PUBLIC VERSION

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION

FEDERAL TRADE COMMISSION,

Plaintiff,

vs.

TENET HEALTHCARE CORPORATION, a Nevada Corporation, and POPLAR BLUFF PHYSICIANS GROUP, INC. d/b/a DOCTORS REGIONAL MEDICAL CENTER, a Missouri Corporation,

Defendants.

Civil Action No. 1:98CV00040CDP

 

PLAINTIFF'S MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION FOR PRELIMINARY INJUNCTION

DEBRA A. VALENTINE WILLIAM J. BAER

General Counsel Director
Bureau of Competition

ROBERT F. LEIBENLUFT
Assistant Director

GARRY R. GIBBS Attorney
Bureau of Competition

Federal Trade Commission
Washington, D.C. 20580
(202) 326-3688

April 27, 1998 

TABLE OF CONTENTS

TABLE OF AUTHORITIES ii

PRELIMINARY STATEMENT 1

ARGUMENT 5

I. UNDER SECTION 13(b) OF THE FTC ACT, THE COURT SHOULD ENJOIN THE PENDING ACQUISITION 5

II. THE FTC IS LIKELY TO SUCCEED ON THE MERITS 5

A. The Relevant Product Market 7

B. The Relevant Geographic Market 7

C. The Acquisition is Likely to Lessen Competition Substantially 12

1. The Acquisition Would Significantly Increase Concentration and Create a Monopoly 12

2. The Acquisition Would Substantially Harm Competition and Hence Consumers 13

3. New Entry or Repositioning by Other Hospitals Would Not Occur
15

4. Defendants' Likely Rebuttal Arguments Do Not Undermine the Commission's Likelihood of Success on the Merits 16

III. THE BALANCE OF EQUITIES AND THE PUBLIC INTEREST REQUIRE PUTTING THE ACQUISITION ON HOLD PENDING FURTHER PROCEEDINGS 18

TABLE OF AUTHORITIES

FEDERAL CASES

Bathke v. Caseys General Stores,
64 F.3d 340 (8th Cir. 1995) 8

Brown Shoe Co. v. U.S.,
370 U.S. 294 (1962) 7, 8

California v. American Stores Co.,
495 U.S. 271 (1990) 6

Citizen Publg Co. v. U.S.,
394 U.S. 131 (1969) 16

Community Publishers, Inc. v. DR Partners,
1998 U.S. App. LEXIS 5802 (8th Cir. Mar. 25, 1998) 12

FTC v. Dean Foods Co.,
384 U.S. 597 (1966) 18

FTC v. Exxon Corp.,
636 F.2d 1336 (D.C. Cir. 1980) 5

FTC v. Freeman Hospital,
69 F.3d 260 (8th Cir. 1995) 5,7,8,17

FTC v. National Tea Co.,
603 F.2d 694 (8th Cir. 1979) 5,18

FTC v. PPG Industries, Inc.,
798 F.2d 1500 (D.C. Cir. 1986) 18

FTC v. Staples, Inc.,
970 F. Supp. 1066 (D.D.C. 1997) 18

FTC v. University Health, Inc.,
938 F.2d 1206 (11th Cir. 1991) 5,16,17

FTC v. Weyerhaeuser Co.,
665 F.2d 1072 (D.C. Cir. 1981) 19

Hospital Corp. of America v. FTC,
807 F.2d 1381 (7th Cir. 1986), cert. denied, 481 U.S. 1038 (1987) 6

Morgenstern v. Wilson,
29 F.3d 1291 (8th Cir. 1994), cert. denied, 513 U.S. 1150 (1995) 7

U.S. v. General Dynamics Corp.,
415 U.S. 486 (1974) 16

U.S. v. Long Island Jewish Med. Ctr.,
983 F. Supp. 121 (E.D.N.Y. 1997) 7,16

U.S. v. Marine Bancorporation, Inc.,
418 U.S. 602 (1974) 6

U.S. v. Philadelphia National Bank,
374 U.S. 321 (1963) 6,12

U.S. v. Rockford Mem. Corp.,
898 F.2d 1278 (7th Cir.), cert. denied, 498 U.S. 920 (1990) 7

FEDERAL STATUTES

Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. 53(b) 3

Section 7 of the Clayton Act, 15 U.S.C. 18 5

16 C.F.R. 3.11A 19

MISCELLANEOUS

U.S. Dept. of Justice & Federal Trade Commn, Horizontal Merger Guidelines (1997) 6,7,13,16

PRELIMINARY STATEMENT

Tenet Healthcare Corporation ("Tenet"), the nation's second-largest for-profit hospital chain, plans to acquire Doctors Regional Medical Center ("DRMC"), a general acute care hospital in Poplar Bluff, Missouri. Tenet already owns DRMC's only significant competitor, Lucy Lee Hospital. The proposed acquisition would eliminate the vigorous competition between these hospitals -- which has given consumers a choice of two highly regarded, competitively priced, and financially sound facilities -- and create a monopoly. Tenet's post-merger market share of nearly 80% in the relevant market makes the transaction presumptively illegal. The risk of anticompetitive conduct by the merged hospitals is real. Employers in the area (the major non-governmental purchasers of hospital services) overwhelmingly agree they will have no alternatives to paying higher prices unless the acquisition is blocked.

The Federal Trade Commission has found reason to believe that the proposed acquisition would violate the antitrust laws and that a preliminary injunction to preserve the status quo pending a trial on the merits in an FTC administrative proceeding would be in the public interest. Section 13(b) of the Federal Trade Commission Act, 15 U.S.C.  53(b), authorizes district courts to grant such preliminary relief if, "weighing the equities and considering the FTC's likelihood of ultimate success, such action would be in the public interest." A preliminary injunction is needed here to prevent the interim harm that consumers would likely suffer and to ensure adequate relief in the future if the transaction is ultimately found unlawful. Accordingly, the FTC requests that this Court preliminarily enjoin the proposed transaction until completion of an administrative proceeding.

* * *

The Hospitals: Lucy Lee and DRMC are both for-profit, general acute care hospitals in Poplar Bluff, Missouri, which is located in the Ozark Foothills region of southeast Missouri. In addition to Lucy Lee, Tenet owns eight other hospitals in Missouri, including St. Louis University Hospital. DRMC is controlled by 30 Poplar Bluff physicians.

Lucy Lee and DRMC are similar in size and services offered. Lucy Lee has 201 licensed beds, and DRMC has 230.(1) Both hospitals provide a full range of primary and secondary hospital services (e.g., obstetrics, pediatrics, general medicine and surgery), but not tertiary care, (e.g., high risk obstetrics, neonatology, neurosurgery, and heart surgery). Both Lucy Lee and DRMC are profitable.

Lucy Lee and DRMC are the only hospitals in Butler County. The only hospitals within the seven counties surrounding Butler County(2) are a 118-bed Tenet hospital in Dunklin County, Missouri, and four rural hospitals offering more limited services. (See attached map (PX 101)).

Hospital Competition: The competition between Lucy Lee and DRMC, which has saved consumers substantial sums through lower hospital prices, demonstrates why hospital competition is crucial in the evolving health care industry. Rapidly escalating health care costs have prompted employers and governments to shift from traditional indemnity insurance (which provides few incentives for people to choose less expensive or more efficient hospitals) to various strategies that have come to be known as "managed care." Employers, and health plans acting as their intermediaries, gather information about the price and quality of hospital services, negotiate hospital rates that are lower than posted charges, selectively contract with hospitals that offer the best value, and use financial incentives (such as lower co-payments and deductibles) to encourage patients to use the most cost-effective hospitals. A choice between competing facilities such as Lucy Lee and DRMC is critical to the success of such efforts, because only hospitals facing competition have a strong incentive to lower their prices in order to keep their current patients and attract new ones.

Competition between Lucy Lee and DRMC has been intense. Employers and managed care health plans view these hospitals as good substitutes for one another, and have been willing to shift their business from one to the other in order to get the best deal.(3) As a result, purchasers have received discounts of up to off the hospitals' standard charges.(4) Employers and health plans agree that Lucy Lee and DRMC are competitively priced, and that the prices they must pay at the closest comparable hospitals outside the Poplar Bluff area are much higher (PX 10 at 6-7; PX 49 at  4, 6; PX 50 at 5). Competition also spurs hospitals to provide high quality, cost effective care (PX 338 at 190-91). The current competition between DRMC and Lucy Lee has given consumers a choice between two hospitals that not only are highly regarded providers of health care, but also are efficient and low cost. (PX 129 at 1190325-26).

The Acquisition Will Leave Consumers with No Practical Alternatives: The proposed acquisition will end this competition. Because there are no practical alternatives to the combined Lucy Lee/DRMC, consumers will lose competitive prices, choice, and the other benefits of a competitive market. The four non-Tenet hospitals within the seven counties surrounding Butler County are small, financially distressed hospitals that offer a much narrower range of services than Lucy Lee and DRMC.(5) Other, more distant hospitals that might theoretically serve as alternatives are too far away, and, in most cases, too expensive to provide any constraint on Tenet's ability to raise prices.(6)

Employers and health plans agree that they would have no choice but to pay higher prices after the merger.(7) For example, one of the area's largest employers states:

The Missouri Attorney General has determined that the merger would substantially reduce competition and has filed suit to block the transaction.

* * *

The proposed acquisition creates a monopoly for general acute care hospital services in the Poplar Bluff area, is presumptively unlawful, and threatens substantial consumer injury. The strong public interest in competitive markets requires that the status quo be maintained pending a full trial on the merits in an FTC administrative proceeding.

ARGUMENT

I. UNDER SECTION 13(b) OF THE FTC ACT, THE COURT SHOULD ENJOIN THE PENDING ACQUISITION

Section 13(b) directs district courts to grant preliminary relief if, "weighing the equities and considering the FTC's likelihood of ultimate success, such action would be in the public interest." In deciding whether to grant relief under this statute, courts (1) examine the likelihood that the FTC will ultimately succeed on the merits, and (2) weigh "the competing equities advanced by the parties." FTC v. Freeman Hosp., 69 F.3d 260, 267-68 (8th Cir. 1995). The court is not called upon to reach a final determination on the merits of the antitrust issues. Rather, to justify relief under Section 13(b), the Commission need only raise "questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance, and ultimately by the Court of Appeals." Freeman, 69 F.3d at 267, quoting FTC v. National Tea Co., 603 F.2d 694, 698 (8th Cir. 1979). In evaluating the equities, "[t]he principal equity weighing in favor of issuance of [an] injunction is the public's interest in effective enforcement of the antitrust laws. FTC v. University Health, Inc., 938 F.2d 1206, 1225 (11th Cir. 1991). Unlike private litigants, the Commission need not satisfy the traditional equity standard of irreparable injury, which is presumed in a statutory enforcement action. See FTC v. Exxon Corp., 636 F.2d 1336, 1343 (D.C. Cir. 1980)(Congress enacted a "unique 'public interest' standard . . . rather than the more stringent, traditional "equity" standard for injunctive relief").

II. THE FTC IS LIKELY TO SUCCEED ON THE MERITS

The ultimate question in any challenge to an acquisition under Section 7 of the Clayton Act, 15 U.S.C.  18, is whether the transaction's effect "may be substantially to lessen competition." California v. American Stores Co., 495 U.S. 271, 284 (1990). Certainty is not required. "All that is necessary is that the merger create an appreciable danger of [anticompetitive] consequences in the future." Hospital Corp. of America v. FTC, 807 F.2d 1381, 1389 (7th Cir. 1986), cert. denied, 481 U.S. 1038 (1987). Thus Section 7 requires a prediction as to the merger's likely impact, in order to stop anticompetitive mergers "in their incipiency." U.S. v. Philadelphia Nat'l Bank, 374 U.S. 321, 362 (1963).

The predictive task here is simpler than in most cases by virtue of (1) the parties' own business documents identifying each other as their principal competitor; and (2) the overwhelming concern of knowledgeable customers -- employers and health plans -- that the elimination of competition between these two rivals will inevitably mean higher prices for hospital services. This evidence that the merger would substantially reduce competition and lead to higher prices for hospital care provides a solid basis for concluding that there is an "appreciable danger" of anticompetitive effects.

The formal analysis under Section 7 leads to the same conclusion. That analysis involves determinations of: (1) the "line of commerce," or product market, affected by the transaction; (2) the "section of the country," or geographic market, where the acquisition will have its effect; and (3) the transaction's probable effect on competition in the relevant market. See, e.g., U.S. v. Marine Bancorporation, Inc., 418 U.S. 602, 618-23 (1974); U.S. Dept. of Justice & Federal Trade Comm'n, Horizontal Merger Guidelines (1997) ("Merger Guidelines") (PX 4). Application of that analysis to the facts in this case confirms what buyers in this market have already concluded: that the merger of Lucy Lee and DRMC will mean reduced competition and higher prices.

A. The Relevant Product Market

A relevant product market under Section 7 is defined by the "reasonable interchangeability of use . . . between the product itself and substitutes for it." See Brown Shoe Co. v. U.S., 370 U.S. 294, 325 (1962). In hospital merger cases, courts have almost universally defined the product market as general acute care inpatient services. See, e.g., Freeman., 69 F.3d at 268; U.S. v. Rockford Mem. Corp., 898 F.2d 1278, 1284 (7th Cir.), cert. denied, 498 U.S. 920 (1990); U.S. v. Long Island Jewish Med. Ctr., 983 F. Supp. 121, 140 (E.D.N.Y. 1997) (citing cases). General acute care inpatient services are the range of services and capabilities necessary to meet the medical, surgical, and other needs of inpatients. No substitutes exist for the core cluster of acute care inpatient services offered by these hospitals. The evidence in this case establishes that a relevant product market for assessing this acquisition is the general acute care inpatient services provided by the merging parties. (PX 333 at 32-34; PX 335 at 41-43; PX 336 at 158-59; PX 338 at 115-16).

B. The Relevant Geographic Market

A relevant geographic market "encompasses the geographic area to which consumers can practically turn for alternate sources of the product and in which the antitrust defendants face competition." Morgenstern v. Wilson, 29 F.3d 1291, 1296 (8th Cir. 1994), cert. denied, 513 U.S. 1150 (1995). The ultimate goal of market definition is to determine whether sellers within the area could profitably increase prices after the merger. Merger Guidelines at  1.21.

The geographic market must be defined in terms of the "commercial realities of the industry," Brown Shoe, 370 U.S. at 336, and the practical alternatives available to consumers if prices increase. See Freeman, 69 F.3d at 268 ("critical question of where consumers . . . could practicably turn"); Bathke v. Casey's General Stores, 64 F.3d 340, 345 (8th Cir. 1995) (requiring "a factual inquiry into the 'commercial realities' faced by consumers"). In other words, as the Eighth Circuit has emphasized, geographic market definition requires a dynamic, forward-looking analysis, not merely a static snapshot of current competitive behavior, and one that rests on commercial realities, not theoretical possibilities.

The relevant geographic market to use in evaluating Tenet's acquisition of DRMC is an area no larger than Butler County and portions of the surrounding seven counties. This market includes, in addition to Lucy Lee and DRMC, Tenet-owned Twin Rivers Hospital (118 beds; 50 miles from Poplar Bluff), and four rural hospitals: 26-bed Ripley Memorial (31 miles); 50-bed Dexter Memorial (28 miles); 29-bed Reynolds County Memorial (53 miles); 27-bed Piggott Community (43 miles).(8)

Evidence from employers, health plans, and the parties themselves shows that the hospitals outside the market are not practical alternatives to the Poplar Bluff hospitals now, and would not be in the future if the merger takes place and prices increase in Poplar Bluff. Hospitals in Sikeston (55 miles), Cape Girardeau (82 miles), St. Louis (150 miles), and Jonesboro (80 miles) and Paragould (60 miles), Arkansas, could not constrain a price increase in Poplar Bluff for a number of reasons. Most of the closest ones are much more expensive on average than the Poplar Bluff hospitals, and all are too far away for most consumers who live in the market; and switching hospitals often would require changing physicians. Moreover, as discussed in Section II.C.3, none of the rural hospitals within the market offers comparable quality or services, or constrains pricing by the Poplar Bluff hospitals.

The "commercial realities faced by consumers" confirm that outlying hospitals are not practical alternatives:

Perceptions of Buyers: Customers of Lucy Lee and DRMC overwhelmingly state they do not have practical alternatives to these hospitals. Employers, whether they are in Poplar Bluff itself, Stoddard County, or Wayne County; whether they employ people or , say that they could not steer their employees to other hospitals to defeat a price increase by the Poplar Bluff hospitals . Health plans state that they could not sell insurance products in Butler and surrounding counties that required people to use hospitals outside the market.

A key "commercial reality" of this industry is the existence of two categories of customers for hospital services: individual consumers, and the employers and health plans who negotiate and pay on their behalf. The employers and health plans play a significant role in determining the price options that consumers confront (both through the prices they negotiate with hospitals and the financial incentives built into their health benefit programs). Thus, the likelihood that a price increase in Poplar Bluff would induce individual consumers to use other hospitals must be evaluated by looking at the response of employers and health plans. The evidence shows that these knowledgeable customers do not see other hospitals as viable alternatives and could not and would not attempt to shift people to other hospitals. (PX 51 at 7-9; PX 50 at  5, 6).(9)

High Prices: Consumers and payers could not escape a price increase in Poplar Bluff by seeking care in Cape Girardeau and Sikeston because those hospitals are much more expensive. Data from health plans who contract with hospitals in Poplar Bluff, Cape Girardeau, and Sikeston, shows the hospitals in Cape Girardeau charge more than the Poplar Bluff hospitals, and the hospital in Sikeston charges more than the Poplar Bluff hospitals.(10)

(11) Thus, even if Tenet raised prices in Poplar Bluff by a substantial amount after the merger, these other hospitals would still be more costly to use.

Distance: It is more than an hour's drive from Poplar Bluff to any hospital that even comes close to the size and services offered by Lucy Lee and DRMC (PX 100, Table I). Because none of the hospitals outside the market have outreach clinics within the market, people would also have to travel significant distances to the hospital's community for each pre- and post-procedure visit. (PX 18 at 6; PX 20 at 6; PX 106). Tenet's pre-litigation view of commercial realities confirms the accuracy of the Commission's geographic market.

Availability of physicians: Very few of the physicians who have admitting privileges at Poplar Bluff hospitals have such privileges at hospitals outside the market. (PX 99 at 10, Table II). Thus, using a hospital outside the market may also require people to use a physician located a considerable distance away, and would require people currently using a physician located in the market to switch doctors. (PX 338 at 127; PC 333 at 158; PX 52 at  7). Employers and insurers say these considerations would cause consumers to stay in Poplar Bluff despite a price increase. (PX 51 at 7; PX 14 at 6; PX 18 at 4; PX 13 at  5; PX 52 at  7).

Defendants' and other hospitals' view of the market:

In sum, the commercial realities faced by purchasers today and in the future, and the other available evidence, support the conclusion that Butler County and portions of the surrounding counties is an appropriate area in which to analyze the effects of the merger. While the defendants no doubt will argue that there are many geographically distant hospitals, or small rural hospitals, that could serve as alternatives to the ones in Poplar Bluff, commercial realities make these theoretical alternatives impractical.

C. The Acquisition is Likely to Lessen Competition Substantially

1. The Acquisition Would Significantly Increase Concentration and Create a Monopoly

Mergers that result in a single firm with a high market share and a concentrated market are presumptively illegal. See Philadelphia Nat'l Bank, 374 U.S. at 364 (merger presumptively illegal where merging banks would have 30% of market and top four would have 78%); Community Publishers, Inc. v. DR Partners, 1998 U.S. App. LEXIS 5802, at *9 (8th Cir. Mar. 25, 1998) (market shares of 84% and 88% "clearly raised a presumption that the acquisition violated Section 7"). Here, the proposed acquisition would create a single hospital with a market share (based on patient days) of 77.8% in the relevant market. (PX 99 at Table I) Concentration, as measured by the Herfindahl-Hirschman Index ("HHI"), increases dramatically as a result of the merger -- to 6204, an increase of 2775. (PX 99 at Table I).(12) In other words, this merger results in a monopoly, and increases market share and concentration more than enough to trigger the presumption of illegality.

2. The Acquisition Would Substantially Harm Competition and Hence Consumers

A wealth of real world evidence validates the presumption that this merger would significantly diminish competition. The evidence shows that Lucy Lee and DRMC are each other's main -- and in many senses only -- competitor. (PX 336 at 139; PX 338 at 152, 185).

This competition has resulted in numerous benefits for consumers, including: (1) price discounts up to off the hospitals' standard charges for employers and health plans;(13) (2) ;(14) and (3).(15)

The merger would transform this thriving, competitive market -- which large purchasers use as a benchmark for evaluating hospital prices in other parts of the country (PX 21 at 6) -- into a non-competitive market dominated by a monopolist. The likely increase in prices that will flow from the merger explains the overwhelming opposition to the merger by local employers and managed care plans. As the area's explained:

Area employers and managed care plans agree that the post-merger hospital would be able to raise prices and that they could not escape those higher prices by turning to other hospitals.(16) Those who have suffered the effects of similar hospital mergers in other markets are particularly concerned. (PX 51 at  13; PX 50 at  9). The higher prices at the closest comparable hospitals outside the market mean that health care consumers could not find cheaper services outside Poplar Bluff even in the face of a 10% price increase by the Poplar Bluff hospitals. See Section II.B, supra.

3. New Entry or Repositioning by Other Hospitals Would Not Occur

The four rural hospitals within the market are very small facilities (50 beds or fewer), with very few physicians on staff, and are not JCAHO-accredited.(17) They do not possess the resources, scope of services, or reputation of the Poplar Bluff hospitals, and are not effective substitutes.(18) All are suffering serious financial problems and are unable to add services or expand (PX 65 at  4, 6; PX 70 at  2; PX 75 at  3, 4). Reynolds County Memorial Hospital is in bankruptcy. (PX 69 at 4, 7). These hospitals could not reposition themselves in the near future to compete with a combined Lucy Lee/DRMC.

There is little likelihood that new hospital capacity, which might defeat a price increase, would enter the market in the foreseeable future. Entry is difficult and unlikely -- whether through new construction, addition of beds to an existing hospital, or conversion of a non-hospital to hospital use -- particularly given the time and expense for construction (PX 336 at 171-72; PX 59 at 7; PX 84 at 6, 7). In addition, certificate-of-need ("CON") regulation in Missouri precludes such entry in the near future: the CON process can take over two years; and CON approval for additional hospital beds in the Poplar Bluff area would be unlikely in the near future (PX 86 at  12, 16; PX 336 at 171-72).

4. Defendants' Likely Rebuttal Arguments Do Not Undermine the Commission's Likelihood of Success on the Merits

Tenet is likely to argue that the proposed merger's anticompetitive effects are offset by efficiencies related to the merger, and that the market is too small to support two hospitals. Neither of these claims has merit.

Efficiencies: A defendant cannot rebut the government's prima facie case with efficiencies claims unless the defendant can "demonstrate that the intended acquisition would result in significant economies and that these economies ultimately would benefit competition, and hence, consumers." University Health, 938 F.2d at 1223. Proof of such efficiencies must amount to more than "speculative, self-serving assertions." Id. Efficiencies counteract the anticompetitive impact of a merger only if they "create a net economic benefit for the health care consumer," Long Island Jewish, 983 F. Supp. at 121, 147, and are simply irrelevant to assessing the competitive impact of a merger if they could be achieved without the merger. See id. Efficiencies "almost never justify a merger to monopoly or near-monopoly." Merger Guidelines,  4. Defendants have not shown that any benefits that might be achieved through the merger (and only through the merger) would benefit competition and consumers, rather than Tenet's shareholders, and are unlikely to be able to do so.

Future Market Conditions: DRMC does not satisfy the requirements of a traditional "failing firm" defense. See Citizen Publ'g Co. v. U.S., 394 U.S. 131, 136-38 (1969) (must show imminent financial failure of acquired firm and no alternative purchaser). Any more limited argument based on speculation about the long-run competitive viability of DRMC would not be supportable under the cases construing Section 7. See, e.g., University Health, 938 F.2d at 1221 (rejecting argument based on weakness of acquired firm); cf. U.S. v. General Dynamics Corp., 415 U.S. 486 (1974) (market share statistics overstated acquired company's competitive significance because its remaining reserves were committed under long term contracts). Defendants cannot show that DRMC -- which is fiscally sound (PXs 158-161, 164, 165) and competes vigorously with Lucy Lee -- is not a meaningful competitor, or will not be one in the foreseeable future.

Further, employers and health plans oppose the acquisition precisely because of the important competitive role that DRMC plays.

Arguing that hospital bed occupancy rates are low in Poplar Bluff, the defendants predict that demand for inpatient hospital services will inevitably decrease in the future to levels insufficient to support two hospitals in the market. But occupancy rates (such as Tenet's 1997 system-wide rate of 42.6% (PX 308 at 7)) only reflect use of the hospitals by people categorized as inpatients, and do not tell the whole story. Lucy Lee and DRMC, like hospitals throughout the nation, have adapted to declining demand for inpatient hospital services by using their facilities to treat on an outpatient basis many patients who previously would have been admitted for overnight hospital stays (PX 174 at 0050423). Thus, despite declines in inpatient utilization, hospital profits have increased (PX 158 at 6; PX 174 at 50423: PX 137 at 13; PX 138 at 5).

Given the demographic and other characteristics of this market, defendants' forecasts of drastic future declines are speculative. Indeed, and Tenet's willingness to pay for DRMC, undermine defendants' speculation about future conditions in the market.

III. THE BALANCE OF EQUITIES AND THE PUBLIC INTEREST REQUIRE PUTTING THE ACQUISITION ON HOLD PENDING FURTHER PROCEEDINGS

The courts recognize the strong public interest in effective enforcement of the antitrust laws and in preservation of competition while a transaction that poses a significant competitive threat is analyzed in detail. See Freeman, 69 F.3d at 272; University Health, 938 F.2d at 1225. Although private equities must be considered in the balance, courts "must afford such concerns little weight, lest [they] undermine section 13(b)'s purpose of protecting the 'public-at-large, rather than individual private competitors.'" University Health, id., quoting National Tea Co., 603 F.2d at 697 n.4; see also Freeman, 69 F.3d at 272 ("the public equities are to be given greater weight in the balance").

A preliminary injunction is warranted here, because, absent such relief, it will be impossible to ensure effective post-merger relief. One of the primary reasons for enjoining potentially illegal acquisitions is the difficulty of effectively splitting a combined operation into two viable entities after the acquisition is consummated. That problem is evident here, where

Thus, a post-merger divestiture order would have to both reverse the consolidation of services Tenet proposes and recreate services terminated at the individual hospitals as a result of the consolidation. See FTC v. Staples, Inc., 970 F. Supp. 1066, 1091 (D.D.C. 1997) ("Unscrambling the eggs after the fact is not a realistic option").

In addition, later divestiture would do nothing to remedy the immediate harm consumers would suffer from the elimination of this competition. See FTC v. PPG Industries, Inc., 798 F.2d 1500, 1508 (D.C. Cir. 1986)(even a hold separate order, as opposed to a preliminary injunction "could not certainly protect against interim competitive harm or ensure the adequacy of eventual relief"). The inherent deficiencies of divestiture have long been recognized by the courts and were a primary reason for the enactment of section 13(b). See, e.g., FTC v. Dean Foods Co., 384 U.S. 597, 606 n.5 (1966) FTC v. Weyerhaeuser Co., 665 F.2d 1072, 1085 n.31 (D.C. Cir. 1981).

Any private interests the parties may have in closing immediately on their April 1997 agreement to merge are overwhelmed by the strong public interests that mandate issuance of a preliminary injunction. See Weyerhaeuser, 665 F.2d at 1083. Under Commission rules, a proceeding in this matter, including a full trial on the merits and issuance of a Commission opinion, can be completed within 13 months if defendants so choose. See 16 C.F.R.  3.11A; PX 3. The public's vital interest in preserving competition requires a preliminary injunction precluding consummation during that period of time, so that the administrative process that Congress prescribed can be completed.

CONCLUSION

For the foregoing reasons, the Court should grant the Commission's request for a preliminary injunction.

Respectfully submitted,

 

Garry R. Gibbs Attorney for Federal Trade Commission


Endnotes

1. Not all licensed beds are staffed, or used for acute care. For example, some of Lucy Lee's and DRMC's licensed beds are used for skilled nursing care. (PX 305 at 204; PX 306 at 150).

2. These are Carter, Dunklin, Reynolds, Ripley, Stoddard, and Wayne Counties in Missouri, and Clay County in Arkansas.

3. PX 52 at 11; PX 10 at 6; PX 14 at 7, 8; PX 27 at 8.

4.

5. See infra Section II.C.3.; PX 65 at 3, 5, 6; PX 69 at 4, 7; PX 70 at 2, 3; PX 75 at 2, 4; PX 24 at 7; PX 18 at 5; PX 21 at 7; PX 22 at 7; PX 49 at 5.

6. PX 49 at 6; PX 50 at 6; PX 51 at 7-9; PX 13 at 6; PX 14 at 5.

7. PX 10 at 7; PX 9 at 4, 6; PX 14 at 5, 8; PX 15 at  8; PX 49 at 5; PX 50 at 6; PX 51 at 7-9; PX 52 at 10.

8. Distances in this section are approximate driving miles from Poplar Bluff (PX 100, Table I).

9. Many of these practical obstacles to switching hospitals apply to consumers in indemnity plans as well.

10.

11.

12. The HHI is a measure of market concentration calculated by squaring the market share of each competing firm and summing the resulting numbers. Because the HHI increases both as the number of firms in the market decreases, and as the disparity in size among those firms increases, it takes into account the relative size distribution of the firms in a market. In a market with only a single firm, the HHI would be 10000. Markets with an HHI of more than 1800 are considered highly concentrated, and the Merger Guidelines,  1.51, presume that a merger which increases the HHI by more than 100 points in a highly concentrated market is "likely to create or enhance market power or facilitate its exercise."

13.

14.

15.

16. PX 17 at  8; PX 13 at  9; PX 28 at  9; PX 14 at  8; PX 20 at  9; PX 52 at  12.

17. Accreditation by the Joint Commission on Accreditation of Healthcare Organizations indicates that a hospital has met the most widely recognized standard of quality for the industry.

18. PX 27 at 7; PX 20 at 5; PX 51 at  6; PX 50 at  4; PX 75 at  4; PX 65 at  9; PX 52 at  5.