UNITED STATES OF AMERICAFEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Bureau of
Competition
June 20, 1995
Derrell O. Fancher
407 Lay Dam Road
P.O. Box 185
Clanton, AL 35045
Dear Mr. Fancher:
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.
Derrell O. Fancher Page 2
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...)
Derrell O. Fancher Page 3
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.
Derrell O. Fancher Page 4
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.