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Hospital Corp. of America v. Federal Trade Commission

Court of Appeals for the Seventh Circuit
807 F.2d 1381 (1986)
ELI5:

Rule of Law:

A merger or acquisition violates Section 7 of the Clayton Act if it produces a firm controlling an undue percentage of the relevant market and results in a significant increase in the concentration of firms in that market, creating an appreciable danger of anticompetitive consequences such as collusion.


Facts:

  • Hospital Corporation of America (HCA), the largest proprietary hospital chain in the U.S., owned one hospital in Chattanooga, Tennessee.
  • In 1981 and 1982, HCA acquired two corporations, Hospital Affiliates International, Inc. and Health Care Corporation.
  • These acquisitions gave HCA ownership of two additional hospitals in the Chattanooga area.
  • Through the acquisitions, HCA also assumed management contracts for two other Chattanooga-area hospitals, giving it control over their pricing and key decisions.
  • As a result of these transactions, HCA came to own or manage 5 of the 11 hospitals in the Chattanooga area.
  • The acquisitions increased HCA's market share from 14 percent to 26 percent.
  • The market concentration of the four largest firms in the Chattanooga hospital market increased from 79 percent to 91 percent.
  • The Tennessee hospital market was subject to a state "certificate-of-need" law, which created a regulatory barrier to entry for new competitors.

Procedural Posture:

  • The Federal Trade Commission (FTC) initiated an enforcement action against Hospital Corporation of America (HCA), alleging its recent acquisitions violated Section 7 of the Clayton Act.
  • An FTC administrative law judge held a hearing and concluded that the acquisitions were unlawful.
  • HCA appealed the administrative law judge's decision to the full Federal Trade Commission.
  • The Commission affirmed the finding of a Section 7 violation and issued a final order requiring HCA to divest the acquired hospitals and provide advance notice of future acquisitions.
  • HCA, as petitioner, sought judicial review of the Commission's final order in the United States Court of Appeals for the Seventh Circuit.

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Issue:

Do corporate acquisitions that significantly increase market share and concentration in an already highly concentrated market, when combined with other market characteristics like high barriers to entry and inelastic demand, create a probable anticompetitive effect in violation of Section 7 of the Clayton Act?


Opinions:

Majority - Posner, Circuit Judge.

Yes. Corporate acquisitions that significantly increase market concentration in a market with characteristics conducive to anti-competitive behavior violate Section 7 of the Clayton Act. The court, applying a deferential substantial evidence standard of review, found that the Federal Trade Commission's conclusion was well-supported. The acquisitions reduced the number of independent competitors from 11 to 7 and gave the four largest firms control of 91% of the market, making tacit or express collusion significantly easier. The court's reasoning was further bolstered by several other economic factors: 1) Tennessee's certificate-of-need law created a significant barrier to entry for new competitors; 2) the demand for hospital services is highly inelastic, meaning price increases would not significantly reduce demand, thus making collusion more profitable; and 3) a history of cooperation among Chattanooga hospitals demonstrated a market prone to collusion. The court rejected HCA's arguments that the heterogeneity of services and the presence of large third-party payors would prevent collusion, finding these points were not dispositive and were properly weighed by the Commission.



Analysis:

This decision is a significant example of the modern, economics-based approach to antitrust law, championed by Judge Posner and the Chicago School. It moves beyond the rigid, market-share-driven tests of 1960s merger jurisprudence to a more holistic analysis focused on the likelihood of consumer harm through collusion. The case solidifies the principle that market concentration statistics are the starting point, but the ultimate Section 7 inquiry requires a detailed assessment of other market realities like barriers to entry, demand elasticity, and industry practices. It also affirms the highly deferential 'substantial evidence' standard for judicial review of FTC economic findings, reinforcing the agency's role as the primary fact-finder in complex antitrust matters.

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