Advisory Opinion to Smith (05-31-95)

May 31, 1995

Carlos C. Smith, Esq. 
Strang, Fletcher, Carriger, Walker, Hodge & Smith
400 Krystal Building
One Union Square
Chattanooga, Tennessee 37402

Edward N. Boehm, Esq.
Miller & Martin
Suite 1000, Volunteer Building 
832 Georgia Avenue
Chattanooga, Tennessee 37402

Gentlemen:

This letter responds to your request for an advisory opinion, which was submitted to the Commission on March 2, 1995,1 on behalf of the Chattanooga-Hamilton County Hospital Authority d/b/a Erlanger Medical Center ("Erlanger"), the Memorial Hospital Division of the Sisters of Charity of Nazareth Health System, Inc. ("Memorial"), and Women's East, Inc., a joint venture recently established by Erlanger and Memorial. Erlanger and Memorial are general acute care hospitals in Chattanooga, Tennessee. You requested our advice about the planned joint operation by Erlanger and Memorial, through the Women's East joint venture, of a new hospital in a Chattanooga suburb which will specialize in obstetrical and related gynecological hospital services.

As we explain more fully below, it does not appear that the proposed joint operation of the Women's East facility by Erlanger and Memorial, in the manner presented in your request for an advisory opinion, is likely to violate any law enforced by the

1 This request was supplemented on May 26 by information we requested about the Galaxy Health Alliance, a joint venture recently formed by Erlanger and several other hospitals in the Chattanooga region (including some hospitals Erlanger identifies as competitors, at least for obstetrical services).

Federal Trade Commission.2 This opinion is based on our understanding of the facts as explained in your letters, the accompanying supplemental information, and the extensive information supplied by the hospitals (both orally and in documentary form) on several occasions in advance of their request for an advisory opinion. This opinion also reflects, and our analysis of factual issues was substantially aided by, our unusually extensive knowledge of the Chattanooga hospital market (both generally, and specifically relating to obstetrical services) which we obtained in three prior Commission investigations of hospital mergers in Chattanooga.3 However, we have not conducted an independent investigation of the proposed Women's East joint venture. Our assessment of the venture could change if the facts change significantly from those you have presented in connection with this request for an advisory opinion.


I. Background 

Erlanger and Memorial propose to operate jointly, through Women's East, Inc., a new 28-bed hospital in Chattanooga's eastern suburbs. Erlanger, an 811-bed general acute care hospital in downtown Chattanooga, is operated by a local public hospital authority. Erlanger is the largest general hospital serving Chattanooga and the surrounding region. It is also the leading provider of obstetrical hospital services in the region,

2 We do not in this opinion address whether the joint venture between Erlanger, which is operated by a city-county public hospital authority, and Memorial, a private non-profit entity, might be "state action" beyond the reach of the Federal antitrust laws. See Parker v. Brown, 317 U.S. 341 (1943). While your letter expresses the view that the joint venture qualifies for the state action defense, you have asked for our advice only on whether the joint venture complies with the Federal antitrust laws independent of state action considerations.

3 The Commission investigated, but did not challenge, the 1994 combination of Parkridge Medical Center and East Ridge Hospital, which resulted from the acquisition by Columbia Healthcare Corporation of Hospital Corporation of America (FTC File No. 941-0005/Docket No. C-3505), and the 1989 acquisition by Erlanger of Riverchase Hospital (FTC File No. 891-0004). The Commission had earlier challenged Hospital Corporation of America's 1981 acquisitions of ownership of, or management contracts to operate, several hospitals in Chattanooga and surrounding areas; the Commission ultimately ordered divestiture of three Chattanooga hospitals or HCA interests therein (FTC Docket No. 9161; 106 F.T.C. 361 (1985), aff'd, 807 F.2d 1381 (7th Cir. 1986), cert. denied, 481 U.S. 1038 (1987)).

Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 3

with over 3600 live births in 1993.4 Memorial is a 350-bed general acute care hospital, also in central Chattanooga, which is operated by a Catholic multi-hospital system. While Memorial is now the third largest general hospital competitor in the Chattanooga area in terms of bed capacity (after Columbia/HCA Healthcare Corp., which owns two local general acute care hospitals with a total of 423 beds), Memorial historically has been Erlanger's principal and most direct competitor.5 Memorial provides a broad range of primary, secondary, and tertiary general hospital services (except for some of the most specialized services, provided in the Chattanooga region only by Erlanger) -- with the notable exception of obstetrics, which Memorial has not provided since 1982.

According to your request, Women's East would specialize in the provision of obstetrical hospital services associated with routine, low-risk childbirths,6 along with related gynecological services. The majority of the beds at Women's East will be devoted to the delivery of children in a "Labor, Delivery, Recovery, and Post-Partum" ("LDRP") setting. The LDRP setting permits the entire birthing process to take place in a single room, under the supervision of a single group of nurses, with the baby remaining with the mother, and with participation in the birthing process by other family members. (By contrast, a typical patient in Erlanger's traditional-style obstetrical department may be moved six times among five different beds, and treated by three different nursing staffs.) According to your letter, the LDRP setting is more appealing to patients and their families, as well as also more efficient and economical, than a traditional setting.

Erlanger and Memorial share ownership of the Women's East joint venture, with each naming half of the venture's governing

4 American Hospital Association Guide to the Health Care Field (1994 ed.). In that year, the two other hospitals providing obstetrical services in the Chattanooga metropolitan area had about, respectively, 2300 and 1100 births.

5 We do not know whether Columbia/HCA has made its Parkridge and East Ridge hospitals a stronger force in the market, rivalling or overtaking Memorial, since it brought those hospitals under common Columbia/HCA ownership last year.

6 Erlanger's main campus in downtown Chattanooga would continue to handle both low-risk childbirths and high-risk childbirths (e.g., where delivery poses significant dangers to the mother's health and/or the newborn children are likely to require immediate treatment for significant medical problems of their own).

Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 4 

board members. Under the joint venture, each hospital may make the Women's East facility available to patients covered by health plans with which the hospital contracts; in effect, each hospital would purchase services from Women's East, and resell those services to health plans as part of the overall package of general hospital services sold under that hospital's contracts with health plans. Women's East may also enter into its own contracts with health plans, as well as provide its services on a fee-for-service basis for patients whose health plans do not contract with either Erlanger or Memorial.

Women's East, Inc. has already received state certificate- of-need regulatory approval to proceed with the construction and operation of the new hospital. However, there are pending administrative challenges to that certificate of need, by local hospitals contending that there is no "need" for a new hospital that would compete with their own obstetrical departments.7

II. Antitrust Issues Presented by the Joint Venture

One of the Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust, which the Commission and the Department of Justice jointly issued last September, discusses the antitrust issues raised by financially-integrated hospital joint ventures (such as the Women's East venture) involving "specialized clinical or other expensive health care services."8 That statement outlines the potential antitrust concerns raised by joint ventures such as the Women's East venture, to be weighed under the "rule of reason" against potential benefits that such ventures may offer consumers.

In particular, it is necessary to assess two concerns: whether "the joint venture would eliminate an existing or potentially viable competing provider of a service" with few existing providers in the market; and "whether cooperation in the joint venture market might spill over into a market in which the parties to the joint venture are competitors." Both concerns are

7 Their objections appear to be directed to the establishment of a new obstetrical facility in the Chattanooga area hospital market, rather than to its being operated by a Erlanger-Memorial joint venture instead of just one of the two hospitals.

8 United States Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust, at 35-43 (September 27, 1994), reprinted in 4 Trade Reg. Rep. (CCH)