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ProMedica pitches alternative to divestiture

by William McConnell in Washington | Published February 7, 2012 at 9:17 AM

Ohio hospital operator ProMedica continues to push the Federal Trade Commission to allow an alternative remedy to divesting St. Luke's Hospital in Toledo.

In a Monday, Feb. 6 oral argument for ProMedica's appeal to the members of the FTC, McDermott Will & Emery partner David Marx -- while still maintaining that no remedy at all was necessary -- addressed the prospect of an FTC decision that ProMedica's August 2010 acquisition of St. Luke's was anticompetitive. In that case, he argued, allowing financially struggling St. Luke's to operate as a separate unit of ProMedica with its own insurance contract negotiating team would be a better solution than forcing a St. Luke's spinoff.

In December 2011, an FTC administrative law judge ruled against ProMedica's takeover of St. Luke's and ordered it to be divested, either to a new buyer or to be run as an independent institution. Administrative Law Judge Michael Chappell's ruling is now being reviewed by the full commission. St. Luke's will continue to be operated separately as a unit of Toledo-based ProMedica through the appeals process. If the commission affirms Chappell's ruling, the company can seek review before a federal court.

Marx argued that St. Luke's operated in the red from 2007 through 2010 and even though its reimbursement contracts with insurers are coming up for renegotiation, there's no assurance the rates will increase enough to assure profitability.

By continuing under the ProMedica umbrella, St. Luke's has a better chance for long-term viability, he said. "ProMedica is committed to operating St. Luke's," he said.

Marx argued that Chappell's divestiture order was not based on a finding of anticompetitive effects caused by the reduction in the number of competitors caused by the merger, from four hospital operators to three. Chappell found that the reduction in competition, Marx noted, would be addressed by separating the negotiating teams.

The divestiture order was based on the so-called "unilateral effects" theory, in which a merger gives a combined entity sufficient market power to raise prices regardless of what competitors do. Marx argued that the case does not qualify as a unilateral effects case because St. Luke's is not ProMedica's closest substitute in the market -- that role falls to the more robust Mercy Health Partners.

"This case is not a proper unilateral effects case," Marx said.

FTC Commissioner Tom Rosch sympathized with the Marx's interpretation of unilateral effects precedents.

Although Chappell found that the government's merger guidelines require parties to a merger need only be close substitutes for a deal to qualify as a unilateral effects case, Rosch said nearly all case law has required that the target be the closest substitute in the market. Rosch said the only case he knows of where a more lenient standard of substitution led to a unilateral effects finding was in a district court's recent decision upholding the Department of Justice's challenge to the H&R Block Inc.'s failed takeover of TaxAct. A single opinion by a lowly district court is a thin reed to support the divestiture order, Rosch said.

FTC lawyer Matt Reilly, however, said full divestiture is necessary to ensure competition is restored and that St. Luke's finances are not as bad as Marx maintained and that reserves and capital are strong enough to ensure survival for the foreseeable future.

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