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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1987
- **Citation:** 481 U.S. 1038

## Text

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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,

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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

i I rica sn coninecssecninencanssemmaanenbcaiuabddessaan

i I TN aii bicoiccseisssrietccininshaclsoniininamsaninns

me: ht . _ ___,_——_ EEN UnE TIN EE onan

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
TI vis cesnicciuvinssseinnnithinsietpeicakehetatiadianbaiieandin

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_1972%3A2. Public record. Not legal advice.