Amicus Curiae Brief — Rockford Memorial Corp. v. United States

euprem@ Court, U,

REIL Hs D

‘US 6 1999

JOSEPH F. SPANIOL, JR,

CLERK

No. 90-162

i

IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

ROCKFORD MEMORIAL CORPORATION and

SWEDISHAMERICAN CORPORATION,

Petitioners,

V.

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Seventh Circuit

BRIEF OF THE AMERICAN HOSPITAL ASSOCIATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

TIMOTHY B. Dyk

Of Counsel:

FREDRIC J. ENTIN (Counsel of Record)

JEFFREY M. TESKE PHILLIP A. PROGER

AMERICAN HOSPITAL ToBY G. SINGER

ASSOCIATION JONES, DAY, REAVIS & POGUE

840 North Lake Shore Dr. 1450 G Street, N.W., Suite 700

Chicago, IL 60611 Washington, D.C. 20005-2088

(202) 879-3939

(312) 280-6700

Counsel for Amicus Curiae

August 6, 1990

APIA PL AE te NEI ATO

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

BEST AVAILABLE COP

TABLE OF CONTENTS

ee SO Gr esis sieincnrenanascantcsincsannsacions ii

STATEMENT OF INTEREST

REASONS FOR GRANTING THE WRIT..................... 2

I. THE PRODUCT MARKET ISSUE PRE-

SENTED BY THIS CASE IS IMPORTANT

AND IS LIKELY TO RECUR IN FUTURE

HOSPITAL MERGER CASES ........00200220002022.... 2

II. IN TREATING THE PROPER DEFINITION

OF THE PRODUCT MARKET AS A QUES-

TION OF LAW RATHER THAN OF FACT,

THE SEVENTH CIRCUIT HAS DECIDED

AN IMPORTANT QUESTION OF ANTI-

TRUST LAW IN CONFLICT WITH THE DE-

CISIONS OF THIS COURT AND OTHER

I cc hc ssn cin buntlncrisacenda hed dieda Ratna, 11

CAFTA iin iiaienicenigisistnibichesabenaincadeceabadia teats 17

ii

TABLE OF AUTHORITIES

Cases: Page

Adventist Health System/West, 5 Trade Reg. Rep.

(CCH) {22,761 (FTC Nov. 7, 1989) (FTC

COMI) annie sia'scoissninissccdasenbean-eescagenieliaaminmnmaia 8

American Hospital Association v. Schweiker, 721

F.2d 170 (7th Cir. 1983), cert. denied sub nom.

American Hospital Association v. Heckler, 466

UB. GE CED ccecsecti tives esa ee 3

American Medical International, 104 F.T.C. 1

CRO) ania ciniiccisnicivcecnsdceselienentince anne tch acaenakennnentaaa 8, 10

Brown Shoe Co. v. United States, 870 U.S. 294

CRIED ones cncinscs ahintncbds deccadigigin atin 14, 15, 16

Hospital Corporation of America (In re Forum),

106 F.T.C. 298 (1985) (consent order) ............... 8

Hospital Corporation of America, 106 F.T.C. 361

(1985), aff'd sub nom. Hospital Corporation of

America v. FTC, 807 F.2d 1381 (7th Cir. 1986),

cert. denied, 481 U.S. 10388 (1987) ..........00000000.... 8, 10,14

Kaiser Aluminum & Chemical Co. v. FTC, 652 F.2d

1BBA (Fe Coe, REED sccieeecictceetice 9,14

Reading Hospital, 55 Fed. Reg. 15,290 (FTC 1990)

(ecmmmemt OHOW Daan vik<cccccaatececaaesisssacuibiensenieininn 8

Telex Corp. v. International Business Machines,

510 F.2d 894 (10th Cir.), cert. dismissed, 423

US. 308 (IGG) a eee 14,17

Thurman Industries v. Pay ’N Pak Stores, 875 F.2d

1960 (ORR CAR. See te 17

United States v. Carilion Heaith Sys., 892 F.2d

1042 (4th Cir. 1989) (unpublished) —.....0000000000.. passim

United States v. Central State Bank, 817 F.2d 22

COE CO. TIED vient ils 17

United States v. Connecticut National Bank, 418

Ue. GG CI nce ntiticeccceaeeeeeeet 12, 15, 16

United States v. Continental Can Co., 378 U.S. 441

f | | REDEEMER ns oS eee, th a passim

United States v. E.I. du Pont de Nemours & Co.,

S68 Um. GOS. CHORD occ cake ee. 9

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

GD CUD wisiicnicthice eka ee 13

United States v. Grinnell Corp., 384 U.S. 563

0 | RRNNRM MOM NNERRL Re on rE PR SD i 9

iii

TABLE OF AUTHORITIES—Continued

Page

United States v. Hospital Affiliates International,

1980-81 Trade Cas. (CCH) ‘ 63,721 (E.D. La.

eR ED ital a ae oe 8

United States v. National Medical Enterprises,

1987-1 Trade Cas. (CCH) {| 67,640 (E.D. Cal.

Statutes:

June 25, 1987) (consent decree) —...........-.-00...... 8

United States v. Philadelphia National Bank, 374

as a a a a 9,14

United States v. Phillipsburg National Bank &

Trust Co., 399 U.S. 3560 (1970).............................. 15

Hill-Burton Act, 42 U.S.C. § 291 (1982)... 3

Omnibus Budget Reconciliation Act of 1989, P.L.

No. 101-239 § 6002, 103 Stat. 2106, 2140 (1989) .. 4

42 U.S.C. § 13895ww (1982 & Supp. IV 1986) ........ 4

Legislative Materials: 7

S. Rep. No. 23, 98th Cong., Ist Sess. 47 (1983) .... 4

Rules:

I a sc entescimalieticinn 1

Administrative and Executive Materials:

R. Bloch, Chief of Professions and Intellectual

Property Section, Antitrust Div., Dep’t of Jus-

tice, Remarks at the New England Antitrust

US eS. | Fe ee 9

Bureau of the Census, U.S. Dep’t of Commerce,

Statistical Abstract of the U.S. 1989 (1989)... 5

FTC Statement Concerning Horizontal Mergers,

4 Trade Reg. Rep. (CCH) {13,200 (June 4,

||| REE Serene Gere Meee. ern Meni te 9

M. Horoschak, Assistant Director for Health Care,

Bureau of Competition, FTC, Materials Accom-

panying Remarks at Nat’] Health Lawyers Ass’n

Seminar, Antitrust in the Health Care Field

+. SS SS peeeeece : 9

iv

TABLE OF AUTHORITIES—Continued

Page

International Trade Admin., U.S. Dep’t of Com-

merce, 1990 U.S. Industrial Outlook (1990) ........ 2,3

Office of Evaluation and Inspections, Office of In-

spector Gen., U.S. Dep’t of Health & Human

Services, Hospital Closure: 1988 (1990) ........... 7

Office of Health Facilities, U.S. Dep’t of Health &

Human Services, Directory of Facilities Obli-

gated to Provide Uncompensated Services by

State and City as of January 1, 1986 (1986) ........ 3

President’s State of the Union Address, 26 Weekly

Comp. Pres. Doc. 146 (Feb. 5, 1990)... 3

Prospective Payment Assessment Commission,

Medicare Prospective Payment and the Ameri-

can Health Care System: Report to the Con-

I attiicianrintisbita ee le ines 6

J. Steiger, Chairman of the FTC, Remarks at the

Legal Seminar for Nonprofit Organizations

REE TASES ALPE cae a 9

U.S. Dep’t of Health and Human Services, The

Fiscal Year 1991 Budget (1990) 4

U.S. Dep’t of Justice Revision of 1982 Merger

Guidelines, 4 Trade Reg. Rep. (CCH) { 13,103

I i 9

Books and Articles:

P. Areeda & D. Turner, Antitrust Law—An Analy-

sis of Antitrust Principles and Their Applica-

ASIN eid Sv era” 9

Baker, The Antitrust Analysis of Hospital Mergers

and the Transformation of the Hospital Indus-

try, 51 Law & Contemp. Probs. 93 (1988) 9,11

Blackstone & Fuhr, Hospital Mergers and Anti-

trust: An Economic Analysis, 14 J. Health Pol.,

Pay a a Oe Cee ee i

Burda, Hospital Closures Top Record at 79—AHA,

Modern Healthcare, Mar. 25, 1988, at4 3,7

Burke, Mixed Signals from Government Have

Chilling Effect on Mergers, Hospitals, June 5,

1990, at 36 8

v

TABLE OF AUTHORITIES—Continued

Carr & Feldstein, The Relationship of Cost to Hos-

pital Care, 4 Inquiry 45 (1967) -.....................

Cohen, Variations in Cost Among Hospitals of

Different Sizes, 33 S. Econ. J. 855 (1967) -......

Comment, Defining the Relevant Market in Health

Care Antitrust Litigation:. Hospital Mergers,

75 Ky. L. J. 175 (1987) ....

Cruz, Product and Geographical Market Measure-

ments in the Merger of Hospitals, 91 Dick. L.

Rov. BOT CABO ncectisctinicnsne-

Freudenheim, Rising Number of Hospitals Forced

to Close, N.Y. Times, June 28, 1988, at A17,

CORD citticcibitionnnttinibenaleldl

Guterman & Dobson, Impact of the Medicare Pro-

spective Payment System for Hospitals, 7

Health Care Financing Rev. 97 (1986) -.............

Hellinger, Recent Evidence on Case-Based Systems

for Setting Hospital Rates, 22 Inquiry 78

(TBE cceccicnnninsnsinscinnnnenntennssatsinaibiniduniinaaanaianianitigiiee

Leonard & Rosch, Courts Split on Clayton Act Use

in Non-Profit Hospital Mergers, The Nat’! L. J.,

Where. BG, RI Gee Be sicrranicnnncttnnnnentsntenitinsintenntsicmansnce

Noether, Competition Among Hospitals, 7 J.

Health Econ. 259 (1988) -.......22222222222222--.eeeeee-------

R. Posner, Antitrust Law—An Economic Perspec-

Bind, CUO eiicttnnsctenctdesacteninatnaatisenamaleiliil

L. Sullivan, Handbook of the Law of Antitrust

— , ere vsti iii

Miscellaneous:

American Hosp. Ass’n, Annual Survey of Hos-

pitals (1988) ..............

American Hosp. Ass’n, Economic Trends (1990)..

American Hosp. Ass’n, Hospital Statistics—Data

from the American Hospital Association 1988

Annual Survey (1989) ...........2.-----2--.0.ccceeseeeeeeeeeeees

Brief of Appellants Rockford Memorial Corp. and

SwedishAmerican Corp., United States v. Rock-

ford Memorial Corp., 898 F.2d 1278 (7th Cir.

1990) (No. 89-1900) .....

Page

7

7

10

10

3,7

4,5

8,10

5, 6

12, 18

vi

TABLE OF AUTHORITIES—Continued

Brief for Appellee United States, United States

v. Rockford Memorial Corp., 898 F.2d 1278 (7th

Civ. BERG) Gale, Gee ete

Hospital Data Center, American Hosp. Ass’n, Hos-

pital Closures 1980-1989: A Statistical Profile

+

Reply Brief of Appellants Rockford Memorial

Corp. and SwedishAmerican Corp., United States

v. Rockford Memorial Cerp., 898 F.2d 1278 (7th

Cin. BERG) Gare: GOD Siete

Statistical Information Compiled by the Office of

Health Fin. & Data Analysis, American —

BOGR CHOCO <ittisntitniane ies

Page

12, 13

13

In THE

Supreme Court of the United States

OCTOBER TERM, 1990

No. 90-162

ROCKFORD MEMORIAL CORPORATION and

SWEDISHAMERICAN CORPORATION,

™ Petitioners,

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Seventh Circuit

BRIEF OF THE AMERICAN HOSPITAL ASSOCIATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

This amicus curiae brief is filed on behalf of the

American Hospital Association (“AHA”) with the writ-

ten consent of the parties to this action." AHA supports

granting certiorari on Question 2 of the petition with

respect to the issue of the appropriate product market.

STATEMENT OF INTEREST

The AHA is a not-for-profit membership corporation

organized under the laws of the State of Illinois, and is

the primary organization of hospitals in the United

States. Its membership includes approximately 5,500

hospitals and other health care institutions, as well as

approximately 49,000 individuals. The principal corpo-

1 See Sup. Ct. R. 37.2. Statements of consent are on file with

the Clerk of the Court.

2

rate objective of the AHA is to promote high quality

health care and health services for all people through

leadership and assistance to hospitals and health care

organizations in meeting the health care needs of their

communities. AHA’s members believe that in appro-

priate cases mergers and consolidations can reduce hos-

pital costs and benefit the public. At the present time,

due to the dramatic changes in the hospital industry,

there are increasing numbers of hospital consolidations.

AHA’s members are al! potentially subject to proceed-

ings brought by the Department of Justice or the Fed-

eral Trade Commission to challenge such mergers and

consolidations under the antitrust laws. The definition of

the relevant product market is an important issue in

these cases, and the appropriate resolution of that issue

is significant to AHA’s membership.

REASONS FOR GRANTING THE WRIT

In determining that competing outpatient providers

should be excluded from the relevant product market in

hospital merger cases as a matter of law, the Seventh

Circuit, in an opinion by Judge Posner, has decided an

important and recurring question of federal antitrust

law in conflict with the decisions of this Court and of

other circuits.

I. THE PRODUCT MARKET ISSUE PRESENTED IN

THIS CASE IS IMPORTANT AND IS LIKELY TO

RECUR IN FUTURE HOSPITAL MERGER CASES.

The health care industry is the single largest sector of

the nation’s economy. Expenditures on health care ap-

proached $600 billion in 1989.2 Health care services ex-

ceed 11% of the Gross National Product, and the pro-

portion of the GNP they represent continues to grow.’

2 International Trade Admin., U.S. Dep’t of Commerce, 1990

U.S. Industrial Outlook 49-1, 49-1 (1990).

3 Jd.

3

The industry is currently experiencing a crisis due to

escalating health care costs.‘ This is one of the key is-

sues affecting the United States today, so significant that

President Bush addressed the issue in his State of the

Union Address, promising that we are “committed to

bringing the staggering costs of health care under

control.” ®

This acceleration in health care costs has resulted in

significant part from the effect on the health care indus-

try of past policies of the federal government—policies

that were designed to increase the availability of health

care services to the American public. The federal gov-

ernment is the single largest purchaser of hospital ser-

vices, accounting for approximately 50% of hospital rev-

enues.® Beginning in the middle 1960s, with the adoption

of the Medicare and Medicaid programs, and with the

expansion of private health insurance coverage, an enor-

mous demand for additional health care services was

create to serve those who previously had been unable to

afford quality care. At the same time, the federal gov-

ernment encouraged hospitals to construct modern facili-

ties,’ and indirectly encouraged the construction and

4 See Burda, Hospital Closures Top Record at 79—AHA, Mod-

ern Healthcare, Mar. 25, 1988, at 4; Freudenheim, Rising Num-

ber of Hospitals Forced to Close, N.Y. Times, June 23, 1988, at

A17, col. 1.

5 President’s State of the Union Address, 26 Weekly Comp. Pres.

Doe. 146, 148 (Feb. 5, 1990).

6 International Trade Admin., supra note 2, at 49-2.

7 Federal financial assistance was provided under the Hill-Bur-

ton Act, 42 U.S.C. § 291 (1982), to assist in the construction and

modernization of hospitals in return for a commitment to provide

care to indigent patients. See American Hosp. Ass'n v. Schweiker,

721 F.2d 170, 172-73 (7th Cir. 1983), cert. denied sub nom.

American Hosp. Ass'n v. Heckler, 466 U.S. 958 (1984). Approxi-

mately 6,900 facilities received Hill-Burton assistance, a substan-

tial number of which were acute care hospitals. Office of Health

Facilities, U.S. Dep’t of Health & Human Services, Directory of

4

staffing of such facilities by providing reimbursement to

hospitals on a cost reimbursement basis.* The cost reim-

bursement approach encouraged individuals to seek, and

hospitals to provide, the best available health care, re-

gardless of cost. As a result of all of these factors, hos-

pitals invested in the construction of costly facilities,

physical plants, equipment, and the staffs to operate

them.

In 1983, however, the federal government, in response

to rising health care costs, changed its policies and re-

vised its method for paying hospitals for treating Medi-

care patients. The federal government now pays a set

amount for each patient based on a particular diagnosis,

which constrains hospitals’ investments in costly services

and equipment. 42 U.S.C. § 1395ww (1982 & Supp. VI

1986). The federal government establishes rates for

Medicare reimbursement that are often below the fully

allocated costs of the services provided. Furthermore,

Medicare capital payments to hospitals have been re-

duced by 15% for rural and urban hospitals,? and an

additional 10% reduction for urban hospitals has been

proposed.” Similarly, state governments and private

payers are eliminating cost-reimbursement arrangements

and have sought to establish fixed fees for hospital ser-

vices, forcing hospitals to bear the burden of rising

costs that exceed the amount of reimbursement."!

Facilities Obligated to Provide Uncompensated Services by State

and City as of January 1, 1986, 187 (1986).

8 See S. Rep. No. 23, 98th Cong., Ist Sess. 47 (1983).

® Omnibus Budget Reconciliation Act of 1989, P.L. No. 101-239,

§ 6002, 103 Stat. 2106, 2140 (1989).

10U.S. Dep’t of Health and Human Services, The Fiscal Year

1991 Budget 46-47 (1990).

11 See Guterman & Dobson, Impact of the Medicare Prospective

Payment System for Hospitals, 7 Health Care Financing Rev. 97,

106 (1986).

5

These fixed fee arrangements have been effective in con-

straining costs to purchasers of health care services be-

cause of the enormous power that the federal and state

governments and large private insurers enjoy in the

health care industry. Hospitals by and large must ac-

cept the fixed fees established by the federal government

because they are unable to survive without Medicare

business, which constitutes, on average, 40% of a hos-

pital’s revenue.” Similarly, state governments and large

private insurers, which also account for a signifiant por-

tion of hospital revenues, are able to negotiate low fixed

prices because their business is essential to most hos-

pitals.1* As a consequence, hospitals do not, for the most

part, have the ability to control the prices they are paid.

These cost-containment measures have led to a decline

in both admissions to hospitals and the length of hospital

stays.'* Hospital occupancy has therefore fallen dramat-

ically.* Between 1980 and 1986, occupancy rates fell

from 75.9% to 63.4%."

This trend has been exacerbated by the shift of pa-

tients out of the hospital to providers of outpatient ser-

vices, a trend encouraged by the federal government and

other major purchasers of health care services such as

state governments, commercial insurers, and self-insured

employers. Outpatient visits to hospitals have increased

by 160% since 1980; indeed, according to the latest data,

12 American Hosp. Ass’n, Hospital Statistics—Data from the

American Hospital Association 1988 Annual Survey xxxiii (1989).

13 Overall, private third-party payers account for 35% of hospital

revenues. Id.

14 Hellinger, Recent Evidence on Case-Based Systems for Setting

Hospital Rates, 22 Inquiry 78, 85 (1985); Guterman & Dobson,

supra note 11, at 103-04, 109.

15 Bureau of the Census, U.S. Dep’t of Commerce, Statistical Ab-

stract of the U.S. 1989, at 102 (1989).

16 American Hosp. Ass’n, Economic Trends 4 (1990).

6

since 1986 outpatient visits have exceeded inpatient

days.'7 Almost half of all surgical procedures are now

outpatient procedures,” and growth in outpatient rev-

enues far outstrips growth in inpatient revenues.’ As

the district court in this case recognized, “many types of

traditionally inpatient care and treatment, including

many diagnostic tests and types of surgery, [are now

being] performed on an outpatient basis.” Pet. App. at

a-162-a-163.% The district court also explained that

“(this trend has caused the number of inpatient days at

hospitals to level out and in some cases drop.” Pet. App.

at a-163.

While revenues have been decreasing as a result of

cost-containment measures and competition from outpa-

tient providers, hospitals continue to bear the burden of

costly investments encouraged by earlier federal policies,

and hospital operating costs continue to rise. Overall,

costs to hospitals have increased almost 30% since 1984,

while the Medicare update factor, which was originally

intended to compensate for the effect of inflation, has in-

creased only 16%." This is particularly troublesome

when Medicare accounts for, on average, 40% of a hos-

pital’s revenue.” :

17 American Hosp. Ass’n, supra note 12, at xxv.

18 American Hosp. Ass’n, Annual Survey of Hospitals (1988).

19 From 1984 to 1989, inpatient revenue rose on average only 6.5%

per year while outpatient revenues grew more than 16%. Prospec-

tive Payment Assessment Commission, Medicare Prospective Pay-

ment and the American Health Care System: Report to the Congress

52 (1990).

20 Cites to “Pet. App.” are to the Appendix to the Petition for

Writ of Certiorari in this case. See also Noether, Competition

Among Hospitals, 7 J. Health Econ. 259, 279 (1988).

21 Statistical Information Compiled by the Office of Health Fin.

& Data Analysis, American Hosp. Ass’n (1990) (numbers include

1990 projections) .

22 American Hosp. Ass’n, supra note 12, at xxxiii.

7

Vs

Thus, hospital operating margins have drastically de-

clined. The Deputy Administrator of the Medicare pro-

gram has acknowledged the problem, stating that “[a|

significant proportion of hospitals will experience losses

on their Medicare business” and that hospital profit mar-

gins are “close to zero.” ~ Hospitals have been forced to

cut back their operations, sometimes at the expense of

more innovative programs and services. Those hospitals

that have been unable to contain their increasing costs are

in serious financial difficulties.* These financial troubles

have caused many hospitals to seek to merge with

stronger facilities or, when unable to merge, even to close

their doors.”

Consolidatien can enable two hospitals to utilize their

fixed-cost assets more productively. For example, total

costs can be lowered if one of the consolidating hospitals

transfers its obstetrical and pediatric services to the other

hospital, and the second shifts its cardiac surgery pro-

gram to the first. Hospital mergers often achieve scale

economies and create more efficient facilities that are bet-

ter equipped to operate under the new reimbursement

schemes.*° When a weak hospital is rescued by a stronger

hospital, access to health care services that might other-

23 Freudenheim, supra note 4, at A17, col. 1.

24 See Office of Evaluation and Inspections, Office of Inspector

Gen., U.S. Dep’t of Health & Human Services, Hospital Closure:

1988, at 8 (1990).

25 Jd. at 7; see also Burda, supra note 4, at 4. In 1982, only 23

hospitals closed; in contrast, in 1987, 79 hospitals closed and in 1989,

80 hospitals closed. Hospital Data Center, American Hosp. Ass’n,

Hospital Closures 1980-89: A Statistical Profile 6 (1990).

26 See Blackstone & Fuhr, Hospital Mergers and Antitrust: An

Economic Analysis, 14 J. Health Pol., Pol’y & L. 383, 383 (1989) ;

Carr & Feldstein, The Relationship of Cost to Hospital Care, 4

Inquiry 45, 63 (1987); see generally Cohen, Variations in Cost

Among Hospitals of Different Sizes, 33 S. Econ. J. 355 (1967).

8

wise have become unavailable can be preserved, thus

benefiting consumers.”

Not surprisingly, in light of these advantages of merg-

ers, the hospital industry is going through a period of

consolidation. In 1987 there were almost twice as many

hospital mergers as in 1982, and that trend is continu-

ing.** At the same time, hospitals attempting to consoli-

date have been challenged with increasing frequency by

the Department of Justice and the Federal Trade Com-

mission. These agencies, while at times recognizing the

benefits of hospital mergers, have displayed considerably

less enthusiasm for this solution to the predicament of

the hospital industry. Almost as many cases were filed in

the past two years of the decade as were brought in the

preceding eight.” Recent statements by the enforcement

agencies indicate that hospital mergers will continue to

be a priority of both the Department of Justice and the

27 See R. Posner, Antitrust Law—-An Economic Perspective 96

(1976) (anti-merger laws are costly because, among other reasons,

mergers that may be held to violate the antitrust laws may serve

to exploit economies of scale).

28 Burke, Mixed Signals from Government Have Chilling Effect

on Mergers, Hospitals, June 5, 1990, at 36.

29 Five actions were brought from 1980 to 1987. United States

v. National Medical Enterprises, 1987-1 Trade Cas. (CCH) { 67,640

(E.D. Cal. June 25, 1987) (consent decree); United States v. Hos-

pital Affiliates Int’l, 1980-81 Trade Cas. (CCH) { 63,721 (E.D. La.

Oct. 9, 1980); Hospital Corp. of America, 106 F.T.C. 361 (1985),

aff'd sub nom. Hospital Corp. of America v. FTC, 807 F.2d 1381

(7th Cir. 1986), cert. denied, 481 U.S. 1038 (1987); Hospital Corp.

of America (In Re Forum), 106 F.T.C. 298 (1985) (consent

order); American Medical Int’l, 104 F.T.C. 1 (1984). Since June

1988, four additional cases have been filed, including this one:

United States v. Rockford Memorial Corp., Pet. App. a-1 - b-46;

United States v. Carilion Health Sys., 707 F. Supp. 840 (W.D.

Va.), aff'd, 892 F.2d 1042 (4th Cir. 1989) (unpublished); Read-

ing Hosp., 55 Fed. Reg. 15,290 (FTC 1990) (consent order) ;

Adventist Health System/West, 5 Trade Reg. Rep. (CCH) {| 22,761

(FTC Nov. 7, 1989) (FTC complaint).

9

Federal Trade Commission.* Thus, a significant number

of hospital merger actions are likely to be brought in the

future.

Defining the relevant market is the first step in deter-

mining whether any merger violates the antitrust laws,*

and market definition is frequently the determinative fac-

tor as to the lawfulness of a particular merger.** The

government’s own guidelines for analyzing horizontal

mergers state that “[m]arket definition has historically

played a crucial role in antitrist analysis... .” U.S. Dep’t

of Justice Revision of 1982 Merger Guidelines, 4 Trade

Reg. Rep. (CCH) 7 13,103, at 20,551 (June 4, 1984).

30 J. Steiger, Chairman of the FTC, Remarks at the Legal Semi-

nar for Nonprofit Organizations 6-7 (June 28, 1990); M. Horo-

schak, Assistant Director for Health Care, Bureau of Competition,

Materials Accompanying Remarks at Nat’] Health Lawyers Ass’n

Seminar, Antitrust in the Health Care Field 26 (Feb. 16, 1990);

R. Bloch, Chief of Professions and Intellectual Property Section,

Antitrust Div., Dep’t of Justive, Remarks at the New England

Antitrust Conference 2 (Nov. 4, 1989).

31 See Brown Shoe Co. v. United States, 370 U.S. 294, 324

(1962); United States v. EJ. du Pont de Nemours & Co. °53 U.S.

586, 593 (1957).

32 See, e.g., United States v. Continental Can Co., 378 U.S. 441,

458-61 (1964); Kaiser Aluminum & Chem. Co. v. FTC, 652 F.2d

1324, 1329-30, 1841 (7th Cir. 1981); see also Baker, The Antitrust

Analysis of Hospital Mergers and the Transformation of the Hos-

pital Industry, 51 Law & Contemp. Probs. 93, 119 (1988) (“Market

definition is often the determinative analytic step in antitrust liti-

gation, and thus is strongly contested.”). Product market defini-

tion can be important in other types ofantitrust cases as well, and

principles established in merger cases can affect market definition

in conduct cases. See 2 P. Areeda & D. Turner, Antitrust Law—

An Analysis of Antitrust Principles and Their Application 321

(1978); L. Sullivan, Handbook of the Law of Antitrust 605

(1977); compare United States v. Philadelphia Nat'l Bank, 374

U.S. 321 (1963) (cluster market approach applied in merger case)

with United States v. Grinnell Corp., 384 U.S. 563 (1966) (cluster

market approach applied in monopolization case).

33 See also FTC Statement Concerning Horizontal Mergers, 4

Trade Reg. Rep. (CCH) { 13,200, at 20,905 (June 4, 1984) (“‘is-

10

As Judge Posner himself has written in his antitrust

treatise, “[t]he definition of the market in which to

measure the market shares of the merging parties and

their competitiors is critical; given enough flexibility in

market definition a surprising number of innocuous

mergers can be made to appear dangerously monopo-

listic.” R. Posner, supra, note 27, at 125.

Not surprisingly, in virtually every litigated hospital

merger case, the product market question was hotly con-

tested, and the parties raised the same issues of market

definition as are presented in this case. The question of

the appropriate product market definition that should be

applied to the unique facts of the hospital industry has

divided not only the Antitrust Division, private litigants,

and the courts,** but commentators as well.®

sues of market definition are critcally important to sound merger

analysis.”’).

34 Compare, e.g., Rockford Memorial Corp., Pet. App. at b-31-

b-34 (excluding outpatient providers) with Carilion Health Sys.,

Pet. App. at d-38 (including outpatient providers). The product

market issue has led to varying approaches at the Federal Trade

Commission. For example, American Medical Int'l, 104 F.T.C. at

192-93, defined the relevant product market as “general acute care

hospital services,” a market definition that included outpatient

services provided by hospitals, but not those provided by non-

hospital providers. Hospital Corp. of America, 106 F.T.C. at 466,

defined the market as “general acute care hospital services” but

stated that the market must be viewed “with primary reference to

the cluster of services provided to inpatients.” See Comment, De-

fining the Relevant Market in Health Care Antitrust Litigation:

Hospital Mergers, 75 Ky. L. J. 175, 199 (1987) (difference in

product market definition between the American Medical Int'l and

Hospital Corp. of America cases could be significant in future

cases).

35 Compare Cruz, Product and Geographical Market Measure-

ment in the Merger of Hospitals, 91 Dick. L. Rev. 497, 514 (1986)

(“non-hospital providers should be considered competitors of hos-

vitals and their services should be included in the product mar-

ket”) with Comment, supra note 34, at 194 (“Defining the rele-

vant market as inpatient hospital services . . . is appropriate for

11

At the present time, varying definitions of the product

market in hospital merger cases have caused substantial

confusion in the industry, which finds it difficult to as-

sess whether planned consolidations are likely toe pass

muster under the antitrust laws.** Resolution of this

important question under the appropriate standard is

critical to the industry, and indeed to all parties in pend-

ing and future cases involving hospital mergers.

Il. IN TREATING THE PROPER DEFINITION OF

THE PRODUCT MARKET AS A QUESTION OF

LAW RATHER THAN OF FACT, THE SEVENTH

CIRCUIT HAS DECIDED AN IMPORTANT QUES-

TION OF ANTITRUST LAW IN CONFLICT WITH

THE DECISIONS OF THIS COURT AND OTHER

CIRCUITS.

The hospital industry, of course, does not seek to be

treated differently than other industries for purposes of

product market definition. However, in this case, the

Seventh Circuit has departed from the existing approach

and treated the question of appropriate market definition

as a question of law rather than as a question of fact.

In so doing the Seventh Circuit has rendered a decision

that is in conflict with decisions of this Court and of

other circuits, and particularly with the decision of the

Fourth Circuit in United States v. Carilion Health Sys.,

892 F.2d 1042 (4th Cir. 1989) (unpublished), which

held in a similar hospital merger case that the product

market was an issue of fact and affirmed a district court

finding that non-hospital providers should be included in

the market.

the health care industry.”); see also Baker, supra note 32, at 126

(a narrow definition of product market “may lead courts to under-

estimate the significance of outpatient clinics in restraining some

forms of hospital collusion, and so to interdict mergers generating

increased concentration among hospitals when the danger of col-

lusion is limited.”).

86 See Leonard & Rosch, Courts Split on Clayton Act Use in

Non-Profit Hospital Mergers, The Nat'l L. J., Nov. 27, 1989, at 18, 19.

12

As in most hospital merger cases, the parties in the

present case differed sharply as to the appropriate prod-

uct market. The Antitrust Division urged that the prod-

uct market should be limited to inpatient services pro-

vided by hospitals. See Brief for Appellee United States

at 8-12, United States v. Rockford Memorial Corp., 898

F.2d 1278 (7th Cir. 1990) (No. 89-1900). The merging

hospitals, petitioners in this Court, urged that the market

should include outpatient services offered by non-hospital

providers (providers whose competition, in part, had con-

tributed significantly to the conditions necessitating hos-

pital mergers in the first place). See Brief of Appellants

Rockford Memorial Corp. and SwedishAmerican Corp. at

14, United States v. Rockford Memorial Corp., 898 F.2d

1278 (7th Cir. 1990) (No. 89-1900).

The district court adopted the government’s position,

finding that the relevant product market consisted of a

cluster of services offered only by acute care hospitals.

It excluded services offered by other types of facilities,

even those offered by outpatient facilities that, as the dis-

trict court recognized, compete directly with acute care

hospitals.**

On appeal, petitioners challenged the district court’s

conclusions on a number of grounds. Pointing out that

this Court’s precedents demonstrate it is not necessary

that there be a complete overlap between competing prod-

ucts in order for them to be included in the same mar-

ket,** petitioners urged that the appropriate test was rea-

sonable substitutability and that “|t]he record in this

ease . . . establishes that outpatient care is a functional

37 “Tt is true, as the defendants contend, that non-hospital pro-

viders such as out-patient clinics, emergency care centers, doctors

offices and other providers, offer some of the same services as do

acute care hospitals.” Pet. App. at a-52.

38 Appellants’ Brief at 15; see United States v. Connecticut Nat'l

Bank, 418 U.S. 656, 662 (1974); Continental Can Co., 378 U.S. at

455-57.

13

substitute for a significant and growing amount of in-

patient care. ...” Appellants’ Brief at 15. Petitioners

argued that the district court’s findings were “clearly er-

roneous” because there was “extensive evidence of sub-

stitutability and actual substitution,” Appellants’ Brief

at 22; Reply Brief of Appellants Rockford Memorial

Corp. and SwedishAmerican Corp. at 6, United States v.

Rockford Memorial Corp., 898 F.2d 1278 (7th Cir. 1990)

(No. 89-1900), and contended that the trend towards

increasing utilization of outpatient facilities should have

been considered by the district court, Appellants’ Brief at

18; see United States v. General Dynamics Corp. 415 U.S.

486, 501 (1974). Petitioners also asserted that the dis-

trict court did not take into account the effect of the

presence of large third-party payers on the extent of

competition between hospitals and outpatient providers.

See Appellants’ Brief at 18.*°

The Antitrust Division, in contrast, urged that the dis-

trict court’s findings should be sustained because “(t]he

key question is whether buyers today would substitute

outpatient services for inpatient services if the defend-

ants imposed a price increase, and the answer, as the

district court found, is clearly that they would not do so.”

Appellee’s Brief at 11-12.

The Seventh Circuit affirmed the district court’s deci-

sion, rejecting petitioners’ claim that outpatient providers

should have been included. Pet. App. at b-31-b-34. But

in doing so it failed to address petitioners’ objections to

the district court’s factual findings. Instead, it adopted

an approach entirely at odds with that of the district

court or either of the parties in this case. Rather than

reviewing the factual findings of the district court and

basing its decision on the factual record, the Seventh

Circuit approached the issue of product market definition

89 The district court made no findings with respect to the effect

of large payers on competition in the health care industry. See

Pet. App. at a-213-a-286.

14

as a matter of law, relying on its own intuition and un-

supported opinions about characteristics of the hospital

industry. In effect, the Seventh Circuit enunciated a new,

inflexible rule of law, applicable to all hospital merger

cases, that the relevant product market cannot include

providers of outpatient services.“ —

The Seventh Circuit’s approach is contrary to this

Court’s decisions. This Court has established that the

question of product market definition is one of fact, not

of law, and has enumerated the factors that should be

considered in determining the product market for anti-

trust analysis. Courts should determine “the reasonable

interchangeability of use . . . between the product itself

and substitutes for it” by examining “such practical

indicia as industry or public recognition of the |market]

as 4 separate economic entity, the product’s peculiar

characteristics and uses, unique production facilities,

distinct customers, distinct prices, sensitivity to price

changes, and specialized vendors.” Brown Shoe Co. v.

United States, 370 U.S. 294, 325 (1962). These factors

must be given “careful consideration based upon the

entire record.” Continental Can Co., 378 U.S. at 449."

This Court’s decisions also require a thorough analy-

sis of the specific conditions of the industry at issue when

defining a relevant product market. For example, in

Philadelphia Nat'l Bank, 374 U.S. at 356-57, the case in

which this Court first enunciated the “cluster market” ap-

proach used in hospital merger cases, see Pet. App. at a-75;

Hospital Corp. of America, 106 F.T.C. at 436, 466, the

Court examined competitive conditions in the banking in-

* Pet. App. at b-31-b-34. It is particularly ironic that the court

excluded outpatient services from the relevant market, given that

the shift of patients to outpatient providers ia one of the major

reasons hospitals are finding it necessary to consolidate. See supra

pp. 5-6.

*! See also Kaiser Aluminum & Chem. Co., 652 F.2d at 1329;

Telex Corp. v. International Business Machines, 510 F.2d 894, 915

(10th Cir.). cert. dismissed, 423 U.S. 802 (1975).

15

dustry to determine which firms should be included in

the market. In subsequent bank merger cases, this

Court again analyzed the competitive dynamics of the

industry to define the relevant market. Connecticut Nat’l

Bank, 418 U.S. at 663-66; United States v. Phillipsburg

Nat’l Bank & Trust Co., 399 U.S. 350, 369-61 (1970).

The Seventh Circuit did not consider the actual facts

of this particular industry and ignored virtually all of

the Brown Shoe factors in its brief discussion of the

product market issue. Indeed, the opinion did not even

trouble to cite Brown Shoe or any other decision of this

Court in its product market discussion, much less apply

the analysis required by this Court’s decisions. The opin-

ion’s disdain for factual analysis is not merely of aca-

demic interest. If the Seventh Circuit decision is fol-

lowed, courts of appeals in future cases will not examine

the facts of the marketplace and the dynamics of the

industry in product market determinations.

In declining to address petitioners’ factual contentions,

the court of appeals ignored central factual issues rele-

vant to product market definition. For example, the ex-

istence of “distinct customers” and “specialized vendors”

in the health care industry has enormous significance. As

we have discussed above, the fact that the federal and

state governments and large private purchasers account

for a substantial portion of hospital revenues, and the

critical importance of such purchasers to any hospital,

severely constrains the ability of hospitals to raise prices.

Those constraints exist not only with respect to the wide

range of services that are available outside the hospital

context but with respect to the services that are offered

only in hospitals. This is so because of the power that the

federal government has to refuse to pay excessive prices

and the threat that other purchasers will take their out-

patient business to non-hospital providers.“

*2 These third-party payers have the power to use the outpatient

providers as leverage over hospitals even for inpatient services. If

16

The only portion of the Seventh Circuit’s opinion that

appears to follow the Brown Shoe approach indeed recog-

nizes the existence of non-hospital competitors. The court

of appeals noted that petitioners “point out correctly that

a growing number of services provided by acute-care

hospitals are also available from non-hospital providers.”

Pet. App. at b-31. But the court then dismisses them

as irrelevant, stating “the force of the point eludes us.”

Id. It is just such cavalier dismissal of the record that

this Court has condemned in other antitrust cases. E£.9.,

Connecticut Nat'l Bank, 418 U.S. at 665; Continental

Can Co., 378 U.S. at 449. In applying its own idiosyn-

cratic views to the product market analysis, the Seventh

Circuit has rendered a decision in clear conflict with this

Court’s requirements.

The decision below also directly conflicts with a ruling

of the Fourth Circuit involving a similar hospital merger.

Carilion Health Sys., Pet. App. at e-1-e-20. In Carilion,

the Fourth Circuit decision upheld a district court de-

cision defining the relevant product market to ‘include

outpatient providers. Pet. App. at e-16-e-17. The court

of appeals in Carilion again treated the question as one

of fact, upholding the district court’s findings as not

clearly erroneous. /d. The decision in the present case

cannot be reconciled with the Fourth Circuit’s decision

in Carilion, either in terms of the approach to product

market definition or in the result it reached.

there is a substantial amount of competition between hospitals and

outpatient providers for patients in need of outpatient services,

large purchasers can insist on reasonable prices for inpatient serv-

ices by threatening to channel their subscribers to non-hospital

providers for outpatient services.

*8There is thus a conflict between the decision below and

Carilion on both the standard (whether the issue is one of law or

fact) and the applicaticn of the standard to the hospital industry.

In view of the size and importance of the hospital industry, we

urge that the conflict that exiets with respect to application of the

standard also warrants review by this Court.

17

The Seventh Circuit’s holding in this case is also con-

trary to decisions of the Sixth, Ninth, and Tenth Cir-

cuits, which have specifically held that product market

definition is a question of fact. United States v. Central

State Bank, 817 F.2d 22, 24 (6th Cir. 1987) (“relevant

product market definition” is a question of fact); Thur-

man Industries v. Pay ’N Pak Stores, 875 F.2d 1369,

1374 (9th Cir. 1989) (“For antitrust purposes, defining

the product market involves identification of the field of

competition . ... This definitional process is a factual

inquiry ... .”); Telex Corp., 510 F.2d at 915 (“market

definition is generally treated as a matter of fact”).

In sum, the appropriate approach to product market

definition in hospital merger cases is an important and

recurring question of federal antitrust law. The deci-

sion of the Seventh Circuit is contrary to the decisions

of this Court and to the decisions of other courts of

appeals. Certiorari should be granted.

CONCLUSION

For these reasons, the Court should grant the Peti-

tion for a Writ of Certiorari.

Respectfully submitted,

Of Counsel: TIMOTHY B. Dyk

FREDRIC J. ENTIN (Counsel of Record)

JEFFREY M. TESKE PHILLIP A. PROGER

AMERICAN HOSPITAL Tosy G. SINGER

ASSOCIATION JONES, DAY, REAVIS & POGUE

840 North Lake Shore Dr. 1450 G Street, N.W., Suite 700

Chicago, IL 60611 Washington, D.C. 20005-2088

(312) 280-6700 (202) 879-3939

Counsel for Amicus Curiae

August 6, 1990