IN THE UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
No. 96-2440
FEDERAL TRADE COMMISSION,
Plaintiff/Appellant,
v. 
BUTTERWORTH HEALTH CORPORATION, a Michigan Corporation, and
BLODGETT MEMORIAL MEDICAL CENTER, a Michigan Corporation,
Defendants/Appellees.
 
On Appeal from the United States District Court
for the Western District of Michigan
 
BRIEF AMICI CURIAE OF THE AMERICAN HOSPITAL ASSOCIATION
AND THE MICHIGAN HEALTH AND HOSPITAL ASSOCIATION
IN SUPPORT OF DEFENDANTS/APPELLEES



Fredric J. Entin         Gerard Mantese
Tracey L. Fletcher         Mantese Miller and Mantese, P.L.L.C.
American Hospital Association         2855 Coolidge Highway
One North Franklin         Suite 107
Chicago, IL 60606         Troy, MI 48084
(312) 422-2777         (810) 649-1300
Counsel for Amicus Curiae         Counsel for Amicus Curiae
American Hospital Association         Michigan Health and Hospital Association

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT


Federal Trade Commission
        v.
Butterworth Health Corporation and
Blodgett Memorial Medical Center

DISCLOSURE OF CORPORATE AFFILIATIONS
AND FINANCIAL INTEREST


Pursuant to 6th Cir. R. 25, American Hospital Association makes the following disclosure:

  1. Is said party a subsidiary or affiliate of a publicly-owned corporation? No

    If the answer is YES, list below the identity of the parent corporation or affiliate and the relationship between it and the named party:
  2. Is there a publicly-owned corporation, not a party to the appeal, that has a financial interest in the outcome? No

    If the answer is YES, list the identity of such corporation and the nature of the financial interest:

    _______________________________ _______________________________
    Signature of Counsel Date

    DISCLOSURE OF CORPORATE AFFILIATIONS
    AND FINANCIAL INTEREST


    Pursuant to 6th Cir. R. 25, Michigan Health and Hospital Association makes the following disclosure:

    1. Is said party a subsidiary or affiliate of a publicly-owned corporation? No

      If the answer is YES, list below the identity of the parent corporation or affiliate and the relationship between it and the named party:
    2. Is there a publicly-owned corporation, not a party to the appeal, that has a financial interest in the outcome? No

      If the answer is YES, list the identity of such corporation and the nature of the financial interest:

      _______________________________ _______________________________
      Signature of Counsel Date

      TABLE OF CONTENTS

I. EFFICIENCIES ARE PARTICULARLY IMPORTANT IN HOSPITAL
MERGERS
3

A. OVERCAPACITY IS CHARACTERISTIC OF MOST HOSPITAL
MARKETS
3

B. HOSPITAL MERGERS TEND TO YIELD GREATER EFFICIENCIES
THAN OTHER MERGERS
7

C. TRADITIONAL ANTITRUST ANALYSIS TENDS TO OVERSTATE THE
ANTICOMPETITIVE EFFECTS OF HOSPITAL MERGERS
8

II. EFFICIENCIES MUST BE APPROPRIATELY ANALYZED 9

A. POTENTIAL EFFICIENCIES MUST BE WEIGHED AGAINST
POTENTIAL ANTICOMPETITIVE EFFECTS
10

B. REQUIRING MERGING PARTIES TO PROVE EFFICIENCIES BY
“CLEAR AND CONVINCING” EVIDENCE IS IMPROPER
12

CONCLUSION

14

CERTIFICATE OF SERVICE


TABLE OF AUTHORITIES


CASES:

FTC v. University Health, Inc., 938 F.2d 1206 (11th Cir. 1991)        10, 11

United States v. Carilion Health System, 707 F. Supp. 840 (W.D. Va.),
aff’d, 892 F.2d 1042 (4th Cir 1990)        10

United States v. Mercy Health Servs., 902 F. Supp. 968 (N.D. Iowa 1995)        11

United States v. Rockford Memorial Corp., 898 F.2d 1278 (7th Cir. ),
cert. denied, 498 U.S. 920 (1990)        8

United States v. Rockford Memorial Corp., 717 F. Supp. 1251 (N.D. Ill. 1989),
aff’d, 898 F.2d 1278 (7th Cir.), cert. denied, 111 S.Ct. 295 (1990)        10

STATUTES:

42 U.S.C. § 1395f(b)        5

Comprehensive Health Planning and Public Health Services Amendments of 1966,
Pub. L. No. 89-749, 80 Stat. 1180 (1966)        4

National Health Planning and Resource Development Act, Pub. L. No. 93-641,
88 Stat. 2225 (1975)        4

MISCELLANEOUS:

American Hospital Association, Health Care Fact File (Aug. 1995)        3, 12

American Hospital Association, Hospital Stat (1995-96 ed.)        5, 6

American Hospital Association, Hospital Statistics (1994-95 ed.)        5, 6

Anticipating the 21st Century: Competition Policy in the New High-
Tech, Global Marketplace
, A Report by Federal Trade Commission Staff
(May 1996)        8, 13-14

Gloria Bazzoli et al., Federal Antitrust Merger Enforcement Standards:
A Good Fit for the Hospital Industry?
, 20 J. Health Pol. Pol’y. & L. (1995)        9


Joseph A. Califano, Jr., America’s Health Care Revolution: Who Lives? Who
Dies? Who Pays?
(1986)        3

Frank Cerne & Jim Montague, Capacity Crisis, Hosp. & Health Networks,
Oct. 5, 1994        6

Committee on Ways & Means, United States House of Representatives,
Health Care Resource Book (1991)        3

Department of Justice & Federal Trade Commission, Horizontal Merger
Guidelines § 4.1        11

Fredric J. Entin et al., Hospital Collaboration: The Need for an Appropriate
Antitrust Policy
, 29 Wake Forest L. Rev. 107 (1994)        1, 8-9

Federal Trade Commission, Statement Concerning Horizontal Mergers, IV        13

Richard J. Gilbert, Responding to Structural Change: A Call for a Review of the
Competitive Consequences of Hospital Mergers
, Statement before the Federal
Trade Commission Hearings on Global and Innovation-Based Competition
(Nov. 14, 1995)        9

Joseph Kattan, Efficiencies and Merger Analysis, 62 Antitrust L. J. 513 (1994)        10

Robert W. McCann & William G. Kopit, The Government’s Hospital Merger
Policy
(1990) (unpublished manuscript), cited in Advisory Council on Social
Security, Commitment to Change: Foundation of Reform (1991)        9-10

Deborah K. Owen, Federal Trade Commission Antitrust Enforcement in the
Health Care and Hospital Industries
, Prepared Remarks before the American
Osteopathic Hospital Association (Oct.11, 1992)        6

Prospective Payment Assessment Commission, Medicare and the American
Health System: Report to the Congress
(1992)        6

Mary Lou Steptoe, Acting Director, Bureau of Competition, Efficiency
Justifications for Hospital Mergers
, Prepared Remarks before the Practising
Law Institute (June 17, 1994)        7

Christine A. Varney, New Directions at the FTC: Efficiency Justifications in
Hospital Mergers and Vertical Integration Concerns
, Prepared Remarks before
the Health Care Antitrust Forum (May 2, 1995)        7

Dennis A. Yao & Thomas N. Dahdouh, Information Problems in Merger
Decision Making and Their Impact in Development of an Efficiencies Defense
,
62 Antitrust L. J. 23 (1993)        13

Jack Zwanziger et al., Costs and Price Competition In California Hospitals,
1980-1990
, Health Aff. (Fall 1994)        4


INTEREST OF THE AMICI CURIAE

        The American Hospital Association (“AHA”) is an Illinois nonprofit corporation. Founded in 1898, AHA is the primary organization of hospitals and health systems in the United States. Its membership includes 5,000 hospitals, health care systems, networks, and other providers of care.

        AHA’s corporate mission is to advance the health of individuals and communities. AHA leads, represents, and serves health care provider organizations that are accountable to the community and committed to health improvement. To fulfill this mission, AHA regularly participates in the judicial and legislative arenas to address important health care issues.

        Virtually all of the hospitals in Michigan, as well as numerous health systems and health care providers, are members of the Michigan Health and Hospital Association (“MHA”), one of the largest associations in Michigan. MHA members work together with patients, communities, and providers to improve health care for all Michigan citizens by addressing current health care issues.

        Experience has convinced the AHA’s and MHA’s members that, in appropriate cases, mergers and consolidations can reduce hospital costs, improve the quality of care, and benefit consumers. Recent changes in health care delivery have led to an increasing number of hospital mergers and other types of consolidations, making all of the AHA’s and MHA’s members potentially subject to investigations and challenges under the antitrust laws.1/

        As hospitals participate in the restructuring of our nation’s health care delivery system, antitrust will continue to be an issue of fundamental importance. The establishment of consistent, predictable, and economically sound standards for analyzing hospital mergers is important to the AHA’s and MHA’s members. In evaluating any hospital merger, it is essential that efficiencies be thoroughly considered and properly weighed against any alleged potential anticompetitive effects. This is especially important given the structure and functioning of hospital markets.

SUMMARY OF THE ARGUMENT

        This is a critical time for hospitals and health care providers. Until the early 1970s, hospitals operated in an environment that encouraged the construction and expansion of hospital facilities and services. More recently, prospective fee schedules and capitated payments have put cost containment pressures on hospitals which, along with technological advances and changing clinical protocols, have reduced utilization of inpatient services and facilities and resulted in substantial excess capacity.

        Hospitals are now faced with increasing pressures to eliminate excess capacity and become more efficient. In this rapidly changing environment, hospitals are looking for ways to compete more effectively in the marketplace or, in some cases, to survive. Frequently, hospitals are finding that a merger with another hospital is the best way to achieve these goals.

        Given hospitals’ excess capacity, hospital mergers are more likely than mergers in other industries to result in substantial efficiencies. Also, in hospital markets, higher concentration does not necessarily result in higher prices. Despite the greater potential for efficiencies and the decreased risk of anticompetitive harm, any merger between two hospitals is likely to be presumptively illegal under the Horizontal Merger Guidelines because hospital markets tend to be highly concentrated. For these reasons, it is crucial that the courts and the federal antitrust enforcement agencies appropriately analyze efficiencies in hospital merger cases.

ARGUMENT

I. Efficiencies are particularly important in hospital mergers.
A.     Overcapacity is characteristic of most hospital markets.

        Direct federal involvement in private hospital investment began during the Great Depression. After World War II, these efforts intensified with the establishment of the Hill-Burton Program, which subsidized the development of hospital facilities and services. By 1978, the program had used $4.4 billion in federal money to leverage another $9.1 billion from state and local governments. These funds were used to build 500,000 beds, nearly half the hospital beds in use in 1985. Joseph A. Califano, Jr., America’s Health Care Revolution: Who Lives? Who Dies? Who Pays? 49 (1986).

        Even more significant than the federal government’s capital contributions to hospital construction has been the impact of the federal health care financing programs, Medicare and Medicaid. Prior to the implementation of Medicare and Medicaid in 1965, the federal government financed about 15 percent of hospital spending. Committee on Ways & Means, United States House of Representatives, Health Care Resource Book 38 (1991). Today, with federal financing of care for the elderly and disabled, total government spending accounts for more than 50 percent of community hospitals’ net revenues, with Medicare alone accounting for 36 percent of such revenues. American Hospital Association, Health Care Fact File 9A (Aug. 1995) (“Fact File”). As the largest source of income for most hospitals, Medicare has had a profound effect on hospital organization and financial viability.

        Initially, Medicare and Medicaid paid hospitals based on costs, giving hospitals an incentive to spend more, rather than less. Indeed, the “spend a dollar, get a dollar” incentive of cost reimbursement encouraged hospitals to expand services and invest in capital resources, particularly because Medicare and Medicaid increased hospital utilization by expanding access for the poor and the elderly. Also, because insurance insulated most patients from health care prices, hospitals competed on the basis of services, amenities, and quality. Jack Zwanziger et al., Costs and Price Competition In California Hospitals, 1980-1990, Health Aff. 118, 124 (Fall 1994). This competition further fueled investment in hospital facilities and equipment.

        During the 1960s and 1970s, in an attempt to contain unnecessary duplication of hospital services, the federal government implemented a number of health planning programs whose purpose was to allocate health care resources and control capital. The federal government’s health planning efforts began in 1966 with the Comprehensive Health Program (CHP). Comprehensive Health Planning and Public Health Services Amendments of 1966, Pub. L. No. 89-749, 80 Stat. 1180 (1966) (codified as amended at 42 U.S.C. § 246). CHP focused on local determination of health priorities, and was concerned more with “planning” in its pure sense than regulation of health care spending. In 1973, a proposal to combine the Hill-Burton program and CHP into a single, stronger program resulted in the National Health Planning and Resource Development Act (NHPRDA). Pub. L. No. 93-641, 88 Stat. 2225 (1975) (repealed 1987).

        Ultimately, there was widespread dissatisfaction with the proscriptive approach of the NHPRDA, and federal health planning was largely abandoned in favor of a new reimbursement system adopted in the Social Security Amendments of 1983. These amendments implemented the prospective payment system (PPS), which, for most hospitals, replaced cost-based reimbursement with a set of fixed prices established by the federal government. 42 U.S.C. § 1395f(b). If a hospital’s costs exceed Medicare’s fixed payment, the hospital must absorb the financial loss. If its costs are less than the payment, it retains the difference.

        Because payments are fixed, hospitals have incentives to ensure that hospital stays are not extended unnecessarily and that patients who do not require hospitalization are treated on an outpatient basis. In some hospital markets, managed care organizations have reinforced the trend toward fewer and shorter hospital admissions. These trends will accelerate as federal and state governments encourage the movement of Medicare and Medicaid beneficiaries into managed care. At the same time, changes in clinical practice and medical technology have allowed more diagnostic and therapeutic services to be provided in an outpatient setting. The result has been a dramatic change in the way health care is delivered.

        Between 1984 and 1994, outpatient visits grew from just under 212 million to almost 383 million, an increase of over 80 percent. American Hospital Association, Hospital Stat xxvii (1995-96 ed.)(“Hospital Stat”). From 1983 to 1993, the number of outpatient surgeries soared 167.8 percent. American Hospital Association, Hospital Statistics xlii (1994-95 ed.)(“Hospital Statistics”).

        The shift to outpatient treatment has been accompanied by declining inpatient utilization. From 1983 to 1993, hospital admissions declined 14.9 percent and average length of stay decreased 7.1 percent. Hospital Statistics at xxxviii. Although the decline in admissions has moderated in more recent years, patients continue to spend less time in the hospital. In 1994 alone, the average length of stay dropped 4.3 percent from the previous year. Hospital Stat at xxvii.

        The new emphasis on outpatient care has left many hospitals with excess inpatient capacity. Average hospital occupancy rates declined from 75.9 percent in 1980 to 63.5 percent in 1991. Prospective Payment Assessment Commission, Medicare and the American Health System: Report to the Congress 100 (1992). From 1983 to 1993, daily patient census declined 21 percent, Hospital Statistics xxxviii, and it fell another four percent the following year. Hospital Stat xxvii.

Significant excess capacity is now common in many hospital markets, and industry experts expect it to get worse. For example, a health care consulting group recently determined that Washington, DC, which has 5.36 beds per 1,000 population, needs only 2.47 beds per 1,000 population under current market conditions and would need only 1.51 beds per 1,000 population if the market were 100 percent managed care. Frank Cerne & Jim Montague, Capacity Crisis, Hosp. & Health Networks, Oct. 5, 1994, at 34. A study by the AmHS Institute concluded that, based on hospital occupancy of 67 percent and assuming current HMO use rates, there are 447,545 excess hospital beds in the country. Even if total patient days were 50 percent higher than HMO use rates, there would still be 207,000 excess beds. Id.

        Hospitals are searching for ways to reduce excess capacity, operate more efficiently, and realign the services they provide to their communities. Frequently, this involves mergers or other joint activity between competitors. Such consolidations can reduce overall health care costs by eliminating duplicate services and reducing the number of unused beds. Deborah K. Owen, Federal Trade Commission Antitrust Enforcement in the Health Care and Hospital Industries, Prepared Remarks before the American Osteopathic Hospital Association (Oct.11, 1992).

B. Hospital mergers tend to yield greater efficiencies than other mergers

        Because hospitals today typically have substantial excess capacity, hospital mergers are more likely than mergers in other industries to result in efficiencies. FTC Commissioner Christine Varney has publicly recognized this, stating that the unique factors inherent in hospital mergers require that efficiencies be carefully considered:

There are two unique aspects of hospital mergers that virtually mandate that antitrust enforcers carefully examine asserted efficiencies before determining whether to challenge a particular hospital merger. The first relates to the peculiarities of the industry. The second relates to the peculiarities of the 1992 Horizontal Merger Guidelines’ analysis as applied to hospital markets.

Christine A. Varney, New Directions at the FTC: Efficiency Justifications in Hospital Mergers and Vertical Integration Concerns, Prepared Remarks before the Health Care Antitrust Forum (May 2, 1995).

        Commissioner Varney went on to explain that, largely as a result of former policies of the federal government, many hospitals have excess capacity, making efficiency arguments more plausible. She also stated that, because sufficient data to permit a conclusive definition of the market is often lacking in hospital merger cases, it is especially important in these cases to consider the efficiencies likely to result from the merger. See also, Mary Lou Steptoe, Acting Director, Bureau of Competition, Efficiency Justifications for Hospital Mergers, Prepared Remarks before the Practising Law Institute (June 17, 1994) (stating that “characteristics of the hospital industry . . . on the surface, make efficiency claims more plausible than in many other industries.”).

        A recent report by FTC staff noted that, “[i]n the distressed or declining demand industry situation, there is a surprising consensus among scholars that mergers in such industries are likely to be strong candidates for achieving efficiencies.” Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace, A Report by Federal Trade Commission Staff, Volume I, Chapter 3, at 21 (May 1996) (“FTC Staff Report”). The report concluded that, in these situations, efficiencies should be given due weight. Id.

C. Traditional antitrust analysis tends to overstate the anticompetitive effects of hospital mergers

        The ultimate question in any merger case is whether the merger is likely to harm consumers through higher overall prices or lower overall quality. In considering this question, it is important to note that hospital markets do not behave like markets in many other industries and that hospital mergers are not directly analogous to mergers of other types of companies.

        A great deal of research suggests that, in hospital markets, simply increasing the number of competitors does not necessarily decrease prices or raise quality--and may even have the opposite effect. In United States v. Rockford Memorial Corp., 898 F.2d 1278 (7th Cir. ), cert. denied, 498 U.S. 920 (1990), Judge Posner acknowledged that it made sense to consider studies regarding the impact of hospital concentration on price, but explained that such studies were in their infancy:

If the government is right in these cases, then other things being equal, hospital prices should be higher in markets with fewer hospitals. This is a studiable hypothesis . . . and some studies have been conducted correlating prices and concentration in the hospital industry. . . . Unfortunately, this literature is at an early and inconclusive stage . . .

Id. at 1286.

        Since Rockford, however, most new studies have demonstrated that, in hospital markets, there is no correlation between higher market concentration and higher costs and prices. See Entin et al., (1994) at 125-26, 153-67; Gloria Bazzoli et al., Federal Antitrust Merger Enforcement Standards: A Good Fit for the Hospital Industry?, 20 J. Health Pol. Pol’y. & L. 143-45 (1995). Although a minority of the studies suggests the opposite conclusion, those studies are limited to California, which has higher rates of direct contracting than most markets, and many commentators question whether the results are transferable to other settings. Id. In fact, a more recent study of 203 private (not-for-profit and proprietary) California hospitals found:

no statistical relationship between price-cost margins and the level of market concentration. Specifically, holding managed care penetration constant, there was no significant difference in price-cost margins for markets with one, two, three, or more hospitals.

Richard J. Gilbert, Responding to Structural Change: A Call for a Review of the Competitive Consequences of Hospital Mergers, Statement before the Federal Trade Commission Hearings on Global and Innovation-Based Competition (Nov. 14, 1995). In short, the traditional assumption that any transaction that significantly increases market concentration will automatically lead to an increase in price is simply not valid for hospital mergers.

II.        Efficiencies Must be Appropriately Analyzed

        Despite the fact that hospital mergers are less likely to result in higher prices and more likely to result in efficiencies than mergers in other industries, many hospital mergers are presumed to be illegal. Because hospital markets tend to be highly concentrated, in more than 80 percent of the United States communities that have more than one hospital, any reduction in the number of hospitals through merger would be presumptively illegal under the enforcement agencies’ guidelines. Robert W. McCann & William G. Kopit, The Government’s Hospital Merger Policy (1990) (unpublished manuscript), cited in Advisory Council on Social Security, Commitment to Change: Foundation of Reform 126 (1991). For these reasons, it is crucial that the courts appropriately analyze the efficiencies likely to result from any particular hospital merger.

  A. Potential Efficiencies Must be Weighed Against Potential Anticompetitive Effects

        In the middle part of this century, courts treated efficiency arguments with hostility and refused to allow merging parties to defend an otherwise illegal transaction on the grounds that it produced economies. Joseph Kattan, Efficiencies and Merger Analysis, 62 Antitrust L. J. 513, 516 (1994). These earlier cases, however, “clearly reflect the philosophy from another antitrust era.” Id. at 516-17.

        More recently, “both the courts and the enforcement agencies have indicated that efficiencies could save an otherwise anticompetitive merger in some circumstances.” Id. at 516. This is particularly true in cases involving hospital mergers. See, e.g., United States v. Rockford Memorial Corp., 717 F. Supp. 1251, 1289-90 (N.D. Ill. 1989) aff’d, 898 F.2d 1278 (7th Cir.), cert. denied, 111 S.Ct. 295 (1990) (where the court considered efficiency evidence, but concluded that defendants failed to demonstrate that the merger would create a net economic benefit for consumers); United States v. Carilion Health System, 707 F. Supp. 840, 849 (W.D. Va.), aff’d, 892 F.2d 1042 (4th Cir 1990) (evidence regarding capital avoidance and other clinical and administrative efficiencies was considered, but unnecessary to the court’s determination that the merger was not anticompetitive); FTC v. University Health, Inc., 938 F.2d 1206, 1222-24 (11th Cir. 1991) (holding that efficiencies evidence may be used to rebut government’s prima facie case, but finding that the hospitals failed to prove significant economies would result). See also United States v. Mercy Health Services, 902 F. Supp. 968, 987-89 (N.D. Iowa 1995).

        Even the government’s own Merger Guidelines indicate that efficiencies can justify a merger that would otherwise be impermissible, stating:

Some mergers that the Agency otherwise might challenge may be reasonably necessary to achieve significant net efficiencies. Cognizable efficiencies include, but are not limited to, achieving economies of scale, better integration of production facilities, lower transportation costs, and similar efficiencies relating to specific manufacturing, servicing, or distribution operations of the merging firms. The Agency may also consider claimed efficiencies resulting from reductions in general selling, administrative, and overhead expenses, or that otherwise do not relate to specific manufacturing, servicing, or distribution operations of the merging firms, although, as a practical matter, these types of efficiencies may be difficult to demonstrate. . . .

Department of Justice & Federal Trade Commission, Horizontal Merger Guidelines § 4.1 (1992) (“Horizontal Merger Guidelines”).

        The Horizontal Merger Guidelines go on to state that, “expected net efficiencies must be greater the more significant are the competitive risks” created by the merger, Id., suggesting a balancing of efficiencies and anticompetitive effects. A similar balancing test has been recognized by the courts. For example, in University Health, the court stated that to evaluate a transaction’s total competitive effect, it is necessary to compare the anticompetitive costs of an acquisition to the gains realized through greater efficiency. 938 F.2d at 1223.

        Ultimately, to assess accurately the likely effects of a hospital merger, it is necessary to undertake a welfare trade-off, which will reveal whether any likely price increase could outweigh the likely efficiencies. The district court correctly applied this test.2/

        Although the court did not articulate a detailed comparison of quantified anticompetitive effects and efficiencies, its entire opinion indicates that it found the latter to be greater than the former. The district court found, as a matter of fact, that the merger would result in efficiencies in excess of $100 million and that these efficiencies would be passed on to consumers. At the same time, the court repeatedly found that, despite the traditional presumption that higher concentration will result in higher prices, the merged hospitals were unlikely to use market power to raise prices. In other words, the likely efficiencies were substantial, but the likely anticompetitive effects were not even convincingly substantiated. Given these findings, it is hardly surprising that the court resolved the balancing test in favor of the hospitals.

  B.     REQUIRING MERGING PARTIES TO PROVE EFFICIENCIES BY “CLEAR AND CONVINCING” IS IMPROPER

        In their amici curiae brief, the state attorneys general suggest that merging hospitals should be held to a strict “clear and convincing evidence” standard in proving efficiencies. Brief of Twenty-Six States as Amici Curiae at 41-42. While this may be the evidentiary standard contained in the NAAG Merger Guidelines, it is a standard that has been apparently abandoned by the federal enforcement agencies and almost universally criticized by everyone else.

        The 1984 Department of Justice Merger Guidelines did require merging parties to demonstrate efficiencies with “clear and convincing evidence.” The Horizontal Merger Guidelines, however, do not contain such a requirement. Even the FTC Statement Concerning Horizontal Mergers required only “substantial evidence.” Federal Trade Commission, Statement Concerning Horizontal Mergers, IV.

        A strict “clear and convincing” standard suggests that the efficiencies defense is disfavored. There is no evidence, however, that Congress ever intended the Clayton Act to disfavor efficiencies. Dennis A. Yao & Thomas N. Dahdouh, Information Problems in Merger Decision Making and Their Impact in Development of an Efficiencies Defense, 62 Antitrust L. J. 23, 30 (1993). Moreover, such a view would not serve the underlying purpose of the antitrust laws:

A normative judgment that an efficiencies defense should be strictly disfavored does not serve the principles underlying antitrust -- whether one views the purpose of Section 7 law as concerned solely with preventing wealth transfers from consumers to producers (which would focus the analysis on consumer surplus and the price effect of mergers) or whether antitrust enforcers are charged with promoting societal wealth (which would include increased producer surplus as a cognizable benefit).

Id. at 31.

        At the FTC Hearings in late 1995, many witnesses addressed evidentiary issues pertaining to efficiencies. “[M]ost witnesses maintained that . . . ‘clear and convincing’ was too strict a standard for proving efficiencies.” FTC Staff Report, Volume I, Ch. 2 at 18. As a result, FTC staff concluded that the “parties’ efficiencies evidence should not be subject to a ‘clear and convincing’ standard,” explaining:

. . . efficiencies evidence to rebut a showing of likely anticompetitive effect should not be held to a higher standard of proof than the elements of the case demonstrating likely anticompetitive effect. Moreover, insofar as Section 7 involves the difficult task of assessing probabilities, the concerns of many witnesses that a clear and convincing standard could vitiate an efficiencies defense are well-founded.

Id. at 37-38 (emphasis in original). The last sentence appears to be an acknowledgment that, as one witness stated, it is inappropriate for the “government to base its case on inferences largely taken from market structure but require the parties to make a . . . clear and convincing case on the efficiencies point.” Id. at 18, note 85.

        Because the merging parties have access to the relevant information, they should bear the burden of producing evidence tending to establish likely efficiencies. The burden of persuasion, however, must remain with the government. Id. at 37-38. Therefore, this Court must reject any suggestion that the district court committed reversible error by failing to require the Defendants to prove their efficiencies by clear and convincing evidence.

CONCLUSION

        For the foregoing reasons, the decision of the district court should be affirmed.

  Respectfully submitted,
  ___________________________

Fredric J. Entin         Gerard Mantese
Tracey L. Fletcher         Mantese Miller and Mantese, P.L.L.C.
American Hospital Association         2855 Coolidge Highway
One North Franklin         Suite 107
Chicago, IL 60606         Troy, MI 48084
(312) 422-2777         (810) 649-1300
Counsel for Amicus Curiae         Counsel for Amicus Curiae
American Hospital Association         Michigan Health and Hospital Association


IN THE UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT



No. 96-2440


FEDERAL TRADE COMMISSION,
Plaintiff/Appellant,


v.


BUTTERWORTH HEALTH CORPORATION, a Michigan Corporation, and
BLODGETT MEMORIAL MEDICAL CENTER, a Michigan Corporation,
Defendants/Appellees.

CERTIFICATE OF SERVICE

        I hereby certify that, on this date, I have caused two copies of the BRIEF AMICI CURIAE OF THE AMERICAN HOSPITAL ASSOCIATION AND THE MICHIGAN HEALTH AND HOSPITAL ASSOCIATION IN SUPPORT OF DEFENDANTS/APPELLEES to be served by first class mail, postage prepaid, upon the following:


William J. Baer     Jay C. Shaffer
Mark D. Whitener     Ernest J. Isenstadt
Robert F. Leibenluft     Melvin H. Orlans
Stephen Calkins     Leslie R. Melman

Federal Trade Commission
6th & Pennsylvania Ave., N.W.
Washington D.C., 20580
Attorneys for Appellant

William G. Kopit
Epstein Becker & Green
1227 25th Street, N.W., Suite 700
Washington, D.C. 20037-1156
Attorney for Appellees

John D. Tully
Warner Norcross & Judd
900 Old Kent Building
111 Lyon Street, NW
Grand Rapids, MI 49503-2489
Attorney for Butterworth Health Corporation

Jacqueline D. Scott
Varnum, Riddering, Schmidt & Howlett
333 Bridge Street, NW
Grand Rapids, MI 49504
Attorney for Blodgett Memorial Medical Center

Betty D. Montgomery
Doreen C. Johnson
Attorney General of Ohio
Antitrust Section
30 E. Broad Street, 16th Floor
Columbus, OH 43215
Attorneys for Twenty-six States

Louis Saccoccio
Kathryn Wilber
American Association of Health Plans
1129 20th Street, N.W., Suite 600
Washington, D.C. 20036
Attorneys for American Association of Health Plans

Robert E. Bloch
Mitchell D. Raup
Mayer, Brown & Platt
2000 Pennsylvania Ave., N.W., Suite 6500
Washington, D.C. 20006
Attorneys for American Association of Health Plans

Melinda Reid Hatton
Walter A. Smith, Jr.
Hogan & Hartson
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Attorneys for Consumer Federation of America


Dated: January 15, 1997     _________________________________
      Gerard Mantese


1/    "[O]f all mergers, joint ventures, and other transactions that are large enough to be reported in advance to the antitrust enforcement agencies, hospital transactions are two to three times more likely to be investigated." Fredric J. Entin et al., Hospital Collaboration: The Need for an Appropriate Antitrust Policy, 29 Wake Forest L. Rev. 107, 116 (1994) ("Entin et al. (1994)").

2/    Because only some of a hospital’s customers are price sensitive, courts must be careful not to exaggerate anticompetitive effects when balancing them against efficiencies. Even a hospital with monopoly power can raise prices as to only a fraction of its patients. Government payors such as Medicare and Medicaid, which account for approximately 50 percent of community hospitals’ net revenues, Fact File at 9A, generally set their own fee schedules, making price increases impossible.

 

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