Tenet Healthcare Corp.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 971-0024]

Tenet Healthcare Corp.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

-----------------------------------------------------------------------

SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, this consent agreement, accepted subject to final

Commission approval, would require, among other things, the for-profit

general acute care hospital chain to divest a hospital, and related

assets, in San Luis Obispo County, California that it will acquire as

part of its proposed acquisition of OrNda Healthcorp. The complaint

accompanying the consent agreement alleges that Tenet's acquisition of

OrNda would deny the benefits of free and open competition--lower

prices and better quality of service--to patients, physicians, third-

party payers, and other consumers of inpatient acute care hospital

services in that county.

DATES: Comments must be received on or before April 7, 1997.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., NW, Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: William J. Baer, Federal Trade

Commission, H-374, 6th and Pennsylvania Ave, NW, Washington, DC 20580.

(202) 326-2932. Mark Whitener, Federal Trade Commission, H-374, 6th and

Pennsylvania Ave, NW, Washington, DC 20580. (202) 326-2845. Robert

Leibenluft, Federal Trade Commission, S-3115, 6th and Pennsylvania Ave,

NW, Washington, DC 20580. (202) 326-3688.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Sec. 2.34 of the

Commission's rules of practice (16 CFR 2.34), notice is hereby given

that the above-captioned consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of sixty (60) days. The following Analysis to Aid Public

Comment describes the terms of the consent agreement, and the

allegations in the accompanying complaint. An electronic copy of the

full text of the consent agreement package can be obtained from the

Commission Actions section of the FTC Home Page (for January 29, 1997),

on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A

paper copy can be obtained from the FTC Public Reference Room, Room H-

130, Sixth Street and Pennsylvania Avenue, NW, Washington, DC 20580,

either in person or by calling (202) 326-3627. Public comment is

invited. Such comments or views will be considered by the Commission

and will be available for inspection and copying at its principal

office in accordance with Sec. 4.9(b)(6)(ii) of the Commission's rules

of practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission has accepted, subject to final

approval, a proposed consent order from Tenet Healthcare Corp.

(``Tenet''), to resolve antitrust concerns raised by Tenet's proposed

acquisition of OrNda Healthcorp (``OrNda''). Tenet would be required to

divest, among other things,

[[Page 5419]]

OrNda's French Hospital and Medical Center in San Luis Obispo,

California (``French''), and OrNda's interests in Monarch Health

Systems, an integrated health care delivery system in the San Luis

Obispo area. Tenet has also agreed to hold French, the Monarch

interests, and some additional assets separate from Tenet's other

assets, pending the required divestitures.

The proposed consent order has been placed on the public record for

sixty (60) days for reception of comments by interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreement and the comments received, and will decide whether it should

withdraw from the agreement or make final the agreement's proposed

order.

The Commission's Complaint

The proposed consent order would settle charges by the Federal

Trade Commission that Tenet's proposed acquisition of OrNda Healthcorp

would endanger competition in the market for inpatient acute care

hospital services in San Luis Obispo County, California, and so would

violate section 7 of the Clayton Act and section 5 of the Federal Trade

Commission Act. This matter involves the same market, and the same

principal hospitals, as were at issue in a previous Commission hospital

merger case, American Medical International, Inc., 104 F.T.C. 1, 617

(1984), which resulted in the divestiture of French.

Tenet operates over 75 acute care hospitals nationwide. In San Luis

Obispo County, Tenet operates two acute care hospitals, 195-bed Sierra

Vista Regional Medical Center (``Sierra Vista'') in the city of San

Luis Obispo, and 84-bed Twin Cities Community Hospital (``Twin

Cities'') in Templeton about 22 miles to the north of San Luis Obispo.

OrNda operates over 50 acute care hospitals nationwide, including 147-

bed French Hospital Medical Center in the city of San Luis Obispo.

OrNda also operates 70-bed Valley Community Hospital in Santa Maria, in

northern Santa Barbara County about 30 miles south of the city of San

Luis Obispo.

The complaint alleges that Tenet and OrNda are the two leading

competitors, out of only four providers, of acute care hospital

services in San Luis Obispo County, California. It further alleges that

Tenet's main hospital in the area, Sierra Vista, and OrNda's French

hospital, offer broader service complements than any of the other

hospitals in the county, and are each other's principal and most direct

competitor.

The complaint identifies 79-bed Arroyo Grande Community Hospital in

southern San Luis Obispo County, and county-owned 64-bed San Luis

Obispo General Hospital (``SLO General'') in the city of San Luis

Obispo, as the only acute care hospitals in San Luis Obispo County that

would not be owned by Tenet after the acquisition of OrNda. The

complaint further alleges that SLO General's long-term competitive

prospects are clouded by its need for major capital improvements,

including construction required to bring the hospital into compliance

with stringent new state earthquake safety standards.

As stated in the complaint, the proposed acquisition would

eliminate competition between Tenet and OrNda, and significantly

increase the already high level of concentration for inpatient acute

care hospital services in San Luis Obispo County. The complaint also

alleges that the proposed merger would increase the market share of

Tenet, already the leading provider of inpatient acute care hospital

services in the Tri-Cities area, to over 71%, an increase of at least

17% above its existing market share. The complaint further alleges

that, as measured by the Herfindahl-Hirschman Index (``HHI''), market

concentration would increase more than 2000 points to a post-

acquisition level of over 5000. The HHI is a measure of market

concentration used by the Federal antitrust enforcement agencies to

estimate, in conjunction with information on other market factors, the

likelihood that a merger would endanger competition. As explained in

the 1992 Merger Guidelines, the Federal antitrust enforcement agencies

consider markets with HHI levels above 1800 (on a scale of 0 to 10,000)

to be ``highly concentrated,'' and, where the post-merger HHI would

exceed 1800, presume that a merger producing an increase in the HHI of

more than 100 points is likely to significantly lessen competition

(unless factors other than market concentration indicate that the

merger presents no significant threat to competition).

According to the complaint, it is unlikely that entry into San Luis

Obispo County by a new acute care hospital will prevent or remedy any

anticompetitive price increases or other effects resulting from the

acquisition. This is due to, among other factors, the lengthy lead

times required to build new hospitals in the relevant market, such as

those required by California's requirements for advance review of

hospital building plans.

The complaint alleges that the proposed acquisition may:

substantially lessen competition for inpatient acute care hospital

services in San Luis Obispo County; result in less favorable prices and

other terms for health plans that contract for such services in the

county; increase the possibility of collusion or interdependent

coordination by the remaining market competitors; deny patients,

physicians, third-party payers, and other consumers of inpatient acute

care hospital services, the benefits of free and open competition based

on price, quality, and service; and deny the opportunity for the San

Luis Obispo County government to purchase, on competitive terms, the

hospital care it must provide to certain indigent County residents, as

a potentially less costly alternative to providing those services at

SLO General.

The Proposed Consent and Hold Separate Agreements

The consent order, if issued in final form by the Commission, would

require Tenet to divest French and related OrNda assets, after Tenet

acquires OrNda. These assets include, among others, OrNda's interests

in a surgery center, two urgent care centers, and two medical office

buildings in San Luis Obispo County.

Tenet would also be required to divest OrNda's holdings of about

one-third of the stock of, and also a short-term loan agreement with,

Monarch Health Systems (``Monarch'). Monarch is an integrated health

delivery system, operating in San Luis Obispo and Santa Barbara

Counties. Monarch has a long-term exclusive contract with French,

through which French receives a large percentage of its patients. As

part of the Agreement to Hold Separate accompanying the proposed order,

Tenet has agreed--effective immediately--to place OrNda's stock in

Monarch into a voting trust, and take other measures designed to

prevent Tenet from exercising influence or control over Monarch,

pending divestiture of the Monarch stock and loan agreement. These

measures are to prevent Tenet from using the Monarch stock and loan

agreement to damage French's business relationship with Monarch, and

thereby lessen French's competitiveness and viability.

Under the terms of the proposed order, Tenet must make the

foregoing divestitures to an acquirer, and in a manner, approved by the

Commission. (However, Tenet may divest the Monarch stock to someone

other than the purchaser of French, and if Monarch is bought in its

entirety by a third party, Tenet need not obtain prior approval to

divest its Monarch stock to Monarch's new owner.) The approval

requirement allows the Commission to make sure that Tenet's

divestitures fulfill their purpose, of ensuring the continuation of

[[Page 5420]]

French as an ongoing, independent, and viable acute care hospital, and

remedying the lessening of competition resulting from Tenet's

acquisition of OrNda.

The divestitures must be completed by August 1, 1997; otherwise,

Tenet will consent to the appointment of a trustee, who will have

twelve additional months to effect the divestitures. If Tenet does not

complete a Commission-approved divestiture of French by August 1, 1997,

the Commission may appoint a trustee to complete that divestiture. The

trustee may divest not only French and related assets, but also OrNda's

Valley Community Hospital in Santa Maria, south of San Luis Obispo

County, and certain assets relating to Valley, if the additional

hospital and assets turn out to be necessary for a successful

divestiture of French.

The Agreement to Hold Separate executed in conjunction with the

consent agreement requires Tenet, effective immediately, to maintain

French, Valley, the Monarch stock and loan agreement, and related

assets separate from Tenet's other operations until the completion of

the divestitures, or as otherwise specified. The Agreement to Hold

Separate also requires Tenet to comply with the provisions of the

proposed consent order, pending its final approval by the Commission.

To assure the complete independence and viability of French and

Valley hospitals, and related assets, the Hold Separate Agreement

requires Tenet to transfer control of those assets to a three-member

board (only one of whom will be a Tenet employee), and to ensure that

no competitive information is exchanged between Tenet and those assets.

(The Hold Separate Agreement's provisions relating to the Monarch stock

have been described above.) Under the Hold Separate Agreement, Tenet

may not exercise any direction, control, or influence over the assets

to be held separate, except as necessary to ensure compliance with the

Consent Order and the Hold Separate Agreement, and to ensure the

continued viability, competitiveness, and marketability of those

assets.

For ten years after the order is made final, the proposed consent

order would prohibit Tenet from combining (through purchase, sale,

lease, or otherwise) its acute care hospitals in San Luis Obispo County

with any other acute care hospital in that area, or from acquiring

Monarch stock, without prior notice to the Federal Trade Commission.

Tenet must provide such notice in accordance with procedures similar to

those governing premerger notifications required by Section 7A of the

Clayton Act, 15 U.S.C. 18a (unless the merger is already subject to

section 7A's requirements, in which case no notice is necessary over

and above that provided pursuant to section 7A). The order provision

supplements section 7A, to ensure that the Commission receives advance

notice of potentially significant Tenet mergers in the relevant market,

and to thereby give the Commission an opportunity to block any such

merger if it can demonstrate that the merger may substantially lessen

competition. The proposed order contains certain limited exceptions to

the prior notification requirement for transactions which are unlikely

to substantially lessen competition, such as for transactions under $1

million.

The proposed consent order also contains provisions concerning its

continued application to future owners of French and of Tenet's acute

care hospitals in San Luis Obispo County. The acquirer of French,

pursuant to the divestiture called for by the order, must agree not to

transfer the hospital, for ten years from the date of the order,

without prior notice to the Commission, to any person already operating

an acute care hospital in San Luis Obispo County. In addition, the

order would prohibit Tenet for ten years from transferring an acute

care hospital facility in San Luis Obispo County, other than French

(e.g., Sierra Vista or Twin Cities) to another person, unless the

acquiring person first files with the Commission an agreement to be

bound by the order.

The purpose of this analysis is to invite public comment concerning

the proposed order, and to assist the Commission in its determination

of whether to make the order final. This analysis is not intended to

constitute an official interpretation of the agreement or to modify its

terms in any way.

Donald S. Clark,

Secretary.

[FR Doc. 97-2810 Filed 2-4-97; 8:45 am]

BILLING CODE 6750-01-P