

(9) The trustee shall have no obligation or author-

ity to operate or maintain any of the properties,

assets, contracts, arrangements or enterprises re-

quired to be divested pursuant to Section II of

this Order.

(10) The trustee shall report in writing to HCA and

the Federal Trade Commission every sixty (60)

days concerning the trustee’s efforts to accom-

plish divestiture.

IV

IT IS FURTHER ORDERED that, for a period of ten

(10) years from the date this Order becomes final, HCA

shall not, without the prior approval of the Federal Trade

Commission, acquire any hospital, as defined in this

Order, if the hospital to be acquired is within the Chat-

tanooga Urban Area, as defined in this Order.

Provided, however, that no acquisition of a hospital by

purchase shall be subject to this Section IV of this Order

if the consideration to be paid for the purchase of the

hospital or any rights or interest therein, including as-

sumption by HCA of any liabilities of its present owners,

does not exceed one million dollars ($1,000,000), and pro-

vided that no lease or management arrangement shall be

subject to this Section IV of this Order if the fair market

value of the hospital to be leased or managed does not

exceed one million dollars ($1,000,000).

V

IT IS FURTHER ORDERED that for a period of ten

(10) years from the date this Order becomes final, HCA

shall not, without providing advance notification to the

34a

Federal. Trade Commission, acquire any hospital, as

defined in this Order, if:

A.

The hospital to be acquired is within an MSA

or a PMSA in which HCA already operates a

hospital and in which HCA, immediately after

the acquisition, would operate hospitals that

combined have a twenty (20) percent or more

share of the licensed acute care hospital beds

within that MSA or PMSA; or

B. The hospital to be acquired is not within an

MSA or a PMSA but is within a county in which

HCA already operates a hospital and in which

HCA, immediately after the acquisition, would

operate hospitals that combined have a twenty

(20) percent or more share of the licensed acute

care hospital beds within that county; or

The hospital to be acquired is (1) not within an

MSA or a PMSA or a county in which HCA

already operates a hospital, but is within thirty

(30) miles of a hospital which HCA already op-

erates in another MSA or PSMA or county, and

(2) the hospital to be acquired and any hos-

pital(s) that HCA operates combined have a

twenty (20) percent or more share of the li-

censed acute care hospital beds in the area

within thirty (30) miles of the midpoint be-

tween the hospital to be acquired and any hos-

pital operated by HCA.

The notification required of HCA by this Section V of

this Order shall not require additional notification by

HCA to the Federal Trade Commission of any acquisition

for which notification is required to be made, and has

been made, pursuant to Section 7A .f the Clayton Act,

15 U.S.C. § 18a, or for which prior approval by the Fed-

eral Trade Commission is required, and has been re-

quested, pursuant to Section IV of this Order. Such

advance notification shall be provided when HCA’s Board

35a

of Directors or Executive Committee, or any individual

or entity that is authorized to act on HCA’s behalf in

such acquistions, authorizes issuance of a letter of intent

or enters into an agreement to make such an acquisition,

whichever is earlier.

The notification required by this Section V of this

Order shall be the Notification and Report Form set forth

in the Appendix to Part 803 of Title 16 of the Code of

Federal Regulations, as amended, and shall be prepared

and transmitted in accordance with the requirements of

that part. The notification required by this Section V of

this Order shall apply to HCA and shall not apply to any

party that HCA seeks to acquire. However, HCA shall

provide at the same time of the filing of the Notification

and Report Form supplemental information, either in

HCA’s possession or reasonably available to HCA, relat-

ing to the hospital to be acquired, the HCA hospital in

that geographic area, and identification and assessment

of the area hospital market. Such supplemental informa-

tion should include, where available, patient flow data,

annual management and strategic plans, hospital utiliza-

tion and revenue data, and documents relating to market

share, formulation of hospital prices, competitive inter-

action among area hospitals, implementation of certificate

of need standards in the area, planned efficiencies, rela-

tions with third-party payors, and physician admitting

patterns.

HCA shall comply with reasonable requests by the

Commission staff for additional information within fifteen

(15) days of service of such requests.

Any acquisition subject to this Section V of this Order,

involving an arrangement to lease, manage, or control a

hospital, shall be fully described in the notification re-

gardless of whether the acquisition involves the acquisi-

tion of any stock or assets of a hospital.

Provided, however, that no acquisition of a hospital by

purchase shall be subject to this Section V of this Order

36a

if the consideration to be paid for the purchase of the

hospital or any rights or interest therein, including as-

sumption by HCA of any liabilities of its present owners,

does not exceed one million dollars ($1,000,000), and pro-

vided that no lease or management arrangement shall be

subject to this Section V of this Order if the fair market

value of the hospital to be leased or managed does not

exceed one million dollars ($1,000,000).

VI

IT IS FURTHER ORDERED that HCA shall, within

sixty (60) days after the date this Order becomes final

and every sixty (60) days thereafter until it has fully

complied with the provisions of Section II of this Order,

submit in writing to the Federal Trade Commission a

report setting forth in detail the manner and form in

which it intends to comply, is complying, and has com-

plied with these provisions.

Such compliance reports shall include, in addition to

any other information that the staff of the Federal Trade

Commission may request, a summary of all contacts and

negotiations with potential purchasers of the stock, assets,

contracts, or other rights or interests to be divested under

this Order, the identity and address of all such potential

purchasers, and copies of all written communications to

and from such potential purchasers.

HCA shall submit such further written reports as the

staff of the Federal Trade Commission may, from time

to time, request in writing to assure compliance with

this Order.

Vil

IT IS FURTHER ORDERED that HCA, upon written

request. of the Secretary of the Federal Trade Commis-

sion or the Director of the Bureau of Competition of the

Federal Trade Commission made to HCA at its principal

office, for the purpose of securing compliance with this

Order, and for no other purpose, and subject to any

87a

legally recognized privilege, shall permit duly authorized

representatives of the Federal Trade Commission or the

Director of the Bureau of Competition:

(1) reasonable access during the office hours of

HCA, which may have counsel present, to those

books, ledgers, accounts, correspondence, memo-

randa, reports, and other records and documents

in HCA’s possession or control that relate mate-

rially and substantially to any matter contained

in this Order; and

(2) an opportunity, subject to the reasonable con-

venience of HCA, to interview officers or em-

ployees of HCA, who may have counsel present,

regarding such matters.

VIII

IT IS FURTHER ORDERED that HCA shall notify

the Federal Trade Commission at least thirty (30) days

prior to any proposed corporate change, such as dissolu-

tion, assignment, or sale resulting in the emergence of a

successor corporation, the creation or dissolution of sub-

sidiaries, or any other change in the corporation that

may affect compliance with the obligations arising out of

this Order.

By the Commission.

/8/ Emily H. Rock

EMILY H. Rock

SEAL Secretary

ISSUED: October 25, 1985

ATTACHMENTS:

Opinion of the Commission

Concurring Statement of Commissioner Azcuenaga

Concurring and Dissenting Statement of Commissioner

Bailey

88a

OPINION OF THE COMMISSION

By Calvani, Commissioner

II.

III.

CONTENTS

Introduction to the Case 2222....222222...222-2cccceeeeeeeeenneee

Aa, Tia BRI cceccsitsnttnicicnccneitnsaystcriitnnnien

B. The Structure of Health Care Markets ..........

Hospitals in the Chattanooga Area ............-.......--

A. Hospitals Within the Chattanooga Urban

Area ...... shsaclildeaRicienikdtibethdinsaiia

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The Effect on Competition —....................22.....------

A. The Effect of HCA-Managed Hospitals..........

B. The Nature of Competition Among Chatta-

ONE IID issrciciccctesecessincaistitichieectintdinnaetnttn

C. Respondent’s Market Share and Concentra-

tion in the Chattanooga Urban Area ............

TR Oh TG aiictnlacceseseecretcetnsiioneinn

E. The Nature and Likelihood of Anticompeti-

tive Behavior in the Chattanooga Hospital

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1. The Nature of Anticompetitive Behavior..

2. The Likelihood of Anticompetitive Ba-

TIONS... icsetinnsnnnitscincnbacittnanelindeiniteassieemiaemandiaaaie

39a

CONTENTS—Continued

Page

a. Non-profit Hospitals and the Likeli-

a emeceeee

b. Purported Obstacles to Successful

Collusion

i

ee

A. The Uniqueness of the Heaith Care Industry.

EE

ST

EES ST SI

40a

I.

INTRODUCTION TO THE CASE

A. The Acquisitions

In August 1981, Respondent Hospital Corporation of

America (“HCA”), the largest proprietary hospital chain

in the United States, acquired Hospital Affiliates Inter-

national (“HAI”) in a stock transaction valued at ap-

proximately $650 million. I.D.F. 1,6." At the time of the

acquisition, HAI owned or leased 57 hospitals and man-

aged 78 hospitals nationwide. LD.F. 6. Prior to its

acquisition by HCA, HAI owned or managed five acute

care hospitals in the general area of Chattanooga, Ten-

nessee, and HCA acquired ownership or management of

these hospitals through the transaction. Some four

months later HCA acquired yet another hospital corpora-

tion, Health Care Corporation (“HCC”), in a stock trans-

action valued at approximately $30 million. I.D.F. 8. At

the time of the acquisition, HCC owned a single acute

1 The following abbreviations are used in this opinion:

LD. —Initial Decision page number

L.D.F. —Initial Decision Finding of Fact number

CX —Complaint Counsel’s Exhibit number

RX —Respondent’s Exhibit number

CAB —Complaint Counsel’s Appeal Brief

RAB —Respondent’s Brief on Appeal from Initial Decision

CAnB—Complaint Counsel’s Answer to Respondent’s Appeal

Brief

RAnB—Respondent’s Brief in Response to Complaint Counsel’s

Appeal Brief

CRB —Complaint Counsel’s Reply to Respondent’s Brief in

Response to Compiaint Counsel’s Appeal Brief

RRB —Respondent’s Reply Brief o.. Appeal from Initial Deci-

sion

Transcript citations are given by the last name of the witness and

the transcript page on which the testimony appears.

4la

care hospital in Chattanooga. These two transactions

provide the genesis for the instant case.

As a result of the HCA-HAI acquisition, Respondent

increased its hospital operations in Chattanooga and its

suburbs from ownership of one acute care hospital to

ownership or management of four of the area’s eleven

acute care hospitals. Within the six-county Chattanooga

Metropolitan Statistical Area (“Chattanooga MSA”),

HCA changed its position from owner of one hospital to

owner or manager of six of fourteen acute care hospitals.

With the acquisition of HCC, HCA obtained yet another

acute care hospital in Chattanooga. Thus, HCA became

owner or manager of five of the eleven acute care hos-

pitals within the Chattanooga urban area and seven of

the fourteen in the Chattanooga MSA.

On July 30, 1982, the Commission issued a complaint

charging that the effect of HCA’s acquisitions of HAI and

HCC, both together and separately, may be substantially

to lessen competition or to tend to create a monopoly in

the acute care hospital services market? in the Chat-

tanooga, Tennessee area in violation of Section 7 of the

Clayton Act, 15 U.S.C. Sec. 18 (1982), and Section 5 of

the Federal Trade Commission Act, 15 U.S.C. Sec. 45

(1982). Judge Parker issued his Initial Decision on Octo-

ber 30, 1984. He found that the acquisitions violated

Section 7 of the Clayton Act and Section 5 of the Federal

Trade Commission Act, and ordered HCA to divest two

of the hospitals of which it had acquired ownership.

Judge Parker also ordered that HCA provide prior noti-

fication to the “ommission of certain of its future hos-

pital acquisitions. HCA appeals the Initial Decision on

? Originally, the complaint alleged that the acquisition may sub-

Stantially lessen competition or tend to create a monopoly in the

inpatient psychiatric treatment services market as well. Compl.

para. 21-28. Upon motion of Complaint Counsel, the Administrative

Law Judge ordered this count dismissed from the complaint. See

I.D. at 3. The count forms no part of the instant proceeding.

42a

several grounds; Complaint Counsel appeal certain of

Judge Parker’s findings as well.

The Commission recently considered the legality of a

hospital merger in the matter of American Medical Inter-

national, Inc., No. 9158 (FTC July 2, 1984). In that

case, we confronted some difficult questions concerning

the application of the antitrust laws to mergers in the

hospital industry. Here, we face some equally difficult

questions regarding the nature of competition and anti-

competitive behavior among hospitals. We affirm Judge

Parker’s finding of liability and modify his opinion only

as stated below.

B. The Structure of Health Care Markets

Both parties agree that the health care industry is

unique in some respects. Before considering the merits

of this case, it is important to have a fundamental under-

standing of the role of physiciars and third-party payors

in the health care transaction.

The role of the physician is a market response to the

extremely high cost to consumers of health care informa-

tion and expertise. As a result of the patient’s grossly

imperfect information concerning proper diagnosis and

treatment, and the doctor’s much greater knowledge, the

doctor decides what diagnoses, treatments, and so forth

the patient will have. See, e.g., Harris 3832. The physi-

cian orders tests, prescribes drugs and courses of treat-

ment, and so forth, and most important for our analysis,

decides whether and when a patient will be admitted

to and discharged from a hospital, along with the battery

of tests and procedures he receives while there. See id.

The patient simply cannot decide these things for him-

self; the doctor is his repository of information and ex-

pertise and thus plays the critical role in determining

the nature and extent of hospital and other health serv-

ices the patient will receive.

st Sed alent id Sham ot Ore Pe.

AL ia wail aasliite

43a

In addition to a lack of information about how to diag-

nose and treat himself, the patient has perhaps even less

perfect information about the occurrence and extent of

future illness and injury. For the most part, neither

the doctor nor the patient can control frequency or inten-

sity of disease or injury. For example, the typical patient

cannot anticipate or prevent being in an automobile

accident or developing cancer. Likewise, the doctor can-

not determine the type or intensity of diagnosis and

treatment until a problem develops, to the extent that

he can determine the severity of a problem within a

short period of time at all. The uncertainty associated

with the nature and extent of potential health problems

is thus enormous, and the uncertainty about the cost

associated with diagnosis and treatment of such contin-

gent events is equally high. As a result, the patient

cannot plan financially for the treatment of his health

problems; he may be healthy for the rest of his life and

have to spend no money on health care whatsoever, or

he may receive an injury so serious that he could not

possibly hope to pay for his treatment with his annual

salary. What is the logical market response to this

dilemma? Health insurance.

Insurance is a response to uncertainty, and spreads the

risk of financial loss occasioned by treatment of disease

or injury over both the people who turn out to have little

need for health care and those who turn out to have a

great need. By paying an insurance premium in a world

where the future need for health care is uncertain, a

potential patient eliminates the risk of not having the

money he needs to pay for diagnosis and treatment, par-

ticularly of serious illnesses or injuries, should health

care and of particular interest to us, hospital care, be

needed. The insurance mechanism is thus an integral

part of the market for hospital services.

Moreover, because health insurance is considered a non-

taxable fringe benefit to employees, tremendous incentives

44a

are created for providing health insurance at the work-

place, and many employers provide it. See, e.g., Salkever

2337-8. Health insurance premiums are a cost of doing

business for employers. See, e.g., id.; Barth 844-5. Thus,

employers have an interest in the cost of health care.

Some employee groups are even self-insured. See, ¢.g.,

Henson 967-69. Moreover, the coverage of health insur-

ance is likely more extensive than it would be if prospec-

tive patients had to pay premiums out of taxable income,

perhaps evoking more coverage for less financially cata-

strophic events than otherwise. See Salkever 2337-8.

With respect to our analysis, there is one extremely

important effect on the hospital services market of third-

party payment: The extent to which a patient is insured

determines the extent to which he is sensitive to the price

of hospital care. If he is fully insured, once he becomes

ill his interest lies in receiving the best quality care

possible, including the highest quality comforts and sur-

roundings if he is in the hospital, no matter what the

costs. Who, then, is concerned about price? We would

expect third-party payors and their customers, the world

of potential patients and employers who pay insurance

premiums, to be interested in minimizing the cests of

insurance. Of course, the government and taxpayers, who

insure many of the elderly and under-privileged through

the Medicare and Medicaid programs, should be interested

as well. There is one wrinkle, however. When hospital

prices rise, the increased payments made by an insurance

company are spread over all its subscribers, both patients

and non-patients (1.e., prospective patients); premiums

rise less than proportionally to the increase in hospital

prices. Thus, not every significant increase in hospital

prices will bring a significant market reaction from in-

surance consumers. However, if insurance premiums rise

sufficiently, even after the cost of health care is spread

over so many people, then consumer reaction should rever-

berate into the health care market. To avoid losing busi-

ness and to minimize their costs, insurance companies

will through the insurance mechanism take whatever

Se a ee ee Pe nS ee ee ee

45a

actions they can to hold down the prices they pay for

hospital and physician care.

We are thus confronted in this case with a very

peculiar market indeed. Because of the uncertainty of ill-

ness and injury and the grossly imperfect information

available to consumers of hospital services, patients gen-

erally rely on physicians to determine the nature and

extent of the medical care they receive and on third-party

payors to provide the financial assurances that such care

will be paid for. Any analysis of hospital markets under

Section 7 must bear in mind both the role that physicians

play on behalf of patients and the role of the insurance

market in financing hospital care. With this in mind, we

now turn to the merits of the case before us.

II. HOSPITALS IN THE CHATTANOOGA AREA

A. Hospitals Within the Chattanooga Urban Area

The city of Chattanooga is situated in Hamilton County

in southeast Tennessee on the state boundary with north-

west Georgia. I.D.F. 10. Chattanooga is the major city

in two federally-designated geographic areas, the Metro-

politan Statistical Area (“MSA”) and the Georgia-

Tennessee Health Service Area (“HSA’). An HSA is an

area designated by the Department of Health and Human

Services as a region in which state and local health plan-

ners are to assess and identify the health needs of the

population in the region. I.D.F. 12. An MSA is a large

population nucleus, together with adjacent communities

which have a high degree of economic and social integra-

tion with that nucleus. I.D.F. 11. The Chattanooga MSA

is a six-county area consisting of the Tennessee counties

of Hamilton, Marion and Sequatchie and the Georgia

counties of Walker, Dade and Catoosa to the south of

Chattanooga. Id. Marion and Sequatchie counties lie to

the west and northwest of Chattanooga, adjacent to

Hamilton county; adjacent Tennessee counties to the

north and east of Hamilton county are not part of the

Chattanooga MSA.

46a

Circles Denote Hospitals Owned or Managed by HCA

Numbers Show the Locations of the

Counties in Tennessee and Georgia:

NAA SNe

Erlanger Medical Center

Memorial Hospital

Parkridge Hospital

Diagnostic Center Hospital

Do «town General Hospital

Metropolitan Hospital

East Ridge Community

Hospital

Red Bank Community

Hospital

North Park Hospital

10.

11.

12.

13.

14.

15.

16.

17.

Following Hospitals Within

John L. Hutcheson Memorial

Tri-County Hospital

Wildwood Sanitarium

South Pittsburg Municipal

Hospital

Sequatchie General Hospital

Whitwell Hospital

Bradley County Memorial

Hospital

Cleveland Community

Hospital

Hamilton Medical Center

eect eA ne

4Ta

There are eleven general acute care hospitals in Hamil-

ton County, Tennessee and the Georgia suburbs of Chat-

tanooga—the “Chattanooga urban area.” After the ac-

quisitions, HCA owned or managed five of these hospitals.

The eleven hospitals include:

1) Erlanger Medical Center. Erlanger is located in

downtown Chattanooga. It is a non-profit teaching hos-

pital owned and operated by *he Chattanooga Hamilton

County Hospital Authority, a public agency created by

state statute, and is governed by a politically appointed

board of trustees. I.D.F. 22. Erlanger is a 780-bed major

medical complex which provides a wide range of health

care services to the community, and it is the only terti-

ary care referral center in the HSA. Jd.*

Erlanger is required by law to accept all Hamilton

County residents needing hospital care, regardless of their

ability to pay, and as a result treats the vast majority

of indigent patients in Hamilton County. Approximately

100 beds are used for the treatment of these patients at

all times. Lamb 110-11, 115, 134; I.D.F. 23.

2) Memorial Hospital. Memorial is located in down-

town Chattanooga. It is a non-profit institution which is

8 Hospitals are sometimes classified from most basic to most ad-

vanced as “primary,” “secondary” or “tertiary.” A primary hospital

generally provides basic acute care services, such as obstetrics,

surgical services, x-ray, clinical laboratory and blood services, a

minimal level emergency room, pharmacy and anesthesia services,

and minimal intensive care capabilities. Secondary care generally

includes the primary services listed above along with more special-

ized capabilities such as EEG equipment, diagnostic and therapeutic

equipment for cancer patients and 24-hour physician coverage. A

tertiary level hospital generally has the same facilities as hospitals

on the other two levels, but also has specialized services such as

open heart surgery capabilities, cardiovascular diagnostic lab, CAT

scanner, burn-care unit, and oncology services. I.D. at 10 n.3. A

referral hospital is one that because of the level of sophistication

of its services is able to attract patients from smaller facilities

having more limited services and capabilities. Jd. r

48a

owned and operated by the Catholic Church. In 1981,

Memorial was authorized by the Tennessee Health Facili-

ties Commission to operate 349 general acute care hos-

pital beds. I.D.F. 27. Memorial is a secondary care hos-

pital which also offers some tertiary services, such as

open heart surgery. I.D.F. 28.

3) Parkridge Hospital. Parkridge is the only hospital

HCA owned in Chattanooga before the acquisitions. It is

located in downtown Chattanooga. I.D.F. 29. Parkridge

is a secondary level hospital with some tertiary capabili-

ties. I1.D.F. 30. Parkridge is authorized to operate 296

general acute care hospital beds. Zd.

4) Diagnostic Center Hospital. Diagnostic is an 80-bed

facility in downtown Chattanooga which specializes in the

diagnosis and treatment of cardiopulmonary disease.

I.D.F. 32. HCA now owns this facility, which it pur-

chased from HAI.

5) Downtown General. Downtown General is a 65-bed

urban general acute care hospital which is located in

downtown Chattanooga. I.D.F. 38. It is a non-profit hos-

pital that was managed by HAI before the HCA acquisi-

tion, and is currently managed by HCA.

6) Metropolitan Hospital (formerly Tepper Hospital).

Metropolitan is a 64-bed proprietary hospital owned and

operated by American Healthcorp, Ine., which purchased

the facility in 1982, subsequent to the HCA acquisitions.

I.D.F. 39. The hospital’s primary focus is on pediatrics,

but it has recently expanded into other services. Id.

7) East Ridge Community Hospital. East Ridge is

located in the community of East Ridge, approximately

six miles east of downtown Chattanooga. I.D.F. 31. It is

a general acute care hospital authorized to operate 128

beds, and has an active obstetrical practice in which it

provides secondary level care. East Ridge is owned and

operated by Humana, Inc., a large, for-profit hospital

chain. Id.

49a

8) Red Bank Community Hospital. Red Bank is a 57-

bed general acute care hospital located in the Red Bank

community north of Chattanooga. I.D.F. 34. Red Bank

is a non-profit hospital owned by the Health and Edu-

cational Facilities Board of the City of Red Bank and is

leased to the Red Bank Hospital Association. Jd. HAI

managed the facility prior to the acquisition, and HCA

managed the facility for several months after the acquisi-

tion.

9) North Park Hospital (formerly Medical Park Hos-

pital). Medical Park was in 1981 an 83-bed facility in

downtown Chattanooga owned by HCC before its acquisi-

tion by HCA. I.D.F. 35. The hospital was relocated to

the suburban north Chattanooga community of Hixson

and opened as HCA-owned North Park Hospital in 1982.

I.D.F. 36. North Park offers primary and limited sec-

ondary level services. It has the latest technology avail-

able for the medical and surgical specialties and services

generally offered in suburban hospitals. I.D.F. 37.

10) John L. Hutcheson Memorial Tri-County Hospital.

Tri-County is located in the Ft. Oglethorpe community in

the Georgia suburbs just across the state line from Chat-

tanooga. I.D.F. 41. Tri-County is a public hospital

owned by the Hospital Authority of Walker, Dade and

Catoosa Counties in Georgia. Jd. Tri-County provides

primary and secondary services comparable to those of

Parkridge Hospital. I.D.F. 42. In 1981, Tri-County was

authorized by the State of Georgia to operate 237 general

acute care hospital beds. It provides care for indigents

and Medicaid recipients in northwest Georgia. Id.

11) Wildwood Sanitarium & Hospital. Wildwood is a

39-bed facility located in Dade County, Georgia, approxi-

mately 10 minutes from Chattanooga. I.D.F. 43. It is

owned by the Seventh Day Adventist Church and provides

non-traditional services such as alcohol, diet, and non-

smoking programs. It also provides some general acute

care services. Id.

50a

B. Hospitals Within a 45-minute Driving Radius of

Chattanooga

The closest population centers to Chattanooga are:

Dalton, Georgia, which lies approximately 40 minutes

southeast of downtown Chattanooga on Interstate 75

(I.D.F. 14); Cleveland, situated in Bradley County, Ten-

nessee, approximately 40 minutes northeast of downtown

Chattanooga on Interstate 24 (I.D.F. 15); South Pitts-

burg, located in Marion County, Tennessee, approximately

40 minutes west of downtown Chattanooga across the

Tennessee River (1.D.F. 16) ; Dunlap, located in Sequat-

chie County, Tennessee, approximately 45 minutes north-

west of downtown Chattanooga (I.D.F. 17); and Whit-

well, in Marion County, Tennessee, approximately 40

minutes northwest of downtown Chattanooga. I.D.F. 18.

At least one general acute care hospital is located in or

near each of these communities. Hospitals within 45

minutes driving time of Chattanooga, numbered as shown

on the map above, include:

12) South Pittsburg Municipal Hospital. South Pitts-

burg is a city-owned facility in South Pittsburg, Tennes-

see, which was approved for use of 107 beds in 1981.

I.D.F. 44. It is comparable to the smaller Chattanooga

hospitals in terms of quality and range of services. /d.

South Pittsburg was managed by HAI before the acquisi-

tion and is now managed by HCA pursuant to a long-

term contract. Jd. The hospital is approximately 42 min-

utes from downtown Chattanooga by car. I.D.F. 45.

13) Sequatchie General Hospital. Sequatchie General

is a small, primary care facility located in Dunlap, Ten-

nessee. I.D.F. 46. In 1981 it was approved to operate 49

beds. RX 1093. Sequatchie was acquired by HCA from

HAI in the 1981 acquisition. In December, 1982, HCA

sold the hospital to Republic Health Corporation as part

of a larger transaction in which it obtained stock owner-

ship in Republic. I.D.F. 47.

5la

14) Whitwell Community Hospital. Whitwell is a 25-

bed facility located in Whitwell, Tennessee. I.D.F. 48. It

is an old, lower quality facility with a small medical

staff. Id. However, it was purchased by Rural Hospital

Associates, Inc. in 1982, and a new 40-bed facility is cur-

rently being built. I.D.F. 49. Whitwell is approximately

40 minutes away from downtown Chattanooga by car.

I.D.F. 50.

15) Bradley County Memorial Hospital. Bradley Mem-

rial is a 251-bed city-owned hospital located in Cleveland,

Tennessee. I.D.F. 55. It is a full-service community hos-

pital that provides primary and secondary care and some

intensive care services. It offers a range and quality of

services comparable to many of the hospitals in Chat-

tanooga. Id.

16) Cleveland Community Hospital. Cleveland Com-

munity is a 100-bed full-service hospital owned by HCA

and located in Cleveland, Tennessee. I.D.F. 52. The hos-

pital is approximately 41 minutes from downtown Chat-

tanooga. Id.

17) Hamilton Medical Center. Hamilton is a publicly-

owned facility located in Dalton, Georgia. It is a 297-bed

facility approximately 40 minutes from downtown Chat-

tanoogwa on Interstate 75. RX 1030(3) ; RX 1093. Hamil-

ton i. a modern medical center providing secondary care

comparable to that available from Tri-County Hospital

and to a lesser extent Memorial and Parkridge. Lamb

152; see Petruzzi 757; Furrey 1605.

Ill. THE PRODUCT MARKET

An acquisition violates Section 7 of the Clayton Act

“where in any line of commerce in any section of the

country, the effect of such acquisition may be substan-

tially to lessen competition, or to tend to create a monop-

oly.” 15 U.S.C. See. 18 (1982). Accordingly, we now

turn to the definition of the relevant “line of commerce”

52a

or “product market” in which to measure the likely com-

petitive effects o* these acquisitions. In measuring likely

competitive effects, we seek to define a product or group

of products sufficiently distinct that buyers could not de-

feat an attempted exercise of market power on the part

of sellers of those products by shifting purchases to still

different products. Sellers might exercise market power

by raising prices, limiting output or lowering quality.

See Grand Union Co., 102 F.T.C. 812, 1040 (1983).

Complaint Counsel argued below that the product mar-

ket * was properly defined as the provision of acute inpa-

tient hospital services and emergency hospital services

provided to the critically ill. This definition would ex-

clude non-hospital providers of outpatient services, e¢.g.,

free standing emergency centers, as well as non-hospital

providers of inpatient services, e.g., nursing homes, from

the product market. It would also exclude the outpatient

business of hospitals, except for that provided to the criti-

cally ill in the emergency room. The rationale for exclud-

ing outpatient care is that inpatient services are the rea-

son for being of acute care hospitals; inpatient services

are needed by and consumed by patients in combination

and therefore can be offered only by acute care hospitals.

Inpatients in almost all cases will purchase a range of

services and not just one test or procedure; they will

typically consume a “cluster” of services involving 24-

hour nursing, the services of specialized laboratory and

+a

* Since hospitals in the main offer services, the relevant line of

commerce in this case could be deemed the “service market.” How-

ever we will adhere to the term of art “product market” throughout

this discussion.

5 More precisely, Complaint Counsel’s expert witness, Dr. David

S. Salkever, professor of health economics at Johns Hopkins Uni-

versity, testified that the market should be defined as “the provision

of acute inpatient hospital services and the provision of hospital

services to critically ill emergency patients, typically who I suspect

would be admitted as inpatients if indeed they survived at the

critical episode.” Salkever 2280.

EE

53a

X-ray equipment, the services of equipment needed to

monitor vital functions or intervene in crises, and so

forth. An acutely ill patient must be in a setting in

which all of these various services can be provided to-

gether. Salkever 2282-83. According to this reasoning,

outpatient services are not an integral part of this

“cluster of services” offered by acute care hospitals, and

therefore must be excluded.

Respondent, on the other hand, urged that the market

be defined to include outpatient care as well as inpatient

care. Respondent’s expert witness, Dr. Jeffrey E. Harris,

testified that outpatient care is growing rapidly for hos-

pitals, as well as for free-standing facilities such as emer-

gency care and one-day surgery centers, which compete

with hospitals for outpatients. Harris 3943-44. More-

over, because of substantial changes in medical tech-

nology, there are a growing number of procedures that

can be provided on an outpatient basis that previously

could have been done on only an inpatient basis. Harris

3944.

Judge Parker agreed that the market should include

outpatient services provided by hospitals but excluded

outpatient services provided by non-hospital providers,

holding that only hospitals can provide the “unique com-

bination” of services which the acute care patient needs.

I.D.F. 134. He defined the relevant product market to be

the cluster of services offered by acute care hospitals, in-

cluding outpatient as well as inpatient care, “since acute

care hospitals compete with each other in offering both

kinds of care and since . . . acute care outpatient facili-

ties feed patients to the inpatient facilities.” Id.

Neither HCA nor Complaint Counsel appeal Judge

Parker’s product market definition. See Commission Rule

of Practice 3.52(b). Accordingly, for purposes of this

54a

proceeding only we accept Judge Parker’s finding on this

issue.®

However, we do note that Judge Parker’s definition

does not necessarily provide a very happy medium be-

tween the two competing positions; the evidence in this

case tended to show both that free-standing outpatient

facilities compete with hospitals for many outpatients

and that hospitals offer and inpatients consume a cluster

of services that bears little relation to outpatient care.

See, e.g., Coddington 463-69; Harris 3943-45; Parkhurst

1396; Kennedy 1760-63; Salkever 2279-87. If so, it may

be that defining the cluster of hospital inpatient services

as a separate market better reflects competitive reality

in this case. In American Medical International, Inc.,

No. 9158, slip op. at 21 (FTC July 2, 1984) (“AMI’),

we defined the relevant product market as the “cluster

of general acute care hospital services” to the exclusion

of outpatient substitutes for individual services that com-

prise the cluster, since the “benefit that accrues to patient

and physician” is derived from the complementarity of

those services. It may well be that in this case the proper

product market excludes all outpatient care; perhaps

outpatient care should be a separate relevant market or

markets. In any case, it is clear from the evidence that

the core and vast majority of an acute care hospital’s

business is acute inpatient care. See, e.g., Salkever

2286-87. Certainly, it is clear that anticompetitive be-

6 In this case, the product market issue would unlikely be outcome-

determinative. First, even if the outpatient services of non-hospital

providers were included in the market, HCA concedes that their

inclusion would not greatly affect hospital market shares. See

RAB at 16; I.D.F. 135. Thus, it seems safe to conclude that adding

such services to the relevant product market would add little to

the analysis in this case. Second, both measures of inpatient market

power and measures that include hospital outpatient services pro-

vide the same basis for liability in this case. See discussion infra

section V.C. Thus, excluding outpatient care from the market

would add little to the analysis.

bs ont lame

55a

havior by hospital firms could significantly lessen competi-

tion for hospital inpatients that could not be defeated by

competition from non-hospital outpatient providers. Our

analysis will hence proceed with primary reference to the

cluster of services provided to inpatients.

IV. THE GEOGRAPHIC MARKET

We now turn our attention to the relevant geographic

market or “section of the country” in which competition

could be substantially lessened by these acquisitions. See

AMI, slip op. at 21-22. Because we are concerned only

with an area in which competition could be harmed, the

relevant geographic market must be broad enough that

buyers would be unable to switch to alternative sellers in

sufficient numbers to defeat an exercise of market power

by firms in the area. Again, sellers may exercise market

power by raising prices, reducing output or reducing

quality. See Grand Union Co., 102 F.T.C. 812, 1040, 1047

(1983). If an exercise of market power could be defeated

by the entry of products produced in another area, both

areas should be considered part of the same geographic

market for Section 7 purposes, since competition could

not be harmed in the smaller area. That is, the geo-

graphic market should determine not only the firms that

constrain competitors’ actions by currently selling to the

same customers, but also those that would be a constraint

because of their ability to sell to those customers should

price or quality in the area change. See AMI, slip op.

at 22.

Looking at a “static” snapshot of a market is thus

insufficient in itself, since that picture might not reflect

a likelihood of future anticompetitive market behavior

suspect under Section 7. Rather, evidence of current

market behavior must be viewed in a “dynamic” frame-

work that considers the possible competitive responses

of firms outside the current market area to anticom-

56a

petitive behavior of firms within. Of course, a static

picture of the market is a logical starting point for a

dynamic analysis. First, only when current market struc-

ture is apparent can the potential for competition from

other areas in the event of an exercise of market power

in the current market be assessed. Second, the type of

evidence utilized in a dynamic analysis may often be the

same evidence used in a static analysis. For example,

evidence of shipment patterns (or of concern to us here,

“patient flow” patterns) may reveal not only the firms

that currently sell substantial amounts to customers in

an area but also those that could substantially increase

shipments to the area in response to anticompetitive be-

havior of firms within the area. In any case, the evidence

must be looked at in the dynamic light of potential harm

to competition.

HCA would have us adopt Hamilton County, Tennes-

see, together with Walker, Dade and Catoosa counties

in Georgia, the “Chattanooga urban area,” as the relevant

geographic market. HCA predicates its conclusion lergely

on an analysis of evidence concerning physician admitting

patterns.

Dr. Harris, HCA’s expert, testified that the relevant

geographic market is determined to a great extent by

physician admitting practice, because physician prefer-

ence, rather than patient choice, decides what hosptials

will be utilized. He contended that “for the great major-

ity of people we’re talking about in a health care market

like Chattanooga, you pick your doctor and then your

doctor is the one who’s going to decide where you’re

admitted.” Harris 3965. HCA introduced a study that

lists, for each hospital in the Chattanooga area, the

physicians by specialty who admitted to the hospital, and

the number of inpatient days for which each physician

was responsible in all of the hospitals in the area’ RX

1081; Harris 3961. With few exceptions, every physician

57a

who admitted to Chattanooga urban area hospitals admit-

ted exclusively to other hospitals in the Chattanooga urban

area. Harris 3961-62; I.D.F. 148, 150-57. Conversely,

physicians admitting and treating patients at hospitals

outside the Chattanooga urban area rarely admitted and

treated patients at hospitals in the Chattanooga urban

area. Harris 3963-64; I.D.F. 150, 158-62.

Indeed, testimony made clear that physicians play a

primary role in determining -where their patients are

admitted. H.g., Lamb 366-67; Coddington 488; Kantanie

1147; Parkhurst 1378-80. Moreover, Chattanooga physi-

cians try to limit their practices to a local area because

of the time and inconvenience involved in traveling be-

tween hospitals. Coddington 499; Furrey 1550; Ken-

nedy 1755; see AMI, slip op. at 24. The few Chatta-

nooga physicians who do have consulting or courtesy priv-

ileges at hospitals outside the Chattanooga urban area

do not actively practice at the outlying hospitals. RX

1114; I.D.F. 149; see CX 892.

Additionally, the weight of the evidence concerning pa-

tient origin suggests that patients admitted to Chatta-

nooga urban area hospitals who live outside the Chatta-

nooga urban area are, with few exceptions, in need of

specilized care and treatment unavailable in their own

communities. Lamb 148; Dunlap 3344; Harris 3968;

I.D.F. 168, 165-67, 169; see AMI, slip op. at 24. Hos-

pitals in outlying communities do not always provide

quite the same product that the urban area hospitals pro-

vide such patients, and therefore patient inflows are not

necessarily indicative of the willingness of patients to

leave their home areas for services that are available in

those areas. In fact, most admissions to urban area

hospitals from outlying counties appear to be through

physician referrals. Dunlap 3344; I.D.F. 166-7, 169.

Judge Parker agreed with HCA that the Chattanooga

58a

urban area is the relevant geographic market in this

case."

7 Judge Parker also found that the Chattanooga urban area was

the smallest geographic area at issue to satisfy the “Elzinga-

Hogarty test” (“E-H test’) as applied to patient flow data. This

geographic market test, named for the economists who developed it,

measures the amount of commerce that leaves the market in ques-

tion and the amount that enters that same area. See Elzinga and

Hogarty, The Problem of Geographic Market Delineation in Anti-

trust Suits, 18 Antitrust Bull. 45 (1973); Elzinga and Hogarty,

The Problem of Geographic Market Delineation Revisited: The Case

of Coal, 23 Antitrust Bull. 1 (1978).

More technically, the E-H test is based on LIFO (“little in from

outside”) and LOFI (“little out from inside”) statistics. A LIFO

statistic as applied to hospital geographic markets signifies the

percentage of hospital patients from a particular area who remain

in the area for hospital services rather than use hospitals outside

the area. When the great majority of patients residing in a speci-

fied geographic area use hospitals within that area, then only a

small proportion of hospital services are “imported” to local resi-

dents from hospitals without the area (even though “importation”

of services from outside hospitals would actually require locai

residents to drive to those outside hospitals). A LOFI statistic

as applied to patient flow data signifies the percentage of patients

of an area’s hospitals who reside in the area rather than outside

the area. If very few patients of the hospitals in question are

residents of other areas, the amount of commerce “exported” is

very low (though “exports” of local hospital services would require

outside residents to drive into the local area).

Evidence that few patients leave an area [LIFO] and few

patients enter an area to obtain hospital services [LOFI], strongly

supports the conclusion that the area constitutes a relevant geo-

graphic market, according to the analysis. See Salkever 2295-6,

2299-2305, 2504-06; I.D.F. 141. If LOFI and LIFO percentages

are low, then the area in question is obviously too small and must

be expanded to include other hospitals to which patients can and

do turn. See id. Judge Parker found that utilizing the Chattanooga

urban area increases the LOFI value by 10 percentage points over

the Hamilton County area, whereas the Chattanooga MSA and

other broader potential markets increase the LOFI value only

marginally over the Chattanooga urban area, “suggesting that one

need not seek beyond the confines of Dr. Harris’ market to find the

relevant geographic market.” I.D.F. 187; see RX 1087. Presum-

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59a

On appeal, Complaint Counsel agree that the Chat-

tanooga urban area is an appropriate geographic area in

which to assess the competitive effects of these acquisi-

tions. However, they claim that a much more appropriate

geographic market is the federally designated Metro-

politan Statistical Area that includes Chattanooga. In

effect, Complaint Counsel would have us add the Tennes-

see counties of Marion and Sequatchie to the market

proffered by HCA and adopted by Judge Parker. By

adding this area, three additional hospitals—South Pitts-

burg Muncipial Hospital, Sequatchie General Hospital,

and Whitwell Community Hospital—would be included

in the relevant market. Both South Pittsburg and

Sequatchie were acquired by HCA from HAI, and Com-

plaint Counsel seek divestiture by HCA of its long-term

lease arrangement with South Pittsburg.®

The Chattanooga MSA is the better geographic mar-

ket, Complaint Counsel argue, because it takes into ac-

count not only current competitive conditions but also

likely dynamic responses to market changes by potential

competitors. The analysis offered by HCA and adopted

by Judge Parker is purely static, they argue. Complaint

Counsel contend that the hospitals in Marion and Sequat-

chie counties could react to the exercise of market power

by hospitals in the Chattanooga urban area by drawing

ably, the smallest area to satisfy the E-H test is appropriate since

areas larger than that do not necessarily reflect the ability of hos-

pitals in any sub-area to exercise market power. For example, the

United States would likely satisfy the Elzinga-Hogarty test in this

case, but it is obvious that a national market would be absurd;

doctors would not refer patients to California for general acute

care if anticompetitive behavior occurred in Chattanooga. See

Salkever 2505. Conversely, significant market power could not be

exercised in an area too small to satisfy the E-H test, since the

current significant influx of patients into the area could obviously

cease and the current significant outfiux could increase. See Salk-

ever 2518-19.

8 HCA no longer owns Sequatchie. See supra section II.B.

60a .

away patients should prices rise or quality drop. They

assert that the evidence relied upon by HCA and by

Judge Parker does not “take into account changes that

could occur as a result of the exercise of market power

by firms in the area, and it was therefore an error for

the judge not to find as a market an area that does take

such changes into account.” CAB at 22-23.

One must wonder, however, why only hospitals in the

two MSA counties to the west and northwest of Chat-

tanooga would deter an exercise of market power by

Chattanooga firms when there are high quality hospitals

of equal distance to the northeast and southeast of the

city. Bradley County Memorial Hospital and Cleveland

Community Hospital in Cleveland, Tennessee, as well as

Hamilton Medical Center in Dalton, Georgia, are no fur-

ther from Chattanooga than South Pittsburg, Sequatchie

or Whitwell hospitals. See supra section II.B. and map.

Moreover, Bradley, Cleveland and Hamilton have some

648 beds between them while the three outlying MSA

hospitals house merely 181i beds. Complaint Counsel

would essentially have us expand the market from the

Chattanooga urban area by drawing a half-circle around

Chattanooga, ignoring the potential competitive pressures

of the three hospitals to the northeast and southeast of

the city.

Complaint Counsel nevertheless contend that the MSA

“integrated area” within which patients have the

ability to choose between hospitals. They make several

arguments in support of this contention. First, because

an MSA reflects general trade and commuting patterns,

the potential competition among hospitals located in the

Chattanooga MSA for MSA residents can be inferred.

Second, Complaint Counsel point to federal government

use of MSA’s to distinguish between urban and rural

areas, a distinction which is one factor in determining

reimbursement levels under the new Medicare prospective

payment system. They claim that “MSA’s have been de-

6la

termined by the federal government, as a purchaser of

health care services, to define reasonable boundaries for

pricing of hospital services.” CAB at 24. Moreover, the

full implementation of the Medicare prospective payment

system will allegedly stimulate “further integration” of

MSAs into distinct hospital markets because hospitals out-

side an MSA will be disadvantaged in their capacity to

compete with nearby MSA hospitals; the smaller “rural”

reimbursement rate they receive will leave them less able

to expend funds on quality competition and service im-

provements. At the same time, at least with respect to

the substantial number of patients enrolled in the Medi-

care program, the MSA will become to an even greater

extent an area within which pricing patterns will be

linked and price movements will be similar, according to

Complaint Counsel. CAB at 25.

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We reject Complaint Counsel’s analysis. Although their

criticism of HCA’s argument as a purely static analysis

is valid, their own “dynamic” analysis is fiawed. Al-

though some of the market forces that are reflected in

designation of an MSA may be relevant to the deter-

mination of the relevant geographic market in a Section

7 case, see Grand Union Co., 102 F.T.C. 812, 1049

(1983), any inferences to be drawn from federal designa-

tion of an MSA in this case are insufficient to establish

the Chattanooga MSA as the relevant geographic market.

Complaint Counsel’s argument does not convince us

that the hospitals to the northeast and southeast of Chat-

tanooga would be less able to exert a restraining influ-

ence on urban area hospitals than the hospitals to the

west of the city. First, we can find no reason why Chat-

tanooga urban area doctors would be more willing to

obtain admitting privileges at outlying MSA hospitals

than at the more modern and better-equipped Bradley or

Hamilton hospitals. Nor do we find any reason why it

would be more difficult for Chattanooga doctors to obtain

admitting privileges at the hospitals to the east of the

ii iaicaeienieeeeneeaumdll

62a

city. Likewise, to the extent that patients influence

where they are admitted, we find no explanation for why

they would prefer the smaller, more rural hospitals to the

west of Chattanooga. The considerations that go into

designating an MSA, and the ways in which the federal

government puts such designations into use, do not an-

swer these crucial questions. The fact is that use of the

Chattanooga MSA as the relevant geographic market

would exclude a large number of hospital beds that are

equally as accessible to physicians and patients as the

beds it would include. Certainly, the greater number of

beds to the northeast and southeast would provide a

greater constraint on the exercise of market power in

the Chattanooga urban area, if at all. We therefore find

Complaint Counsel’s argument to be economically arti-

ficial.®

We do not here contend that the proper market in this

case includes all hospitals within a 45-minute radius of

downtown Chattanooga; indeed, that question is not be-

fore us. Rather, we conclude that if the market were to

be larger than the Chattanooga urban area, under a

dynamic analysis it would have to include all equally

likely sources of potential competition.

Additionally, we note the weakness of the evidence

Complaint Counsel does offer in view of the presence of

® Patient inflow into the Chattanooga urban area from outlying

MSA counties cannot save Complaint Counsel’s proposed market.

First, as discussed above, the weight of the evidence suggests that

the great part of patient flow into Chattanooga hospitals from out-

lying areas is for specialized treatment not available in outlying

hospitals. Thus, such inflow does not reflect well the ability of

outlying hospitals to compete away those patients should Chatta-

nooga hospitals behave anticompetitively. Second, the evidence

shows in any case substantial inflow from Bradley County which

lies to the east of Chattanooga. See Salkever 2301-02. Indeed,

Complaint Counsel’s own expert, Dr. Salkever, rejected the Chatta-

nooga MSA as the relevant geographic market in this case partly

on that basis. Jd. The Chattanooga MSA thus cannot be distin-

guished on the basis of inflow data.

H

63a

the hospitals to the east of Chattanooga. Geopolitical

designations such as “MSA” may reflect a host of consid-

erations that do not concern the issue of competition be-

tween hospitals. Certainly, the Chattanooga MSA was

not designated in a manner that would explain why hos-

pitals to the east of Chattanooga are less likely to deter

an exercise of market power in Chattanooga than are

MSA hospitals of equal accessibility to the west of Chat-

tanooga. Nor do we find any evidence that MSA designa-

tions were ever intended to reflect an economic market

for purposes of Section 7. We do not here conclude that

an MSA will never accurately reflect the relevant geo-

graphic market in a hospital merger case. But where, as

here, the MSA designation excludes important sources of

potential competition, it must be rejected. Likewise, the

argument respecting the new Medicare reimbursement

system, though intriguing, is weak. Complaint Counsel

ask us to rely upon pure speculation as to the effect of

the new Medicare prospective payment system on com-

petition between hospitals within an MSA and hospitals

without for Medicare or other patients. This we decline

to do. We find no basis in the record for concluding that

the new Medicare payments system somehow will create

a separate geographic market for section 7 purposes.

Since Complaint Counsel concede that the Chattanooga

urban area is an appropriate market within which to

assess the competitive effects of these acquisitions, we

conclude that the Chattanooga urban area is the relevant

“section of the country” for purposes of this case. How-

ever, we note that Complaint Counsel’s criticism of the

evidence offered by HCA is a valid one; HCA offered a

static picture of the market without offering evidence or

argument considering the likelihood or unlikelihood that

physicians and their patients in Chattanooga weuld travel

to outlying hospitals in the event of an exercise of market

power by Chattanooga urban area hospitals.

64a

A proper dynamic analysis might have considered some

of the evidence in this case as follows: ‘The closest hos-

pitals to the Chattanooga urban area are about 45 min-

utes driving time away. See supra section II.B. Chat-

anooga doctors try as much as possible to avoid travel,

because it is time consuming and inconvenient. See supra

this section. It is unlikely that doctors would be willing

to make rounds that far away from home on a daily basis

in response to a small but significant reduction in the

quality of hospital services in Chattanooga. They there-

fore would be very unlikely to admit patients to outlying

hospitals. It is also unlikely that patients themselves

would seek hospitalization that far away from home even

if they recognized a small but significant change in the

quality or price of services in Chattanooga. The evidence

suggests that family and friends do not like to commute

far to visit patients. See, e.g., Parkhurst 1393. Proximity

to family and friends is therefore very important to the

hospital inpatient. Thus it is highly unlikely that many

patients and their employers would agree to insurance

coverage that required extensive travel for health care,

even if insurance carriers had to increase premiums be-

cause of a small but significant exercise of market power

by Chattanooga hospitals.”

It is clear that the analysis offered by HCA and

adopted by Judge Parker is incomplete. A review of

patient flow data, physician admitting patterns, and other

facts integral to a static analysis may all be important

to a proper dynamic analysis, since a picture of current

competition must be drawn before competitive responses

to changes in that competitive pattern can properly be

considered. But without looking at those facts in a

framework considering potential competitive responses to

the current market picture, a relevant geographic area

in which competition may be substantially harmed will

be extremely difficult to define. In any event, the Chat-

tanooga urban area is the area within which we will

assess the competitive effects of these acquisitions.

DCRR ace ete RE RAR IE

DARN RD OIE” BE TRI RE PARR RE CEA

Sabai sists sna cnet iys EERE EERSTE BE

65a

V. THE EFFECT ON COMPETITION

A. The Effect of HCA-Managed Hospitals

One of the major dimensions of HCA’s purchase of

HAI was the acquisition of some 75 to 80 hospital man-

agement contracts. Main 3756, 3773 (President of HCA

Management Company) (“It was our opinion that the

total price we were paying to INA to acquire the assets

of Hospital Affiliates from them included a certain.

amount of money designated as the value of the manage-

ment contracts and the future revenues to be derived

from them that HAI had at that time .. .”). Two of

_ these were management contracts HAI had with two hos-

pitals in the Chattanooga urban area—Downtown Gen-

eral Hospital and Red Bank Community Hospital. The

terms of both management contracts were four years.

CX 1851; CX 189G. The question arises as to what

degree HCA’s assumption of management of these two

hospitals enhances its market position, and how best to

characterize HCA’s management role in assessing the

likely effect on competition of these acquisitions.”

10 HCA’s management relationship with Red Bank was termi-

nated by agreement in July 1982, almost one year after HCA pur-

chased the management contract from HAI and prior to the con-

tract’s expiration date. See CX 27M; CX 87; CX 185A, I. We

are thus faced with the difficult question of whether HCA’s volun-

tary post-acquisition termination of the management agreement

(see CX 87) should be considered in assessing the likely competi-

tive effects of these acquisitions. In AMI, we examined the

controlling case law and determined that consideration of post-

acquisition evidence is appropriate when such evidence is relevant

to the effects of a merger and is beyond the control of the merging

firms. AMI, slip. op. at 38-44; see United States v. General

Dynamics Corp., 415 U.S. 486, 504-06 (1974); FTC v. Procter &

Gamble Co., 386 U.S. 568, 576 (1967); FTC v. Consolidated Foods

Corp., 380 U.S. 592, 598 (1965); United States v. Continental Can

Co., 378 U.S. 441, 463 (1964).

The genesis of the termination was a dispute between the Red

Bank hospital board and HCA. The Red Bank board requested

termination of the management contract because board members

66a

HCA argues, and Judge Parker agreed, that Downtown

General and Red Bank hospitals should be treated as

entities completely separate from HCA, incapable of being

believed that HCA could not properly manage Red Bank while at

the same time-owning neighboring North Park Hospital; the new

North Park, which HCA acquired from HCC while it was still

“Medical Park” in downtown Chattanooga, was expected to be

Red Bank’s prime competitor in its new location. See, e.g., Stulce

1198-99; Pust 3661; CX 27M; I.D.F. 213. Nevertheless, HCA

voluntarily relinquished its rights under the management contract

when it could have asserted those rights. Indeed, HCA initially

opposed the termination and did not agree to the termination until

March, 1982, after HCA was apprised in December, 1981 (see

RAnB at 14) that FTC staff was continuing its investigation of

these acquisitions. Stulce 1204; CX 87; Pust 3634; I.D.F. 213;

see Pust 3661-63; CX 214B; RX 954. Termination occurred in

July, 1982 shortly before the complaint in this suit issued.

HCA rarely agrees to early termination of a management con-

tract. Main 3757-59. In fact, HCA sued several hospitals that had

management contracts with HAI and attempted to sever their rela-

tionship with HCA after HCA purchased those contracts. Main

3757-58; see CXs 216-219. HCA obviously had a good measure of

control over the future of its relationship with Red Bank; cer-

tainly, the Red Bank termination was not a matter completely

beyond HCA’s influence. See AMI, slip op. at 38-44.

Thus, no matter what the nature of the dispute between HCA

and Red Bank, we will not consider a voluntary termination of that

relationship in assessing the likely competitive effects of these

acquisitions. Otherwise, an acquiring firm could make anticompeti-

tive acquisitions and then, when confronted with liability, dispose

of assets in a manner that best retains its market position while

reducing statistical measures of concentration to more favorable

levels. See Dean Foods Co., 70 F.T.C. 1146, 1269 (1966) (“We do

not believe that post-acquisition market shares can be adjusted for

actions which the acquiring company itself undertook. To allow

such self-serving adjustments to affect the legality of a merger

would be to invite companies to merge and then to exercise the

resultant power to restructure the market according to their whims

and desires provided some optimum market share was reached or

other favorable restructuring achieved which might by itself be

regarded as inoffensive to the competitive dynamics of the market

if it had been achieved as a result of unmanipulated market

ips liens eae ui “sedi

ees

67a

significantly influenced by HCA in its role as administra-

tor. Complaint Counsel argue that treating hospitals that

HCA manages as entities completely independent of HCA

is contrary to the facts in this case and to common sense.

They would have us include the market shares of HCA-

managed hospitals within HCA’s market share or at the

very least consider HCA management as a significant

factor increasing the likelihood of anticompetitive be-

havior in this market.

We conclude that treating the two managed hospitals

as entities completely independent of HCA is contrary to

the overwhelming weight of the evidence in this case. As

manager, HCA controls the competitive variables needed

for successful coordination with the activities of HCA-

owned hospitals in Chattanooga. Moreover, as manager

it knows the competitive posture of managed hospitals so

well that the likelihood of any anticompetitive behavior

HCA wished to engage in is greatly increased.

We note first the role of market shares in assessing the

likelihood of anticompetitive effects under Section 7.

Market share figures are merely a convenient way to

depict the structure of a market; they are all artificial to

the extent that they deviate from an accurate representa-

tion of the market power of firms they are assigned to.

forces”) ; American General Insurance Co., 97 F.T.C. 339, 340-41

(1981).

We do not believe that respondents should be encouraged to make

illegal acquisitions and then cure them with self-appointed reme-

dies. Rather, we think it is up to the Commission and courts to

determine the proper restoration of pre-acquisition levels of com-

petitiveness once an illegal acquisition is made. Since the original

management contract with Red Bank could have been in effect at

the close of evidence in this case had HCA successfully opposed the

termination, we will treat the Red Bank contract no differently

from that HCA retained with Downtown General for purposes of

liability. See CX 185. In any case, the exclusion of Red Bank from

HCA’s market share would not affect the outcome in this case. See

infra n.18.

68a

See Echlin Manufacturing Co., No. 9157, slip. op. at 8-9

(FTC June 28, 1985) ; Grand Union Co., 102 F.T.C. 812,

1038-41 (1983). Including the market share assigned to

a managed hospital within the market share of its man-

ager is artificial only to the extent that it is not an ac-

curate representation of the manager’s market position.

We hold that including the market shares of Downtown

and Red Bank within HCA’s share presents a much more

accurate picture of HCA’s market power than does ignor-

ing HCA’s management position or considering its rele-

vance in some other manner.

Both the chief executive officer (the hospital adminis-

trator) and the chief financial officer (the controller) are

provided by HCA to Dewntown General and Red Bank.

CX 185G; CX 189E; Chambliss 1434. Although the

boards of the managed hospitals retain ultimate policy-

making authority, the management contracts provide that

HCA as manager is responsible for the day-to-day oper-

ation of the facilities, and is charged with making rec-

ommendations to the boards regarding virtually all

aspects of the institutional operation. CX 185; CX 189;

see Main 3746, 3749-50. This responsibility includes pre-

paring the budget and proposed hospital rates for the

boards. CX 185D-E; CX 189C-D; Chambliss 1436-37;

Stulee 1190-91. Thus, HCA is intimately involved in the

rate setting process. HCA is also responsible for other

important aspects of the way its managed hospitals com-

pete, including the quality control of the hospitals, hiring

and discharging personnel, advising the hospital boards

concerning charges and services offered by the hospitals,

and compliance with government regulations. CX 185;

CX189; see Chambliss 1437.

Indeed, the very reason that a management firm is

hired, as reflected in the management contracts, is to

direct the competitive operations of the managed hospital.

The evidence shows clearly that management recom-

mendations, including proposed rate increases, are almost

69a

invariably followed by the boarcs of direciors of Down-

town General and Red Bank. Chambliss 1435-40; Stulce

1191-92; Smith 1954; Kantanie 1057, 1059, 1080; see

generally CX 310; CX 311; CX 390; CX 391; CXs 428-

80. Long-time board members of both hospitals acknowl-

edge that they and their colleagues do not have the exper-

tise necessary to administer hospitals, and for that reason

rely heavily on management. Stulce 1178, 1190; Cham-

bliss 1425, 1432, 1435; see also CX 185A.

Thus, the question is not whether HCA “dominates”

the boards of the respective institutions, but whether the

management arrangements enhance the ability to coordi-

nate behavior between HCA-owned and managed hospitals

so that any collusion in the market in which HCA desired

to participate is more likely. We think it clear that the

management relationships greatly enhance HCA’s ability

to coordinate behavior, since HCA personnel run the hos-

pitals’ competitive mechanisms and the hospital boards

have hired managers for the very reason that the boards

have neither the time nor the expertise to manage the

variables of hospital competition themselves.

We can see no reason why HCA recommendations to

the Downtown General and Red Bank boards to raise

prices a certain amount or cut back on the employment

of certain personnel, for example, would be either de-

tected or discouraged by board members given their sub-

stantial reliance on HCA. Nor can we see why coordina-

tion with owned hospitals would be difficult for HCA to

establish in view of its influence over competitive vari-

ables, access to information, and substantial control of the

flow of information to the boards. Indeed, the evidence

in this case indicates more than a symbiotic relationship

between the two types of HCA hospitals. HCA’s sister

relationship program for coordination between HCA hos-

pitals in the same local area includes both owned and

managed hospitals. CX 206C-D; CX 214A; Pust 3664;

Bennett 3724-25. In Chattanooga, HCA held meetings

70a

for both owned and managed hospital administrators “to

initiate them into the HCA philosophy.” Pust 3649-50;

see also CX 400A. Moreover, though the evidence is not

clear on the specifics involved, it is clear that HCA was

in-the preliminary stages of an area-wide plan to coordi- ~

nate the activities of its Chattanooga hospitals—both

owned and managed—but abandoned the plan when this

litigation began. CX 625; Colton 3796-97; Stern 602-03,

611-12.

In the case of Downtown General, HCA owns assets

important to the continuing existence of the institution.

HCA owns not only the land on which the hospital is

located, but also the physician office building situated

adjacent to the facility. Chambliss 1419, 1463-64; Ben-

nett 3699-701. Physicians with offices in the adjacent

building account for approximately 95% of the hospital’s

admissions.: CX 334J. Moreover, the hospital board

acknowledges that the hospital would not survive without

the medical office building. Chambliss 1423-24. Interest-

ingly, Judge Parker recognized that hospital control over

adjacent office buildings is important to attract admitting

physicians when he ordered that HCA divest such build-

ings in connection with the ordered divestiture of its hos-

pitals. I.D. at 91. As long as HCA has the power to con-

trol the medical office building or divert its use, it ap-

pears unlikely that the Downtown General board will dis-

rupt the current management relationship under any

circumstances."

Certainly, since HCA has access to all competitively

important data, even if it had no input into deciding the

competitive strategy of a managed hospital, it could use

information about the hospital in connection with plan-

ning the competitive strategy of its neighboring owned

hospitals. Having access to essentially all information

11 We also note that HCA maintains a renewal rate for its man-

agement contracts of approximately 95%. Main 3751; Pust 3660.

‘

— ee

Tla

about the managed hospital’s ability to compete or to

react to market forces or to collusive conduct by other

firms, HCA is in a much better position to confidently

make competitive or anticompetitive moves itself; such

information would allow HCA and other conspirators to

better assess the likelihood of successful collusive be-

havior and the manner in which it should be carried out.

It is noteworthy that the administrators of managed hos-

pitals are required by HCA to prepare annual manage-

ment plans for their hospitals. CX 427V; Pust 3650,

3653-54; see CX 28; CX 191.

Finally, whatever role managers in this market may

play, it has not discouraged them from exchanging sen-

sitive information about prices and wages with other

administrators nor from attempting to organize concerted

opposition to certificate of need proposals. F.g., Smith

1961, 1981-82; Bennett 3719. Indeed, the Downtown

General and Red Bank hospital boards might well encour-

age profitable anticompetitive behavior, since it would be

advantageous to the managed hospitals as well as to

HCA-owned hospitals. As discussed in greater detail

below, the Red Bank board members themselves in fact

signed a market allocation agreement with a competing

firm. See infra section V.E.

In short, we find that considering managed hospitals

to be entities independent of HCA in examining an in-

creased likelihood of competitive behavior in this market

strains credulity. Doing so would seriously understate

the likelihood of competitve harm in the Chattanooga

urban area from HCA’s acquisition of HAI. The evidence

compels us to consider the market shares of Downtown

- General and Red Bank as part of HCA’s market share in

considering the effect on competition in this case.“ Even

12 We note that HCA believes that management of hospitals for

other owners gives it more “control over the environment” in which

hospitals operate and “expands [its] market share.” CX 208C;

CX 414A.

72a

were the evidence not as compelling, we would consider

HCA’s management of the two hospitals to greatly en-

hance the likelihood of collusion in this market.”

HCA’s arguments in response are without merit. HCA

argues that because a f.xed fee is paid to it for manage-

ment services, regardless of the profitability of the man-

aged hospitals, any incentive to collude is mitigated. We

disagree. First, higher prices or lower quality services at

the managed hospitals would protect owned hospitals and

others involved in an anticompetitive scheme from being

undercut or outdone by the managed hospitals. Second,

HCA in any case could set its prices and other competi-

tive variables at owned hospitals more effectively with

full appreciation of its managed hospitals’ pricing and

other competition policies.

18 Although, as Complaint Counsel concede, no case has yet spe-

cifically addressed on the merits the status of hospital management

contracts in a hospital merger case, inclusion of the two contracts

in HCA’s market share is certainly consistent with what case law

does exist on hospital mergers and the case law interpreting Sec-

tion 7 of the Clayton Act generally. See American Medicorp, Inc.

v. Humana, Inc., 445 F. Supp. 589, 605 (E.D. Pa. 1977) (in pre-

liminary injunction proceeding, court found that plaintiff had dem-

onstrated a likelihood of success on the merits regarding its allega-

tion that a hospital merger weuld likely substantially lessen com-

petition or tend to create a monopoly because, as a result of the

acquisition, defendant would “own or manage” the only two hos-

~ pitals in the area); United States v. Archer-Daniels-Midland Co.,

584 F. Supp. 1134, 1139 (S.D. Iowa 1984) (court held that the

lease of operations of one firm by another was an “acquisition”

within the purview of Section 7 since to hold othe»wise would

permit the adroit use of leases to frustrate the procompetitive pur-

poses of the Clayton Act). Indeed, Section 7 “is primarily con-

cerned with the end result of a transfer of a sufficient part of

the bundle of legal rights and privileges from the transferring

person to the acquiring person to give the transfer economic

significance and the proscribed adverse ‘effect.’” United States v.

Columbia Pictures Corp., 189 F. Supp. 153, 182 (S.D.N.Y. 1960).

As we have seen, with its acquisition of the Downtown General

and Red Bank management contracts, HCA obtained sufficient in-

fluence over the managed hospitals to coordinate behavior and

lessen competition.

73a

Furthermore, we do not believe that the boards demon-

strated their lack of reliance on their managers by seek-

ing, before these acquisitions, renegotiation of the origi-

nal HAI management contracts when Medicare refused

to allow the full management fee under those contracts

as a proper cost."* We would expect hospital boards that

intend to and do rely heavily on a management company

to determine how their hospitals will be run to show a

keen interest in obtaining the best possible management

at the lowest cost.”®

14 HAI previously owned the two hospitals that became Downtown

and Red Bank. Stulce 1174; Chambliss 1425-26; Kantanie 1040.

When the hospitals were in need of replacement, HAI arranged

for the two hospitals to be owned by newly organized non-profit

corporations, the boards of which were selected by HAI, so that

new hospitals could be built with tax-free bonds. Kantanie 1047-49,

1051-52, 1075-76, 1079; Smith 2026; Chambliss 1425; Stulce 1178.

HAI arranged to manage the two hospitals under long-term, 25-

year contracts with management fees set at 8% of the hospitals’

gross revenues. Kantanie 1052, 1075-76, 1079; CX 185A, Z-1 - Z-2;

CX 624F, H; Stulce 1178; Chambliss 1425. These two management

contracts were unusually favorable to HAI, with very high man-

agement fees. Kantanie 1054. The contracts were later renego-

tiated with fixed fees resulting in much lower management fees

and shorter terms, after the Medicare intermediary refused to

reimburse the hospitals for much of the management fees because

HAI and the hospitals were found to be “related” parties. Chambliss

1442; Stulce 1193; Smith 1972.

15 Likewise, we attach no significance to the decisions made by

Medicare that HCA’s predecessor in interest, HAI, and the managed

hospitals were not “related persons” under the renegotiated con-

tracts. See I.D.F. 198-99. The determinations concern the integrity

of the reimbursement system—whether the managed hospitals could

claim they had made payments to HAI that were reimbursable.

See id. They do not reflect a lack of power to influence the hospitals’

competitive strategies. Indeed, HCA admits that the Blue Cross

determinations are “perhaps not directly controlling here.” RAnB

at 11.

We also reject any suggestion that under the renegotiated con-

tracts, the management company had less authority. The evidence

is conclusive that management under the old and new contracts did

74a

Though HCA maintains a separate corporate subsidiary

for managed hospitals, we do not think that the separa-

tion of management services from the operations of owned

hospitals within the HCA corporate structure precludes

successful coordination in this market. Certainly, it has

not precluded joint meetings in Chattanooga of HCA ad-

ministrators from both types of hospitals and the formu-

lation of an “areawide plan” to coordinate the activities

of both owned and managed hospitals in Chattanooga.

See supra this section. In any case, company-wide effi-

cient organizations should not be a bar to coordination

among local administrators where collusion is sufficiently

attractive to the administrators.

HCA does not contend as a legal matter that the acqui-

sition of these management contracts falls outside the

purview of Section 7. Nevertheless, because the potential

harm to competition from HCA managing its competitors

is so clear in this case, we hold that the acquisition of a

management contract that may substantially lessen com-

petition or tend to create a monopoly violates Section 5

of the Federal Trade Commission Act independently of a

violation of Section 7 of the Clayton Act. See General

Motors Corp., 103 F.T.C. 641, 700 (1984), and cases cited

therein; see generally Averitt, The Meaning of “Unfair

Methods of Competition” in Section 5 of the Federal

Trade Commission Act, 21 B.C.L. Rev. 227, 251, 271

(1980).

B. The Nature of Competition Among Chattanooga

Hospitals

Traditionally, hospitals have competed for patients ix

three general ways: first, by competing for physicians

not differ and that HCA played the same role as manager that HAI

did both before and after the original Downtown General and Red

Bank contracts were renegotiated in response to the Medicare

disallowance. Chambliss 1440-41, 1449, 1451; Smith 1975-77; Pust

3649 ; Bennett 3708; Stulee 1197-98.

75a

to admit their patients; second, by competing directly for

patients on the basis of amenities and comfort of sur-

roundings; and third, by competing to a limited degree on

the basis of price. Salkever 2332-38. The first two con-

stitute “non-price” or “quality” competition, and by far

have been in the past the most important of the three.

Id. .

Non-price competition for physicians includes the pro-

vision of up-to-date equipment, a qualified and reliable

nursing staff and other technically trained personnel, con-

venient office space to make it easier for the physician to

concentrate both his ambulatory and inpatient work

within the same location, a nice doctors’ lounge with a

good selection of journals—everything that will convince

physicians that their patients are receiving the best care

possible and make physicians’ lives more comfortable. /d.

at 2333. Competition directed at patients themselves has

traditionally been through the provision of amenities,

such as pleasant surroundings, attractive rooms, televi-

sions and telephones, high nurse-to-patient ratios, con-

venient parking—everything that will make patients more

comfortable. Id. at 2334.

Price competition, on the other hand, was much more

limited in the past than non-price competition. Hospital

prices meant little to patients because by the mid-1970s

they were almost completely insured. /d. at 2335-38.

Patients were paying only a minimal amount out of their

own pockets for hospital care. Moreover, health care

fringe benefit costs were not a large portion of total costs

for employers. Id. Employees desired the non-taxable

income of health care benefits and, consequently, sought

the best insurance plans possible in their benefits pack-

ages. Insurers weren’t concerned about price because

employers and employee groups, their primary customers,

weren’t concerned about insurance costs. Jd. The result

of this price insensitivity by consumers, their employers

and their third-party payors was that little incentive was

76a

given hospitals to bid patients away from other hospitais

by maintaining lower prices and informing third-party

payors and customers of those lower prices. Jd. at 2335.

Instead, a more “indirect” form of price competition

took place. Afraid of losing patients because of a public

perception that they were more expensive than their com-

petitors, hospitals felt some constraint on raising prices.

Id. However, because of the state of the third-party pay-

ment mechanism, hospitals did not compete vigorously on

the basis of price. Jd. at 2336.

Over the last decade, two major trends increasing com-

petition among hospitals beyond its traditional limits

have developed. Jd. at 2338-50. First, both non-price and

price competition are now being directed much more to-

ward patients themselves than in the past. Second, begin-

ning in the late 1970s the hospital industry has seen the

clear emergence of direct price competition. At the same

time, traditional non-price competition for patients on

the basis of amenities has intensified somewhat, through

the provision of such amenities as private rooms. Non-

price competition for physicians remains pervasive, since

physicians still largely determine the disposition and

treatment of their patients. Jd. at 2338-41, 2348.

Increasing competitive efforts aimed directly at pa-

tients include health education programs, CPR classes,

community activities, and direct mass media advertising,

such as on billboards and radio. Id. at 2339-40, 2348.

The clear emergence of direct price competition is even

more striking. Hospitals are now trying to attract the

business of employers and insurers by offering price dis-

counts. Id. at 2342-43. The reason for this increase in

price competition is a reaction in the health insurance

market to rising costs.

Total health care and hospital costs in the United

States have grown precipitously over the past several

years. Id. at 2342, 2348-50; CX 812C. HCA itself has

predicted that “total expenditures for health care services

77a

and products [are] likely to continue to rise at a rate

which will alarm purchasers of health services.” CX

209Z-8 (1981); see I.D.F. 242. The rapid rise in health

care costs finally began to impact seriously on employers,

employee groups and third-party payors. Salkever 2342-

43. Health benefits, which were once a small element in

employers’ total payroll, suddenly became a major ele-

ment in their cost structures, accounting for as much as

15 or 20% of total payroll cost. Jd. at 2342; Barth 844-5.

Moreover, where plans in which employees paid part of

the health insurance premium out of their own pockets

were operative, employees felt the same pressures because

premiums were rising rapidly. Salkever 2432. Even

where employees weren’t paying part of the premiums

themselves, employee organizations such as unions real-

ized that the other benefits in their overall benefits pack-

ages were dropping because of the increasing cost of

health care benefits. Jd. at 2343.

The result of rising insurance costs has been a change

in employer and employee concern that in turn has

changed insurer behavior. Insurers realized that there

was a market for cost containment and have reacted by

providing new insurance packages and by marketing cost

containment services. Id. at 2343-44.

New insurance packages include alternative forms of

health care delivery, such as Health Maintenance Organ-

izations (“HMOs”) and Preferred Provider Organiza-

tions (“PPOs”), and higher first dollar deductibles and

coinsurance in health care policies. Jd.; Barth 849-66.

HMOs and PPOs operate as group purchasers of health

care services. I.D.F. 249. An HMO is a plan in which a

subscriber prepays a fixed fee in return for comprehen-

sive health care. Harris 3850; I.D.F. 250. HMOs typically

maintain contractual arrangements with physicians and

hospitals to provide care to subscribers who as a result

generally have lower health care expenditures than other

patients. Harris 3850-51; I.D.F. 250. Studies have shown

78a

that HMOs influence hospital competition and have been

increasingly successful in obtaining discounts from hos-

pitals. See, e.g., RX 1126(1), (3), (6). According to HCA’s

President and Chief Executive Officer, “fa] successful

HMO will help make other providers in a given market

more responsive to consumers, as well as more cost con-

scious.” CX 123E. HMO’s thus act as additional buyers

for which hospitals must compete, on price, as well as

quality terms.

A PPO.¥is an arrangement whereby health care pro-

viders contract to provide services at a discount to vol-

ume purchasers of health care, such as employers or other

third-party payors. CX 6161; I.D.F. 251. There is gen-

erally a financial incentive for the group members or

patients to use the “preferred” providers, such as a

waiver of deductibles or coinsurance. CX 309; I.D.F.

251. Industry now commonly negotiates with health care

providers for discounts. Williamson 3269. A good exam-

ple of such an arrangement is the PPO recently created

by HCA in Florida, on a discounted fee-for-service basis.

CX 616. The HCA PPO is “designed to introduce a new

competitive element into the comprehensive health care

market.” CX 616J.

Higher first dollar deductibles and coinsurance in

health care policies mean that patients are now paying

more of the costs of hospitalization out of their own

pockets. See Barth 851, 855; CX 5384X; RX 1105(9).

Recent studies have shown that health care expenditures

vary depending upon how much of the cost of health care

is borne by the consumer and that price has some effect

on consumers’ decisions to seek health care in the first

place. CX 885 at v; CX 894D. Any time patients pay

more out of their own pockets, we would expect some in-

creased sensitivity to prices. “Stop-loss” provisions that

limit the total out-of-pocket expenditures of patients un-

der their insurance policies are common, however, and

we therefore would not expect patient out-of-pocket ex-

79a

penditures in themselves to tremendously increase price

competition among hospitals for inpatients. See, ¢.g.,

Lamsey 1802-04 ($1500 stop-loss). If a major illness or

injury occurs, the patient will have to pay the same

amount out-of-pocket wherever he goes, unless his third-

party payor is willing to waive the deductible and coin-

surance if he uses a lower-priced provider. Indeed, this

is precisely the manner in which attempts to control costs

through greater deductibles and coinsurance foster sig-

nificant price competition among hospitals. See, e.9.,

Stern 574 (price discounting by hospitals can take the

form of not charging for co-payments). For example,

HCA itself has created its own health insurance plan

with financial incentives, such as lower deductibles and

coinsurance, designed to encourage subscribers to use

HCA hospitals. CXs 809-13.

In addition, insurers are not simply selling insurance

but also marketing “cost containment” services to em-

ployers—the ability to assemble data on prices of services

provided by alternative providers as well as the ability

to monitor claims and to hold down costs by reducing

utilization, a process known as “utilization review’.

Salkever 2345; Barth 841-46. Finally, employers nation-

wide are trying to contain health care costs by forming

coalitions to develop data bases on alternative prices for

different providers, making comparison shopping easier.

Some employers are even directly counseling employees to

use cheaper providers that still provide good quality care.

Salkever 2346-47.

In sum, this increasing concern of employers and em-

ployees with the costs of insurance means that differences

in prices between hospitals matter to them and their

third-party payors, since insurance will cost less when

hospital care costs less. Salkever 2347; see supra section

I.B. The result is that hospitals are now far more likely

to present themselves to insurers, employers and employee

groups as less costly than their competitors as one method

80a

of attracting more business. Jd. Price competition, fos-

tered by these new insurance mechanisms, is therefore

growing in the hospital industry. See Salkever 2341-44,

2347; Kantanie 1094; CX 309B; CX 616.

HCA’s claim that any increase in price competition

among hospitals is insignificant is belied by its records.

HCA itself has predicted a “more price competitive en-

vironment” for hospitals because of increased pressure

from private industry to reduce hospital expenses. CX

421Z-2; see, e.g., CX 100H. HCA planners have noted

the sensitivity of major purchasers of health care to ris-

ing costs, which should “stimulate considerable competi-

tion among health care providers.” CX 209H; see also

CX 108Z-1. Another HCA document reflects the belief

that “increasing competition in the health care sector

. . . will allow natural markets forces to slow the price

rise spiral.” CX 221Z-2; see, e.g., CXs 357, 209Z-17-18.

Moreover, the rise of price competition is reflected in

HCA’s policy that its hospitals should attempt to keep

their charges at a competitive level. Its 1982 form 10-K

states that “[t]he rates charged by the Company’s hos-

pitals are intended to be competitive with those charged

by other local hospitals for similar accommodations, sup-

plies and services” (CX 13Q) ; and the 1983 Management

Plan for HCA East, the division that includes Chat-

tanooga hospitals, states that “[p]rices are budgeted to

increase at the maximum competitive level in each local

market.” CX 110X. Because of the rise of health care

costs and the resultant reaction by purchasers, HCA be-

lieves it has an opportunity to “captur[e] additional pa-

tients in areas where price competition becomes more

important and we are the low cost providers.” CX 209Z-

10. HCA is also concerned about price discounting by its

competitors. CX 209 “O”; I.D.F. 248. The record thus

establishes the emergence and likelihood of increased

price competition among hospitals because of pressures

from buyers.

8la

Both the traditional forms of non-price and price com-

petition are evident in Chattanooga, as well as the emerg-

ing trends, though changes such as the development of

HMOs and PPOs are proceeding more slowly than else-

where. E.g., Salkever 2350-53. The evidence is clear that

Chattanooga hospitals compete for physician patronage

(e.g., Lamb 134; Stern 547; Petruzzi 697-98), and that

they do so in a variety of ways. They compete with

respect to the range and quality of services, equipment

offerings and the quality of hospital personnel they pro-

vide. E.g., Lamb 171-73; Stern 556-57; Petruzzi 721-25;

Kantanie 1093; Parkhurst 1390-92; Furrey 1539-40. For

example, Erlanger recently updated its heart catheteriza-

tion equipment in response to the better quality of Memo-

rial’s. Lamb 174-75. Chattanooga hospitals also compete

.for physician admissions by providing office space close

to the hospital, and other physician amenities. F’.g., Stern

556-57; Petruzzi 723; Parkhurst 1390-91. They further

compete for physicians by providing a pleasant environ-

ment and the amenities that keep the physicians’ patients

satisfied. E'.g., Parkhurst 1390-91. Hospitals compete for

patients by offering personalized care, attractive facili-

ties, private rooms, parking, televisions, telephones, good

meals and quality nurses. E.g., Lamb 171, 182; Stern

560-62, 569; Furrey 1546.

Moreover, the testimony of hospital administrators is

overwhelming that Chattanooga area hospitals compete in

some manner on the basis of price. Lamb 176-78; Stern

560; Petruzzi 727; Furrey 1525, 1537; Kantanie 1960-61;

Smith 1955. The price competition that has traditionally

existed in Chattanooga is meaningful enough that com-

petition could be harmed substantially if it is restricted.

See AMI, slip. op. at 4-9, 32-33. For example, the Blue

Cross participating hospital system is a form of this price

competition that has existed for years. Under the plan,

hospitals become members of Blue Cross and Blue Shield

of Tennessee and agree to charge only Blue Cross-

82a

approved prices to Blue Cross subscribers in order to at-

tract them as patients. Long 1280, 1285. Blue Cross has

a large number of subscribers who receive higher

amounts of reimbursement if they are treated at member

hospitals. Jd. at 1291-92. The result is a strong incentive

for hospitals to participate in the program; indeed, all of

the Chattanooga urban area hospitals are member hos-

pitals. Id. at 1304. This is “price competition” because

if a hospital unilaterally refuses to deal with Blue Cross

at the desired rates, it will lose business to competing

hospitals that are willing to charge lower rates for Blue

Cross subscribers. :

Moreover, the evidence shows that hospital rates in

Chattanooga are established with at least some reference

to the rates of other hospitals. See, e.g., CX 177B; CX

139Z-53; CX 2389. Formal and informal rate surveys

have been used by area hospitals to determine whether

the surveyor’s prices were within the range of prices

offered by competing hospitals or to justify price in-

creases to Blue Cross. E.g., Stern 564, 632-39; Smith

1958-61, 1965-66; CX 845. Almost every hospital in the

Chattanooga urban area has conducted rate surveys at

one time or another or participated in them. E.g., CX

179 (Diagnostic) ; CX 184 (Downtown General) ; CX 276

(Parkridge) ; CX 286 (Red Bank) ; CX 316I (Erlanger) ;

CX 326H (Tri-County); CX 845 (Medical Park); CX

158 (Memorial participated) ; CX 161 (East Ridge partic-

ipated) ; I.D.F. 225. In some instances, surveys and in-

formal rate inquires have concerned not only current

prices but prospective prices. CX 184G; CX 239A; Kan-

tanie 1134; Lamb 206.

The surveys in the record list room rates at other hos-

pitals and charges fora number of ancillary services.

See, e.g., CX 179; CX 184; CX 286. In fact, those hos-

pital rates tended to fall into a pattern in Chattanooga

prior to the challenged acquisitions, with Erlanger’s

prices being the highest, Memorial’s the lowest, and the

83a

other hospitals’ rates somewhere in the middle. F.g.,

Lamb 176, 208; Stern 566; Kantanie 1070-71; CX 239;

I.D.F. 226. Other hospitals in Hamilton County tried to

set their prices not too far above Memorial’s and some-

what below Erlanger’s. Kantanie 1070-71. Finally, the

importance of rates to area administrators is reflected by

the fact that rates were often discussed informally at

meetings or over the telephone. E'.g., Lamb 206-09; Stern

577.

HCA’s Parkridge Hospital has long been concerned

that its rates were significantly higher than Memorial

Hospital’s. CX 18Z-97; CX 189Z-53; CX 301Z-50. In

1978, Parkridge increased recovery room and anesthesia

rates, instead of the more visible operating room rates,

“for competitive reasons.” CX 301Z-50. A 1982 Park-

ridge management plan also discusses Memorial’s lower

prices (CX 18Z-65; CX 18Z-97), and concludes that Park-

ridge “must price itself more by looking at the local com-

petition.” CX 18Z-67; see also CX 18Z-63, 64, 66; CX

38Z-96; CX 189Z-53. The plan notes that “competing

hospitals have chosen to hold down price and charge in-

creases for 1983 significantly lower than Parkridge.”

CX 18J.%* -

Thus, it is obvious that price has been a competitively

sensitive matter among Chattanooga hospitals. See

Lamb 177-78. We do not here conclude that price has

been the prime arena in which hospitals in Chatta-

nooga compete. However, we do think it clear that even

though rates are not constantly adjusted due to a chang-

ing price structure, they have been periodically set with

some reference to what the market will bear in face

16 Other HCA hospital management plans contain similar state-

ments reflecting HCA’s concern with remaining competitive on

prices and price increases. CX 20Z-65 (North Park); CX 28H

(Downtown) ; see also Williamson 3269; Main 3762-63; CX 421Z-2;

CX 209 “O”.

84a

of the prices of other hospitals. See, e.g., Kantanie

1069-70.

It is clear that Section 7 protects whatever price com-

petition exists in a market, however limited. AMI, slip.

op. at 33 (“[T]he antitrust laws will endeavor to pro-

tect this price competition, if, for nothing else, the hope

that price competition will be enhanced”); see United

States v. Philadelphia National Bank, 374 U.S. 321, 368-

69 (1963); Stanley Works v. FTC, 469 F.2d 498, 505

(2d Cir. 1972), cert. denied, 412 U.S. 928 (1973). HCA,

of course, admits that this price competition should be

protected if it is endangered. RAB at 33. Indeed, the

fact that price competition is limited does not mean that

consumers cannot be hurt substantially by its curtail-

ment. For instance, any agreement among hospitals to

refuse to accede to rates requested by Blue Cross, even

under the traditional plan, would harm Blue Cross and

its subscribers. See discussion infra section V.E.

There is, hcwever, even more reason to conclude that

price competition could be harmed by these acquisitions.

The evidence shows that the industry-wide growth in

price competition has taken root as a market phenome-

non in the Chattanooga area. Price competition is in-

creasing and appears likely to further increase signifi-

cantly among Chattanooga hospitals.

Because employers and employee groups in the Chatta-

nooga area ar

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