Promedica Health System Ordered to Divest St. Luke’s Hospital

In an initial decision issued on January 5, 2012, FTC Chief Administrative Law Judge D. Michael Chappell ordered ProMedica Health System Inc to divest recently-acquired St. Luke's Hospital to an FTC-approved buyer within 180 days after the order becomes final. See http://www.ftc.gov/os/adjpro/d9346/120105promedicadecision.pdf
In May 2010, in a non-HSR reportable transaction, ProMedica agreed with the FTC to keep its newly acquired competitor, St. Luke's Hospital, hold separate until the Commission concluded its merger investigation. A hold separate agreement relating to hospital services and staff was entered in August 2010 that allowed the parties to complete the overall merger.

Judge Chappell's decision concluded that the deal would eliminate competition in the Toledo, Ohio area for general acute care inpatient hospital services (the relevant market), as well as give ProMedica bargaining power with commercial health plans, which would ultimately result in higher rates for customers who pay for insurance coverage.

ProMedica argued that market responses would provide a competitive constraint after the acquisition of St. Luke's, and that the combination would lead to increased efficiency that would outweigh the anticompetitive effects of the acquisition. It also argued that the deal should be permitted because St. Luke's was a weakened competitor in recent years. Judge Chappell rejected both arguments.

Judge Chappell also rejected ProMedica's request for an alternative remedy based on remedies the FTC required in Evanston Northwestern Healthcare's 2007 acquisition of a nearby hospital. Like in the Evanstan case, ProMedica proposed that it be permitted to to continue to own St. Luke's, but while erecting a “firewalled” negotiation team to negotiate and administer health care contracts exclusively for St. Luke's independently of ProMedica. Because of the hold separate in place, Judge Chappell stated that there were differences in the two cases that allowed him to conclude that Promedica's acquired assets were far less integrated compared to the Evanston case.

Indeed, Judge Chappell stated: “the evidence does not demonstrate, as it did in Evanston, that divestiture in this case would be 'complex, lengthy and expensive process.'” He further stated: “here, 'it is relatively clear that the unwinding of a hospital merger would be unlikely to involve substantial costs, [and] all else being equal, the commission likely would select divestiture as the remedy.'” Therefore, a divestiture was appropriate in ProMedica.

By requiring ProMedica to sell St. Luke's to an approved buyer and to provide transitional services for one year to St. Luke's, the order is designed to restore competition as it existed before the acquisition. The order also requires that ProMedica ensure that St. Luke's remains viable until the divestiture.

Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com