United States' Motions In Limine And Memorandum In Support

Defendants own and operate the only two general acute-care hospitals in Dubuque: Mercy Health Center ("Mercy") and The Finley Hospital ("Finley"). Mercy and Finley are each other's only competitor in the sale of all but the most advanced inpatient hospital services to Dubuque-area health care consumers. The vigorous competition between Mercy and Finley has created two outstanding, financially-viable hospitals and benefitted health care consumers through the nearly $3 million or more in price concessions Mercy and Finley have given to managed care health plans (such as health maintenance organizations, or "HMOs," and preferred provider organizations, or "PPOs").

After the parent corporations of Mercy and Finley--the Sisters of Mercy Health Corporation ("SMHC"), based in Michigan, and Finley Tri-States Health Group, Inc. ("Tri-States")--announced their intention to form the Dubuque Regional Health System ("DRHS"), several managed care plans and others voiced their concerns about losing their freedom to choose between the two Dubuque hospitals and their ability to negotiate competitive rates with Mercy and Finley. Following its investigation, the United States filed a civil complaint challenging this transaction under Section 7 of the Clayton Act, 15 U.S.C. § 18, and Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1.

To expedite the trial of this case, the United States is filing these motions in limine to: (i) exclude certain evidence and arguments defendants are likely to raise at trial that we believe are irrelevant or otherwise inadmissible; (ii) exclude certain evidence defendants are likely to offer at trial as a result of their discovery; (iii) limit certain inferences that defendants may attempt to make from evidence that is admissible; and (iv) establish certain procedures at trial that may expedite and facilitate each party's presentations.

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The United States moves for an order excluding evidence of purported "community sentiment" concerning the creation of DRHS.

A. Pertinent Background.

Defendants have asserted, in justifying the creation of DRHS, that "the community supports the idea," and may seek to introduce at trial various kinds of testimonial evidence concerning purported support for the merger. We have found strong opposition to the merger. However, whatever may be the "community sentiment" about this transaction, it has no bearing on the statutory issues to be tried.

B. Applicable Law.

It is not surprising that the people in the Dubuque area have different views about whether this merger should proceed. But however interesting it may be to find out who "supports" and who "opposes" the merger, or to hear testimonials concerning how "the community" feels about the matter, such evidence is not relevant.This case is controlled by two federal statutes--the Clayton Act and the Sherman Antitrust Act. Whether this merger violates either statute is not a matter subject to vote or strawpoll. While defendants certainly may introduce evidence from people who support the merger if their substantive testimony bears on an issue, limited available trial time should not be taken up with assertions of community support. Presentation of such evidence could be time-consuming, and, in the end, the Court undoubtedly would face a conflicting record showing substantial sentiment on both sides. We are aware of no case that has recognized favorable "community sentiment" as a reason to allow a merger. And, in the only case we know of that has accepted such evidence, the court made clear that the determination of the merger's legality would not turn on such evidence, emphasizing:

FTC v. University Health, Inc., 1991-1 Trade Cas. (CCH) ¶ 69,444 at 65,836 (S.D. Ga.) (refusing to enjoin the merger), vacated on other grounds, 938 F.2d 1206 (11th Cir. 1991) (directing that the merger be enjoined) ("University Health").

Apart from its lack of relevance and time-consuming nature, such evidence should be excluded under Fed. R. Evid. 403 because much of defendants' purported community "support" appears to have been generated by a misleading promotional campaign. That campaign repeatedly emphasized that: the creation of DRHS was a "partnership," "not a merger"; the two facilities would retain their identities; and consumers' "choice" would be "preserv[ed]." [Appendix ("App.") A (DRHS promotional materials)] Not only does the creation of DRHS represent the elimination of "choice" in every meaningful sense, the only way consumers would have even a semblance of "choice" after the creation of DRHS is if defendants (contrary to their representations in this lawsuit that, to save money, they will consolidate services at Mercy or Finley) did not consolidate services at one of the hospitals--in which event, their purported cost savings would vanish.

The Court should enter an order excluding evidence and argument of purported community sentiment, support, or opposition concerning the creation of DRHS.

The United States moves for an order precluding defendants from presenting arguments regarding a prosecutorial "safety zone" for certain hospital mergers contained in the Statements of Antitrust Enforcement Policy in the Health Care Area ("Policy Statements") in an attempt to justify this merger on the basis of the supposed "smallness" of the defendants, particularly Finley.

A. Pertinent Background.

On September 15, 1993, the Antitrust Division joined with the Federal Trade Commission in issuing Policy Statements regarding "their antitrust enforcement policies regarding mergers and various joint activities in the health care area." [App. B (Policy Statements at 1)] "The policy statements give health care providers guidance in the form of 'antitrust safety zones,' which describe the circumstances under which the Agencies ["absent extraordinary circumstances"] will not challenge conduct as violative of the antitrust laws as a matter of prosecutorial discretion." [Id. at 1-2] The first safety zone applies to hospital mergers satisfying certain criteria.

Defendants' merger does not fall within the safety zone for hospital mergers, and defendants have so stipulated. [App. C] Indeed, it is undisputed that Mercy and Finley, both of which are financially viable, are both significantly larger than the limit set by the Policy Statements, and, hence, do not qualify for safety zone treatment.

B. Applicable Law.

In no hospital merger case has the court's analysis included an evaluation of the prosecutorial guideline set forth in the Policy Statements. Nor have defendants pled any defense based on an alleged abuse of the Government's prosecutorial discretion in bringing this case. Even if they had made such allegations, it is settled that exercises of prosecutorial discretion are not judiciable (except in limited circumstances not remotely applicable here). Wayte v. United States, 470 U.S. 598, 607 (1985); United States v. Jacob, 781 F.2d 643, 646-47 (8th Cir. 1986).

The United States does not object to the introduction of background evidence concerning the size (and other features) of Mercy, Finley and other medical facilities. Defendants should not be allowed, however, to prolong the trial in exploration of, and argument about, a prosecutorial safety zone policy that defendants admit does not apply to them. The Court should enter an order excluding argument regarding the safety zone for hospital mergers, and declaring such prosecutorial policy irrelevant to a determination of this case.

The United States moves for an order precluding defendants from attempting to justify their merger on the discredited defense that they are non-profit entities.

A. Pertinent Background.

Defendants apparently will seek to present evidence or argue that their legal status as "non-profit" entities rebuts or is relevant to rebut any presumed anticompetitive harms that will flow from this merger. It is unclear whether they will argue that position as a blanket matter (i.e., the antitrust laws should not apply to non-profits) or as supporting an evidentiary inference (i.e., non-profits are less likely to act anticompetitively).

B. Applicable Law.

Regardless of which argument defendants ultimately advance, defendants' non-profit legal form is not relevant:

First, a defendant's non-profit status is not a blanket defense to the antitrust laws. As the court in University Health, 938 F.2d at 1213-14, 1224, explained in reversing the district court on this point: "[T]he appellees argue, as the district court held, that University Hospital's nonprofit status supports their position that the proposed acquisition would not result in substantially less competition. We disagree." This holding, the court elaborated, followed from the decision in NCAA v. Board of Regents of Univ. of Okla., 468 U.S. 85, 100 n.22 (1984), where "the Supreme Court has rejected the notion that nonprofit corporations act under such a different set of incentives than for-profit corporations that they are entitled to an implicit exemption under the antitrust laws." Id. at 1224.

Second, a defendant's non-profit status is not even a factor to be considered in determining how defendants will act after the merger. United States v. Rockford Mem. Corp., 717 F. Supp. 1251, 1285-87 (N.D. Ill. 1989), aff'd, 898 F.2d 1278, 1285 (7th Cir.) (rejecting argument that non-profit hospitals might behave differently than proprietary hospitals), cert. denied, 498 U.S. 920 (1990) ("Rockford"); Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1390-91 (7th Cir. 1986) (same) ("HCA"); cf. University Health, 938 F.2d at 1213-14 ("the district court's assumption that University Hospital, as a nonprofit entity, would not act anticompetitively was improper").

The United States moves for an order precluding defendants from attempting to justify their merger on the grounds that they will have "community representatives" on the governing board of DRHS.

A. Pertinent Background.

Defendants are likely to assert that the DRHS' governing board will not act "anticompetitively" because it will be composed of various representatives of the Dubuque community, who purportedly will be aligned with, and hence protect, the "community interest." Even if a "community representative" defense were legally cognizable under the antitrust laws (which it is not), defendants could not realistically assert it here.

The United States moves for an order precluding defendants from introducing evidence of any purported "procompetitive" or other "good" behavior by Mercy or Finley in the past to show that DRHS will not act anticompetitively after the merger.

A. Pertinent Background.

Defendants might assert, as they did during the investigation, that one way to determine whether DRHS would exercise market power is to examine the hospitals' past behavior in pricing services for which they supposedly face no current competition in Dubuque. Specifically, defendants will point to: (i) Mercy's being the only Dubuque hospital offering psychiatric and inpatient rehabilitation services, and yet, in 1993, Mercy allegedly lost money on both those services, despite its overall $1.2 million profit for its general/medical business; and (ii) Mercy's psychiatric service charges allegedly being lower than seven of sixteen Iowa hospitals surveyed in 1993. Apparently, defendants will contend that these facts show that Mercy and Finley, if they acquire market power through the creation of DRHS, will not exercise it.

B. Applicable Law.

In University Health, defendants sought to prove that they would not act anticompetitively--by introducing past instances of "procompetitive" conduct and other "good" behavior, coupled with their status as non-profit hospitals and their boards composed of community representatives. In rejecting that attempt, the court explained:

University Health, 938 F.2d at 1224.

Moreover, it is impossible to draw any conclusions by comparing psychiatric or rehabilitation services with the general acute-care inpatient services at issue in this case. First, the geographic markets appear to be quite different (e.g., unlike for general acute-care services, people often want to be a significant distance from home for psychiatric institutionalization to avoid any stigmatization). See Rockford, 717 F. Supp. at 1261 n.7 (excluding psychiatric and rehabilitation services from the relevant market "because they are not good alternatives for patients who require inpatient hospital services for treatment of an acute condition; nor could those services easily be transformed into services for treating patients needing acute inpatient care"). Second, the barriers to new entrants' competing appear to be quite different (e.g., it is far easier to establish a rehabilitation center than an inpatient hospital), so there may be far more potential competition and price discipline than at first appears . Third, there are highly plausible alternative explanations for defendants' supposedly "losing money" on these services (e.g., such services often serve as "loss leaders" and patient insurance coverage often is lower). In short, permitting defendants to proceed in this fashion would raise collateral, irrelevant issues that would take up significant trial time for no purpose.

The United States moves for an order precluding defendants from asserting their "efficiencies defense" (purported cost savings from this transaction), because, in accordance with Supreme Court precedent, the "special circumstances" that have led some lower courts to entertain that defense are not present here. Even if this Court were not to apply the Supreme Court's stated rule, and consider such a defense, an order should be entered (consistent with those lower court decisions) excluding such evidence unless defendants make a threshold showing, under the requisite "clear and convincing" standard, that the claimed efficiencies: (i) are not speculative; (ii) can be achieved only through this transaction, as opposed to some other, less anticompetitive alternative; (iii) will be passed on to DRHS' consumers; and (iv) will "outweigh" the competitive harm from the merger (e.g., higher prices or lower quality).

A. Pertinent Background.

We expect that much of defendants' case and our rebuttal case will be spent on defendants' efficiencies claims. There is ample precedent to hold that defense unavailing in this case, and to preclude it entirely. Even if permitted, however, defendants would have a very heavy burden of proof on this issue, and none of their evidence that we have seen thus far meets this burden. Therefore, significant trial time can be saved by entering an order precluding defendants from introducing evidence that, by its very nature or severely debilitated probative value, does not satisfy a threshold evidentiary burden.

B. Applicable Law.

The United States moves for an order precluding defendants from introducing affidavits and declarations, as well as inadmissible deposition excerpts, as evidence at trial.

A. Pertinent Background.

Defendants have gathered affidavits and declarations from employers (and perhaps others), and apparently will seek to introduce them as evidence at trial, either directly by moving their admission as exhibits, or indirectly through an expert who allegedly read and relied on them. Defendants also might attempt to introduce inadmissible deposition excerpts.

B. Applicable Law.

The United States moves for an order precluding defendants from arguing certain inferences from data that are misleading and overstated by an unknown amount. Specifically, defendants intend to introduce evidence relating to: (i) services offered by the small, rural hospitals as categorized by Diagnosis Related Group ("DRG"); and (ii) where patients residing in certain zip codes have gone in the past for hospitalization. Because of certain flaws in these data, they do not support the arguments or inferences for which defendants might introduce them. Relatedly, defendants' "patient shifting" argument ultimately turns on its computation of "contribution margin," which also appears to be overstated, but that issue cannot be resolved until trial. Accordingly, the United States moves for an order excluding defendants' "patient shifting" argument in the event defendants' asserted "contribution margin" is determined to be flawed.

A. Pertinent Background.

We understand defendants will seek to offer certain data, and to devote considerable trial time during the examinations of their economist and Mercy and Finley witnesses, to support certain arguments relating to the geographic market and competitive harm issues. These data may be probative of contentions other than those for which defendants will be offering them, so they should not be excluded entirely. Because of the cumulative effect of various severe limitations in these data, however, defendants should be precluded from making certain inferences based on them.

1. DRG Comparisons. Defendants are likely to argue that the small, rural hospitals surrounding Dubuque are comparable to, and good substitutes for, Mercy and Finley because they offer services in 60-70% of the same DRGs as do Mercy and Finley. DRGs are very general classifications of medical conditions that were established to simplify reimbursement amounts for the federal government's Medicare program. Each of the thousands of different procedures performed by acute-care hospitals are categorized into one of 494 DRGs, and each patient discharged from a hospital is classified into one of those 494 DRGs.

The United States moves for an order to preclude defendants from introducing evidence or making argument on certain issues as a result of their discovery.

A. Pertinent Background.

Defendants' Answer (at ¶ 17) said: "If these [DRHS'] prices were to become uncompetitive, ... these patients have many alternatives for hospitalization." Interrogatory 21(iii) asked defendants to explain "how could one determine whether DRHS' prices were 'uncompetitive,' against which other hospitals (by name) would the comparison be made, and for which services would the comparison be made." [App. O (interrogatory and responses)] Plainly, this interrogatory sought information that was highly relevant to defendants' contention that people would "switch" hospitals upon determining that DRHS' prices were not competitive.

While defendants did not object to this interrogatory, their initial response did not even attempt to supply the requested information. They did not name any of the hospitals or the services against which such a comparison would be made. Rather, defendants summarily responded, "[s]uch a comparison would involve a comparison of, among other things, relative charges, applicable discounts, if any, lengths of stay and levels of service." [Id.]

With a motion to compel looming, defendants sent us a letter stating that the hospitals against which one could make a comparison "may include" several listed hospitals and that "[t]he services may include those which those hospitals and Mercy and Finley provide. Thus, defendants refused to give a conclusive answer as to which hospitals would be used in making price comparisons (by use of the phrase "may include") and refused to list the services to be considered (again, by use of the phrase "may include"). [Id.]

This interrogatory goes to the issue of whether the proposed consolidation of Mercy and Finley will lessen competition and what competing hospitals and services are in the market. It also addresses the defense that consumers will "switch" from a Dubuque hospital to a non-Dubuque hospital should DRHS raise prices.

B. Applicable Law.

The rules of discovery, particularly the new rules, are intended to require full disclosure before trial. Auerbach v. Rival Mfg. Co., 879 F.2d 1196, 1201 (3d Cir. 1989). In this way, they insure that the parties, and ultimately the court, are informed fully and that there is no "trial by ambush." Id.

Toward this end, the rule is that a party is bound by its interrogatory answers. Basch v. Westinghouse Elec. Corp., 777 F.2d 165, 175 (4th Cir. 1985). As a corollary of that rule, a party is, and should be, precluded from introducing evidence or making arguments that go beyond their interrogatory answers. Grogen v. Garner, 806 F.2d 829, 837-38 (8th Cir. 1986). Thus, the most common way to fulfill the promise of the disclosure rules, and the appropriate way to do so in this instance, is to prevent defendants from introducing evidence or making argument that goes beyond their interrogatory answers on these two topics, i.e., to present matters at trial that could have, and properly should have, been disclosed in those answers. See 1993 Amendment Commentary to Fed. R. Civ. P. 37(c)(1) (explaining that rule 37 now is "self-executing," so that such an exclusion of evidence should be the effect even without an order).

The United States seeks guidance from the Court as to certain possible procedures that might be followed at trial to expedite and facilitate the presentations. We have raised them with defendants, who agree in part and object in part.

We believe that, if certain procedures are adopted, it might make the trial presentations go more quickly and result in other benefits as well.

1. Narrative Presentations. If direct testimony (in whole or even in part) could be introduced in narrative or semi-narrative form (either written narrative or a spoken narrative), the available trial time could be maximized. We do not propose requiring any witness to so testify, but rather, that both parties have this option available to use as they deem appropriate. It could be accomplished by entry of order saying that "calling for a narrative" response will not be heard as a basis for objection, while preserving the right to move to strike any testimony that otherwise is inadmissible.

2. Witness Introductions. If the Court thinks it might be useful, a few minutes could be devoted at the beginning of each day (or otherwise as appropriate) for counsel to summarize the immediately upcoming testimony. In that way, to the extent the Court has any guidance or questions, they could be addressed, and perhaps time would be saved on the examinations.

3. "Off-the-Record" Sessions. If the Court thinks it might be useful, sessions could be conducted where the Court could explore with counsel ("off the record" or even on the record) the issues that have been raised to that point as well as upcoming issues. In that way, to the extent counsel have an understanding of the Court's concerns as the trial unfolds, counsel may be able to make adjustments that would expedite and focus the trial presentations.

We raised these three proposals with defendants. As to the previews of testimony and "off-the-record" sessions, defendants said they have "no objection to taking one of these steps if the Judge thinks it would be helpful," although "we don't see how this will necessarily provide any significant benefit to the Court." As to waiving objections to narrative answers, defendants voiced concern because "[a]llowing narrative testimony," in their view, "might permit ... testimony without foundation to be introduced"--which concern we believe we addressed in our proposal by allowing for motions to strike inadmissible evidence (on foundation or any other ground). We continue to believe this is a worthwhile procedure to adopt, especially for experts, because it likely will result in a less choppy and more coherent presentation.

We look forward to discussing any questions the Court might have on these motions at the September 19 final pretrial conference.

September 9, 1994.

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