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
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.
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) 13,150
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 5
significant if the potentially affected markets are concentrated, and other factors indicate they may be vulnerable to anticompetitive behavior. If such market conditions prevail, it is then necessary to consider whether the venture might also improve competition in the relevant markets, such as by providing services of higher quality or with greater efficiency, and to balance that potential benefit to consumers against the risk of diminished competition.9
We address these issues below separately for obstetrical hospital services which are provided by Erlanger (but not Memorial) and would be provided at Women's East, and for the broad range of non-obstetrical hospital services currently provided by both Erlanger and Memorial (but would not be provided by the joint venture, for the most part).10
A. Obstetrical Services
Memorial does not currently provide obstetrical hospital services, and so for such services does not compete with Erlanger. Nevertheless, it is necessary to consider whether the Women's East venture will stifle potential competition from Memorial for such services. If Memorial were to enter on its own, that would benefit competition by bringing a new competitor to a currently highly concentrated market.11 Moreover, even the
9 The policy statement also notes the need for scrutiny of any collateral agreements between the joint venturers, which do not contribute significantly to the venture's success, to determine whether those agreements unreasonably restrict competition. The proposed Women's East joint venture raises no such questions.
10 We do not consider significant to our antitrust analysis the very limited overlap among Erlanger, Memorial, and Women's East in the area of gynecology.
11 Your letter argues that Women's East will itself be a "new competing player" in the market, since under the joint venture Women's East would be operated separately from the obstetrical department at Erlanger's main campus (rather than as a wholly-controlled Erlanger subsidiary, as Women's East would be operated if there were no joint venture partner). However, as your letter also emphasizes, Erlanger is retaining some controls over the joint venture, including the right to designate half of the venture's directors, as state law requires to protect Erlanger's investment of public funds in the venture. We therefore do not rely in this opinion on the possibility that the Women's East venture will vigorously compete against Erlanger's own obstetrical department.
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 6
possibility that Memorial would enter may spur existing providers of obstetrical hospital services to redouble their efforts to offer the best possible combination of price and service quality.12 The venture could affect potential competition from Memorial not only through contractual restrictions (such as the noncompete covenant in Memorial's joint venture agreement with Erlanger), but also as a practical matter if the venture reduces Memorial's economic incentives to enter obstetrics as an independent competitor.
We nonetheless conclude that, on balance, Memorial's participation in the Women's East venture is not likely to substantially threaten competition for obstetrical hospital services. Our discussion of the reasons for that conclusion is constrained by the need to maintain the confidentiality of much of the information upon which it is based.13 In particular, we are unable to discuss in great detail the potential competition issues raised by the joint venture, without disclosing competitively sensitive information about Memorial's consideration of options for independently entering obstetrics.14 However, within these constraints, we outline below the principal factors we considered, in balancing the effect of the venture on potential entry by Memorial into
12 See U.S. Department of Justice, Merger Guidelines 4.1 (1984) ("1984 Merger Guidelines"), reprinted in 4 Trade Reg. Rep. (CCH) 13,103, for a general discussion of the antitrust significance of potential competition.
13 This confidential information includes materials submitted by Erlanger and Memorial in connection with their request for an advisory opinion, for which they have requested confidential treatment pursuant to Sections 6(f) and 21(c) of the Federal Trade Commission Act, 15 U.S.C. 46(f), 57b-2(c). It also includes information which they, and third parties, submitted in connection with the Commission's earlier investigations of hospital mergers in the Chattanooga area, which information is accorded confidential treatment pursuant to Section 7A(h) of the Clayton Act and/or Section 21(f) of the Federal Trade Commission Act, 15 U.S.C. 18a(h), 57b-2(f).
14 Memorial may wish to exercise those options if the Women' East certificate of need is ultimately revoked in pending administrative proceedings (see p. 4 above). Moreover, while Memorial's joint venture agreement with Erlanger restricts Memorial's independent entry into obstetrics (and so we do not place great weight on the possibility that such entry will occur in the future), the agreement does not completely preclude Memorial from establishing an obstetrical facility of its own while maintaining its participation in the Women's East venture.
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 7
obstetrics, against the likely procompetitive effects of the venture.
i. Entry plans of Memorial
Memorial's proposed participation in the Women's East venture raises some concerns about the venture's effect on competition. As your letter acknowledges, Memorial had developed plans to enter obstetrics independently before it joined with Erlanger in the Women's East joint venture. These plans were driven by Memorial's desire to fill in the only significant gap in its otherwise full range of primary and secondary (as well as many tertiary) hospital services. If Memorial provided obstetrical services, managed care health plans would have the option of purchasing most of their local subscribers' hospital care through a single contract with Memorial, instead of having to contract both with Memorial and separately with one of Memorial's competitors for coverage of obstetrical care. Memorial's plans, and its apparent business incentives absent the joint venture to carry out those plans if reasonably possible, suggest that Memorial may be a potential competitor for obstetrics.
Your letter presents three reasons for Memorial's abandonment of its plans to independently enter obstetrics. None, however, demonstrate that Memorial ought not be considered a potential competitor, at least for routine obstetrical care. First, according to your letter "the cost of providing a full range of obstetrical services on [Memorial's] campus is financially unfeasible." However, that statement, and other information, leave open whether it would be feasible to open a Memorial obstetrical department that would be somewhat less than "full range," but capable of handling at least routine childbirths. Second, your letter states that the necessity of certificate-of-need approval for a Memorial obstetrical service presents a "significant barrier to entry into the obstetrical services market." However, the application for certificate-of- need approval of the Women's East project states that Memorial had developed plans for entering obstetrics in a manner that would not require certificate-of-need approval (see p. 9 below). Third, your letter states that Memorial found that its plans for independently entering obstetrics lacked support from local obstetricians. That lack of support is relevant to, but not necessarily determinative of, the likelihood and potential competitive impact of entry by Memorial. Support for such a department among obstetricians practicing in Chattanooga might increase in the future, if the competitive performance of existing obstetrical departments at local hospitals were to deteriorate. We also cannot rule out the possibility Memorial would recruit obstetricians from outside Chattanooga to practice at a new Memorial obstetrical department.
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 8
ii. Concentration in obstetrical services
The relevant obstetrical hospital services market in which to evaluate the proposed joint venture is almost certainly a highly concentrated market. In the Chattanooga area and the surrounding region, Erlanger is the leading firm by a wide margin, with only two or three other competitors, depending on the breadth of the relevant geographic market. Only Erlanger, East Ridge Hospital (owned, along with Parkridge Medical Center, by Columbia/HCA Healthcare Corp.), and Hutcheson Medical Center (a public hospital in Fort Oglethorpe, Georgia) provide obstetrical hospital services in the Chattanooga metropolitan area, to its population of over 400,000.15
All of Erlanger's competitors have much lower obstetrical patient volumes than does Erlanger. We estimate that Erlanger's market share for obstetrical hospital services is between 45% and 52%, and the Herfindahl-Hirschman Index of market concentration16 is between 3200 and 4000, again depending on how broad is the geographic market.17 The Department of Justice's 1984 Merger Guidelines indicate that, at such high concentration
15 Residents of the metropolitan area occasionally receive obstetrical care at hospitals outside the metropolitan area, but such outmigration appears to be very uncommon. Hospitals in the Chattanooga metropolitan area provide substantial volumes of obstetrical care to residents of surrounding rural areas; however, most of those rural areas have no obstetrical hospital facilities of their own.
You maintain that Bradley Memorial Hospital, in Cleveland, Tennessee (about 25 miles northeast of Chattanooga, in a county adjacent to the Chattanooga metropolitan area), is also a relevant competitor. Cf. Hospital Corp. of America, 106 F.T.C. at 372, 437-439, 466-72 (the geographic market, for general acute care hospital services as a whole, was defined as the four-county area now designated as the Chattanooga metropolitan area, and did not include Bradley Memorial). From our perspective, it is not crucial whether or not Bradley Memorial should be included in the relevant geographic market, because a market including Bradley Memorial would still be highly concentrated.
16 See Department of Justice and Federal Trade Commission Horizontal Merger Guidelines 1.5 (1992), reprinted in 4 Trade Reg. Rep. (CCH) 13,104 (1994), for a discussion of the Index and how it is used in antitrust analysis.
17 These statistics are based on data on live births, reported in the American Hospital Association Guide to the Health Care Field (1994 ed.).
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 9
levels, whatever potential competition may exist can provide important protections for consumers against the danger of noncompetitive behavior among existing firms.18
iii. Implications of certificate-of-need regulation
Certificate-of-need regulation in Tennessee, as well as the parallel regulatory system applicable in Chattanooga's Georgia suburbs, places significant limits on entry into obstetrical hospital services. These limits affect not only the availability of potential obstetrics competitors other than Memorial, but also Memorial's own significance as a potential competitor. In the Chattanooga metropolitan area, state certificate-of-need approval is required for the establishment of new hospitals, as well as the entry by existing general acute care hospitals into obstetrical care (except that, in the Tennessee portion of the metropolitan area, obstetrics entry can be accomplished without a certificate of need if it is within a general hospital's existing bed capacity and does not entail capital expenditures exceeding $2 million).19 State approval for new general hospitals in the Chattanooga area, except as replacements for existing facilities, has not been granted since certificate-of-need regulation took effect locally in the early 1970s, and appears extremely unlikely in the near term. Obtaining a certificate of need (and defending it against challenges from existing competitors) for an existing hospital to enter obstetrics also appears difficult, at least in the Tennessee portion of the Chattanooga metropolitan area.20
The history of the Women's East project underscores the difficulty of obtaining certificate-of-need approval for a new entrant into obstetrics. One factor that appears to have significantly helped Erlanger obtain approval for the Women's East proposal was Erlanger's portrayal of the proposal to state regulators as a relocation of existing obstetrical and other hospital beds, rather than the addition of new obstetrical or
18 1984 Merger Guidelines at 4.131.
19 T.C.A. 68-11-106; O.G.C.A. 31-6-2, -40 (key provisions of Tennessee and Georgia certificate-of-need laws).
20 We do not know how difficult it would be in Georgia to obtain the certificate-of-need approval required for an existing general hospital to establish a new obstetrical service. However, we doubt that such a new obstetrical service would be established in Chattanooga's Georgia suburbs. The only general acute care hospital in those suburbs, that is not already a competitor in obstetrical hospital care, is a very small 13-bed hospital which historically has focused on lifestyle improvement rather than acute medical care.
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 10
other bed capacity to the market (which the regulators would likely have viewed with some disfavor). To this end, Erlanger promised -- and state regulators made a condition of granting the Women's East certificate of need -- delicensure of existing obstetrical beds at the main Erlanger campus in exchange for the new beds at Women's East, so approval of the Women's East project would yield no net increase in licensed obstetrical beds in the area. A prospective new entrant, without any obstetrical beds in the area, would not have that option. Moreover, the certificate of need for the Women's East project, which was granted in August 1994, is still under challenge in administrative litigation brought by Columbia/HCA (Erlanger's principal obstetrics competitor in Chattanooga), as well as by Bradley Memorial Hospital.
As a practical matter, certificate-of-need regulation in the Chattanooga metropolitan area appears, for the foreseeable future, to make new entry into obstetrical hospital services difficult, except by existing general acute care hospitals on the Tennessee side of the Chattanooga metropolitan area that do not already offer such services (i.e., Memorial, and two much smaller general hospitals in Chattanooga21), if they can enter for less than $2 million in capital expenditures. The 1984 Merger Guidelines indicate that in this situation, where there are at most three good candidates for potential entry into a highly concentrated market -- and if Memorial is indeed one of those few candidates -- the loss of Memorial as a potential entrant may raise antitrust concerns.22
While obstetrics entry without certificate-of-need approval is an option in Tennessee -- indeed, as noted above, an option Memorial appears to have considered -- it has significant limitations, based on what can be accomplished for less than $2 million in capital expenditures.23 Essentially, it appears, based on the information you have provided as well as other information, that in the Chattanooga area the certificate-of-need entry obstacle could be avoided only by establishing a relatively small obstetrics department, without neonatal intensive care or other facilities to handle non-routine childbirths, in the confines of an existing physical plant and without extensive
21 The larger of those two hospitals, North Park, briefly and unsuccessfully operated a small low-risk obstetrics program of its own several years ago.
22 See 1984 Merger Guidelines 4.132-.133.
23 By contrast, the estimated capital costs for the 28-bed Women's East project are over $8 million.
24 These limitations would likely place a new entrant on unequal footing with existing competitors for obstetrical hospital care. The new entrant would be constrained both in the patient volume it could serve, and in the scope and quality of care it could provide. We have considered these limitations, as they would affect Memorial in particular, in weighing the significance of the possible effects of the Women's East venture on potential independent entry by Memorial into obstetrics.
iv. Potential procompetitive efficiencies
We believe it is also important to consider how Memorial's participation in the Women's East venture might promote rather than hinder competition, even under the worst-case assumption that the venture at least temporarily forecloses independent entry into obstetrics that Memorial otherwise would have undertaken. One potential procompetitive effect of the joint venture is that Memorial might be able, through the venture, to offer health plans and other consumers of hospital services obstetrical care of significantly lower cost and/or higher quality than it could provide within a facility of its own, in view of the limitations which would likely affect an independent Memorial facility but not Women's East.25 We consider this scenario plausible and supported by the information you have provided us.
Another possible procompetitive effect is that the cost and quality of obstetrical care would be improved for Memorial's customers, to the extent that the joint venture can achieve scale economies. This would occur if the joint venture can operate at
24 Physical plant constraints may impair a hospital's ability to offer, without certificate-of-need approval, obstetrical care in a modern LDRP setting (which is what Women's East will offer), as opposed to the traditional style of delivering obstetrical hospital care (which appears to be less economical, and also less popular with patients, than an LDRP setting). For example, we understand that the LDRP setting requires patient rooms larger than the standard-sized rooms which a hospital without an obstetrical unit likely would have available for conversion to obstetrics use.
25 The limitations that likely would affect any attempt by Memorial to enter obstetrics on its own, while avoiding the certificate-of-need entry barrier, are outlined above. Women's East, which already has state certificate-of-need approval (subject to litigation) for a facility specifically designed for obstetrics and in particular for the LDRP mode of obstetrical care, is not subject to those constraints.
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 12
a more efficient, or clinically superior, service volume than Memorial can achieve at an obstetrical facility of its own. It appears plausible that a joint venture-operated Women's East may enjoy scale economies beyond those likely to be attained by an independent obstetrical facility at Memorial.26
In any event, to the extent Memorial's participation in the joint venture results in cost savings, Erlanger and Memorial each have substantial competitive incentives to pass some or all of the savings on to consumers. The hospitals could use the cost savings to lower their prices, or improve their service quality, thereby enabling both hospitals to win business from each other and their other competitors.
B. Non-Obstetrical Services
We have also considered the possibility that the cooperation between Erlanger and Memorial that one would expect from, and that is reasonably necessary to the success of, the Women's East joint venture would "spill over" into other aspects of Erlanger's and Memorial's operations. That might adversely affect the direct competition between Erlanger and Memorial for the full range of hospital services, other than obstetrics, which both hospitals provide.
If "spill over" occurs, overall competition in the local market for such non-obstetrical services may be adversely affected. The local general acute care hospital market is highly concentrated, though not as concentrated as the market for obstetrical care. Moreover, historically Memorial has been Erlanger's principal and closest competitor, and certificate-of- need regulation makes the entry of new general acute care competitors unlikely. These factors heighten our concern about the competitive implications, for services other than obstetrics, of coordination between Erlanger and Memorial relating to Women's East.
However, we believe that, with appropriate precautions, the operation of the Women's East joint venture will not significantly threaten competition in the Chattanooga metropolitan area for non-obstetrical hospital services. This conclusion is based on the following principal considerations.
26 It is less clear that Women's East, as operated jointly by Erlanger and Memorial, can achieve scale economies that it could not attain if Erlanger alone operated Women's East. To the extent that Memorial's participation in the Women's East venture would help Women's East achieve scale economies beyond those Erlanger by itself could realize there, costs per patient would be reduced for Erlanger's customers as well as Memorial's.
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 13
First, the Women's East joint venture does not combine, directly or indirectly, any Memorial hospital facilities with any of Erlanger's. Market concentration, for the overall general acute care hospital services market, would thus be unaffected by the venture. Moreover, Erlanger and Memorial face substantial competition from Columbia/HCA and Hutcheson, and also compete with the area's several smaller hospitals, for non-obstetrical services. If "spill over" cooperation were to occur between Erlanger and Memorial for such services, it may present substantial antitrust concerns. However, given the presence of significant competitors to Erlanger and Memorial, and in view of the additional factors discussed below, the risk that such "spill over" cooperation will endanger competition for hospital services in the Chattanooga area appears to be slight enough as to not outweigh the otherwise procompetitive character of the Women's East venture.
Second, the limited scope and the structure of the Women's East joint venture lead us to conclude that Erlanger and Memorial will continue to have strong incentives to vigorously compete with each other for non-obstetrical hospital services. The services which Erlanger and Memorial will provide through the Women's East joint venture are only a narrow subset of the broad range of general acute care hospital services those hospitals offer. Also, Memorial can depend upon long-term contractual protections (rather than just the good graces of Women's East and co-venturer Erlanger) to be able to offer the services of Women's East as part of the full range of hospital care Memorial sells through its contracts with health plans.27 Both features of the joint venture minimize the likelihood that Erlanger and Memorial would, for the sake of maintaining amicable relationships with respect to their Women's East venture, compete less aggressively in their non-obstetrical service lines.
Third, the Women's East venture will be to some extent isolated from the activities of Erlanger's and Memorial's own facilities, with its own governing board (albeit one including
27 Specifically, the joint venture agreement permits Memorial to make the obstetrical and related services of Women's East available to subscribers of the health plans which contract with Memorial for other services. The contract establishes specific maximum prices for particular medical procedures (subject to adjustments for inflation), which Women's East will charge to Memorial and/or the patients and their health plans. Moreover, Memorial may resell the services of Women's East to health plans and their patients at prices below those charged by Women's East, so long as Memorial pays the difference between what Women's East charges Memorial and what Memorial charges the health plans and patients.
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 14
officials of both Erlanger and Memorial) and administration.28 That reduces the likelihood that Women's East will obtain competitively-sensitive information from either Erlanger or Memorial, that whatever such information is received by the venture from one of the hospitals will be disclosed to the other, or that Erlanger and Memorial personnel working together at Women's East will directly exchange such information about their hospitals. You represent that this isolation will be reinforced by antitrust compliance guidelines governing the conduct of the Women's East venture (a draft of which you have provided), including specifically information exchanges and the conduct of governing board members. We emphasize, however, that the presence of senior officials from both Erlanger and Memorial on the Women's East board makes it important for them to be careful about what they discuss, in connection with their duties as Women's East board members, on subjects not directly related to Women's East operations.
For the reasons stated above, the proposed joint operation of Women's East by Erlanger and Memorial, in the manner set forth in your letter requesting an advisory opinion, 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 joint venture results in substantial anticompetitive effects, if the venture is used for improper purposes, if facts change significantly, or if it would be in the public interest to do so.
Mark J. Horoschak
28 Women's East will likely share nursing personnel with Erlanger (so they may be rotated between Women's East and Erlanger's own obstetrical department, to help maintain the nurses' clinical skills), and will probably also purchase some support services (such as food service and laundry) from Erlanger and/or Memorial.