UNITED STATES OF AMERICAFEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Bureau of
Competition
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
Gentlemen:
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.
I. Background
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.
Carlos C. Smith, Esq., and Edward N. Boehm, Esq. Page 11
renovations.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.
III. Conclusion
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.
Sincerely yours,
Mark J. Horoschak
Assistant Director
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.