Advisory Opinion to Fancher (06-20-95)

June 20, 1995

Derrell O. Fancher
407 Lay Dam Road
P.O. Box 185
Clanton, AL 35045

This letter responds to your two letters dated March 6, 1995, requesting an advisory opinion concerning a proposed joint venture between your clients, Elmore Community Hospital and Community Hospital, for the purchase of certain services required by the hospitals.

Elmore Community Hospital, Inc., (Elmore) is a 69-bed general acute care hospital located in Wetumpka, Alabama. Elmore is a public corporation organized under Alabama's Health Care Authorities Act.1 Community Hospital, Inc. (Community), is a 77-bed general acute care hospital located in Tallassee, Alabama, about 20 miles from Wetumpka. Community is a not-for-profit corporation and is exempt from federal income taxation. Each hospital offers both inpatient and outpatient medical and surgical services.

Both hospitals are located in Elmore County, which is part of the Montgomery, Alabama, Metropolitan Statistical Area. However, both hospitals are rural facilities. According to your letter, Elmore and Community compete with one another as well as with four general acute care hospitals located in Montgomery2 and four smaller facilities located in surrounding counties. You have further informed us that residents of the areas served by Elmore and Community are generally referred to Montgomery hospitals if they do not use the local hospital, and that the two hospitals are not significant direct competitors.

1 Ala. Code 22-21-310. You have not requested, and we do not render, an opinion on the extent, if any, to which the state action doctrine applies to the activities of Elmore or the joint venture.

2 According to the 1994 AHA Guide, Baptist Medical Center had 305 beds, East Montgomery Medical Center had 150 beds, Jackson Hospital had 280 beds, and Montgomery Regional Medical Center had 160 beds.

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Elmore and Community propose to create a nonprofit, tax exempt corporation, owned in equal shares by the hospitals, to purchase certain services on behalf of the two hospitals. Half of the governing body of the corporation would be appointed by Elmore and half by Community. Management of the corporation would be the responsibility of the chief executive officers of the two hospitals.

The purpose of the joint purchasing arrangement is to lower purchasing costs through volume discounts and reduced transaction costs, and to share certain personnel that cannot profitably be employed on a full-time basis at either hospital. The venture is directed primarily toward the purchase of services. The venture may contract for or employ personnel involved in rendering clinical services3 as well as personnel involved in other functions.4 Neither Elmore nor Community would be required to purchase services through the venture. Elmore and Community expect that purchases by the venture will account for less than 35% of the total sales of the purchased services in the relevant market, and that the cost of the services purchased jointly will account for less than 20% of the total revenues from all products and services sold by each of the two hospitals.

The proposed joint purchasing arrangement appears to fall within the safety zone established by Statement 7 of the Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust issued by the Department of Justice and the Federal Trade Commission.5 Under that

3 Your letter lists the following types of personnel that may be obtained through the joint venture: dietary, clinical laboratory, pathology, radiology, respiratory therapy, physical therapy, nurse staffing, patient education, pharmacy, infection control, emergency room physician coverage, anesthesiologists, and home health management.

4 Your letter lists the following additional services or personnel that may be obtained though the joint venture: purchasing, medical records, transcription, employees for utilization review and education, collection agencies, waste management, security, auditing, patient billing, employee benefits, medical staff credentialing, telephone services, housekeeping, records storage and retrieval, public relations, marketing, physician recruitment, human resources management, business office, laundry, grounds upkeep, maintenance, and biomedical engineering. You state that not every service listed in your letters will be purchased through the joint venture.

5 United States Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy and (continued...)

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statement, the federal antitrust enforcement agencies normally will not challenge a joint purchasing arrangement among health care providers if:

(1) the purchases account for less than 35 percent of the total sales of the purchased product or service in the relevant market; and (2) the cost of the products and services purchased jointly accounts for less than 20 percent of the total revenues from all products or services sold by each competing participant in the joint purchasing arrangement.6

As the Enforcement Policy Statement points out, most joint purchasing arrangements among hospitals achieve efficiencies that will benefit consumers, and they are likely to raise antitrust concerns only if an arrangement can effectively exercise market power in the purchase of products or services, or if the arrangement may facilitate price fixing or otherwise reduce competition in the market for the products or services sold by the participants in the joint venture. With respect to ventures meeting the requirements listed above, these detrimental effects are not likely to occur. If, as Elmore and Community anticipate, the purchases made by the joint venture do not exceed 35% of the total sales of any service in the relevant market and the total cost of purchased services account for less than 20 percent of the total revenues of either hospital, the venture would not likely have any anticompetitive effects. Moreover, the joint venture appears to have the potential to achieve substantial efficiencies.7

The safety zone applies to joint purchasing arrangements that acquire products or services for the individual use of their participants, not to arrangements in which the participants

5(...continued) Analytical Principles Relating to Health Care and Antitrust ("Enforcement Policy Statements") at 58-65 (September 27, 1994), reprinted in 4 Trade Reg. Rep. (CCH) 13,150 (1994).

6 Id. at 60. 

7 We note that both hospitals appear to fall within the "antitrust safety zone" of Statement 1 of the Enforcement Policy Statements, which provides that mergers of small, underutilized hospitals normally will not be challenged by the agencies. As the policy statement notes, such small hospitals, especially those located in rural area, are unlikely to achieve the efficiencies that larger hospitals enjoy. Id. at 13. In these circumstances, joint purchasing may well permit the hospitals to obtain efficiencies that could not otherwise be achieved.

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jointly provide a service.8 It is our understanding that the joint purchasing arrangement, though it may involve contracting for professional services that are directly involved in patient care, will not involve the joint provision to the public of any hospital services. A different analysis would be required if joint purchasing resulted in the coordination of the clinical services of the two hospitals, and this opinion does not address that situation. Furthermore, we assume, for purposes of this opinion, that the hospitals will not coordinate the prices at which they sell to the public the services that are purchased jointly, and that they will not enter into agreements that otherwise significantly limit competition among themselves as sellers of hospital services.

For these reasons, the formation and operation of the joint purchasing arrangement as proposed would not appear to violate any law enforced by the Federal Trade Commission. This letter sets out the views of the staff of the Bureau of Competition, as authorized by the Commission's Rules of Practice. Under Commission Rule 1.3(c), 16 C.F.R. 1.3(c) (1994), the Commission is not bound by this staff opinion and reserves the right to rescind it at a later time. In addition, this office retains the right to reconsider the questions involved and, with notice to the requesting party, to rescind or revoke the opinion if implementation of the proposed program results in substantial anticompetitive effect, if the program is used for improper purposes, if facts change significantly, or if it would be in the public interest to do so.

Sincerely yours, 

Mark J. Horoschak Assistant Director


8 Hospital joint ventures involving equipment are covered by Statement 2, and hospital joint ventures involving clinical health care services are discussed in Statement 3 of the Enforcement Policy Statements.