[Federal Register Volume 62, Number 24 (Wednesday, February 5, 1997)]
[Notices]
[Pages 5418-5420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2810]


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FEDERAL TRADE COMMISSION
[File No. 971-0024]


Tenet Healthcare Corp.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting 
unfair or deceptive acts or practices and unfair methods of 
competition, this consent agreement, accepted subject to final 
Commission approval, would require, among other things, the for-profit 
general acute care hospital chain to divest a hospital, and related 
assets, in San Luis Obispo County, California that it will acquire as 
part of its proposed acquisition of OrNda Healthcorp. The complaint 
accompanying the consent agreement alleges that Tenet's acquisition of 
OrNda would deny the benefits of free and open competition--lower 
prices and better quality of service--to patients, physicians, third-
party payers, and other consumers of inpatient acute care hospital 
services in that county.

DATES: Comments must be received on or before April 7, 1997.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary, 
Room 159, 6th St. and Pa. Ave., NW, Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: William J. Baer, Federal Trade 
Commission, H-374, 6th and Pennsylvania Ave, NW, Washington, DC 20580. 
(202) 326-2932. Mark Whitener, Federal Trade Commission, H-374, 6th and 
Pennsylvania Ave, NW, Washington, DC 20580. (202) 326-2845. Robert 
Leibenluft, Federal Trade Commission, S-3115, 6th and Pennsylvania Ave, 
NW, Washington, DC 20580. (202) 326-3688.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Sec. 2.34 of the 
Commission's rules of practice (16 CFR 2.34), notice is hereby given 
that the above-captioned consent agreement containing a consent order 
to cease and desist, having been filed with and accepted, subject to 
final approval, by the Commission, has been placed on the public record 
for a period of sixty (60) days. The following Analysis to Aid Public 
Comment describes the terms of the consent agreement, and the 
allegations in the accompanying complaint. An electronic copy of the 
full text of the consent agreement package can be obtained from the 
Commission Actions section of the FTC Home Page (for January 29, 1997), 
on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A 
paper copy can be obtained from the FTC Public Reference Room, Room H-
130, Sixth Street and Pennsylvania Avenue, NW, Washington, DC 20580, 
either in person or by calling (202) 326-3627. Public comment is 
invited. Such comments or views will be considered by the Commission 
and will be available for inspection and copying at its principal 
office in accordance with Sec. 4.9(b)(6)(ii) of the Commission's rules 
of practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

    The Federal Trade Commission has accepted, subject to final 
approval, a proposed consent order from Tenet Healthcare Corp. 
(``Tenet''), to resolve antitrust concerns raised by Tenet's proposed 
acquisition of OrNda Healthcorp (``OrNda''). Tenet would be required to 
divest, among other things,

[[Page 5419]]

OrNda's French Hospital and Medical Center in San Luis Obispo, 
California (``French''), and OrNda's interests in Monarch Health 
Systems, an integrated health care delivery system in the San Luis 
Obispo area. Tenet has also agreed to hold French, the Monarch 
interests, and some additional assets separate from Tenet's other 
assets, pending the required divestitures.
    The proposed consent order has been placed on the public record for 
sixty (60) days for reception of comments by interested persons. 
Comments received during this period will become part of the public 
record. After sixty (60) days, the Commission will again review the 
agreement and the comments received, and will decide whether it should 
withdraw from the agreement or make final the agreement's proposed 
order.

The Commission's Complaint

    The proposed consent order would settle charges by the Federal 
Trade Commission that Tenet's proposed acquisition of OrNda Healthcorp 
would endanger competition in the market for inpatient acute care 
hospital services in San Luis Obispo County, California, and so would 
violate section 7 of the Clayton Act and section 5 of the Federal Trade 
Commission Act. This matter involves the same market, and the same 
principal hospitals, as were at issue in a previous Commission hospital 
merger case, American Medical International, Inc., 104 F.T.C. 1, 617 
(1984), which resulted in the divestiture of French.
    Tenet operates over 75 acute care hospitals nationwide. In San Luis 
Obispo County, Tenet operates two acute care hospitals, 195-bed Sierra 
Vista Regional Medical Center (``Sierra Vista'') in the city of San 
Luis Obispo, and 84-bed Twin Cities Community Hospital (``Twin 
Cities'') in Templeton about 22 miles to the north of San Luis Obispo. 
OrNda operates over 50 acute care hospitals nationwide, including 147-
bed French Hospital Medical Center in the city of San Luis Obispo. 
OrNda also operates 70-bed Valley Community Hospital in Santa Maria, in 
northern Santa Barbara County about 30 miles south of the city of San 
Luis Obispo.
    The complaint alleges that Tenet and OrNda are the two leading 
competitors, out of only four providers, of acute care hospital 
services in San Luis Obispo County, California. It further alleges that 
Tenet's main hospital in the area, Sierra Vista, and OrNda's French 
hospital, offer broader service complements than any of the other 
hospitals in the county, and are each other's principal and most direct 
competitor.
    The complaint identifies 79-bed Arroyo Grande Community Hospital in 
southern San Luis Obispo County, and county-owned 64-bed San Luis 
Obispo General Hospital (``SLO General'') in the city of San Luis 
Obispo, as the only acute care hospitals in San Luis Obispo County that 
would not be owned by Tenet after the acquisition of OrNda. The 
complaint further alleges that SLO General's long-term competitive 
prospects are clouded by its need for major capital improvements, 
including construction required to bring the hospital into compliance 
with stringent new state earthquake safety standards.
    As stated in the complaint, the proposed acquisition would 
eliminate competition between Tenet and OrNda, and significantly 
increase the already high level of concentration for inpatient acute 
care hospital services in San Luis Obispo County. The complaint also 
alleges that the proposed merger would increase the market share of 
Tenet, already the leading provider of inpatient acute care hospital 
services in the Tri-Cities area, to over 71%, an increase of at least 
17% above its existing market share. The complaint further alleges 
that, as measured by the Herfindahl-Hirschman Index (``HHI''), market 
concentration would increase more than 2000 points to a post-
acquisition level of over 5000. The HHI is a measure of market 
concentration used by the Federal antitrust enforcement agencies to 
estimate, in conjunction with information on other market factors, the 
likelihood that a merger would endanger competition. As explained in 
the 1992 Merger Guidelines, the Federal antitrust enforcement agencies 
consider markets with HHI levels above 1800 (on a scale of 0 to 10,000) 
to be ``highly concentrated,'' and, where the post-merger HHI would 
exceed 1800, presume that a merger producing an increase in the HHI of 
more than 100 points is likely to significantly lessen competition 
(unless factors other than market concentration indicate that the 
merger presents no significant threat to competition).
    According to the complaint, it is unlikely that entry into San Luis 
Obispo County by a new acute care hospital will prevent or remedy any 
anticompetitive price increases or other effects resulting from the 
acquisition. This is due to, among other factors, the lengthy lead 
times required to build new hospitals in the relevant market, such as 
those required by California's requirements for advance review of 
hospital building plans.
    The complaint alleges that the proposed acquisition may: 
substantially lessen competition for inpatient acute care hospital 
services in San Luis Obispo County; result in less favorable prices and 
other terms for health plans that contract for such services in the 
county; increase the possibility of collusion or interdependent 
coordination by the remaining market competitors; deny patients, 
physicians, third-party payers, and other consumers of inpatient acute 
care hospital services, the benefits of free and open competition based 
on price, quality, and service; and deny the opportunity for the San 
Luis Obispo County government to purchase, on competitive terms, the 
hospital care it must provide to certain indigent County residents, as 
a potentially less costly alternative to providing those services at 
SLO General.

The Proposed Consent and Hold Separate Agreements

    The consent order, if issued in final form by the Commission, would 
require Tenet to divest French and related OrNda assets, after Tenet 
acquires OrNda. These assets include, among others, OrNda's interests 
in a surgery center, two urgent care centers, and two medical office 
buildings in San Luis Obispo County.
    Tenet would also be required to divest OrNda's holdings of about 
one-third of the stock of, and also a short-term loan agreement with, 
Monarch Health Systems (``Monarch'). Monarch is an integrated health 
delivery system, operating in San Luis Obispo and Santa Barbara 
Counties. Monarch has a long-term exclusive contract with French, 
through which French receives a large percentage of its patients. As 
part of the Agreement to Hold Separate accompanying the proposed order, 
Tenet has agreed--effective immediately--to place OrNda's stock in 
Monarch into a voting trust, and take other measures designed to 
prevent Tenet from exercising influence or control over Monarch, 
pending divestiture of the Monarch stock and loan agreement. These 
measures are to prevent Tenet from using the Monarch stock and loan 
agreement to damage French's business relationship with Monarch, and 
thereby lessen French's competitiveness and viability.
    Under the terms of the proposed order, Tenet must make the 
foregoing divestitures to an acquirer, and in a manner, approved by the 
Commission. (However, Tenet may divest the Monarch stock to someone 
other than the purchaser of French, and if Monarch is bought in its 
entirety by a third party, Tenet need not obtain prior approval to 
divest its Monarch stock to Monarch's new owner.) The approval 
requirement allows the Commission to make sure that Tenet's 
divestitures fulfill their purpose, of ensuring the continuation of

[[Page 5420]]

French as an ongoing, independent, and viable acute care hospital, and 
remedying the lessening of competition resulting from Tenet's 
acquisition of OrNda.
    The divestitures must be completed by August 1, 1997; otherwise, 
Tenet will consent to the appointment of a trustee, who will have 
twelve additional months to effect the divestitures. If Tenet does not 
complete a Commission-approved divestiture of French by August 1, 1997, 
the Commission may appoint a trustee to complete that divestiture. The 
trustee may divest not only French and related assets, but also OrNda's 
Valley Community Hospital in Santa Maria, south of San Luis Obispo 
County, and certain assets relating to Valley, if the additional 
hospital and assets turn out to be necessary for a successful 
divestiture of French.
    The Agreement to Hold Separate executed in conjunction with the 
consent agreement requires Tenet, effective immediately, to maintain 
French, Valley, the Monarch stock and loan agreement, and related 
assets separate from Tenet's other operations until the completion of 
the divestitures, or as otherwise specified. The Agreement to Hold 
Separate also requires Tenet to comply with the provisions of the 
proposed consent order, pending its final approval by the Commission.
    To assure the complete independence and viability of French and 
Valley hospitals, and related assets, the Hold Separate Agreement 
requires Tenet to transfer control of those assets to a three-member 
board (only one of whom will be a Tenet employee), and to ensure that 
no competitive information is exchanged between Tenet and those assets. 
(The Hold Separate Agreement's provisions relating to the Monarch stock 
have been described above.) Under the Hold Separate Agreement, Tenet 
may not exercise any direction, control, or influence over the assets 
to be held separate, except as necessary to ensure compliance with the 
Consent Order and the Hold Separate Agreement, and to ensure the 
continued viability, competitiveness, and marketability of those 
assets.
    For ten years after the order is made final, the proposed consent 
order would prohibit Tenet from combining (through purchase, sale, 
lease, or otherwise) its acute care hospitals in San Luis Obispo County 
with any other acute care hospital in that area, or from acquiring 
Monarch stock, without prior notice to the Federal Trade Commission. 
Tenet must provide such notice in accordance with procedures similar to 
those governing premerger notifications required by Section 7A of the 
Clayton Act, 15 U.S.C. 18a (unless the merger is already subject to 
section 7A's requirements, in which case no notice is necessary over 
and above that provided pursuant to section 7A). The order provision 
supplements section 7A, to ensure that the Commission receives advance 
notice of potentially significant Tenet mergers in the relevant market, 
and to thereby give the Commission an opportunity to block any such 
merger if it can demonstrate that the merger may substantially lessen 
competition. The proposed order contains certain limited exceptions to 
the prior notification requirement for transactions which are unlikely 
to substantially lessen competition, such as for transactions under $1 
million.
    The proposed consent order also contains provisions concerning its 
continued application to future owners of French and of Tenet's acute 
care hospitals in San Luis Obispo County. The acquirer of French, 
pursuant to the divestiture called for by the order, must agree not to 
transfer the hospital, for ten years from the date of the order, 
without prior notice to the Commission, to any person already operating 
an acute care hospital in San Luis Obispo County. In addition, the 
order would prohibit Tenet for ten years from transferring an acute 
care hospital facility in San Luis Obispo County, other than French 
(e.g., Sierra Vista or Twin Cities) to another person, unless the 
acquiring person first files with the Commission an agreement to be 
bound by the order.
    The purpose of this analysis is to invite public comment concerning 
the proposed order, and to assist the Commission in its determination 
of whether to make the order final. This analysis is not intended to 
constitute an official interpretation of the agreement or to modify its 
terms in any way.
Donald S. Clark,
Secretary.
[FR Doc. 97-2810 Filed 2-4-97; 8:45 am]
BILLING CODE 6750-01-P