United States v. Mercy Health Services

OPINION and ORDER

The United States has brought this action under the antitrust laws. The defendants, Mercy Health Services and Finley Tri-States Health Group, Inc. own Mercy Health Center (Mercy) and Finley Hospital (Finley), respectively. Mercy and Finley are the only two general acute care hospitals in Dubuque, Iowa. The two hospitals have agreed to form a partnership, Dubuque Regional Health Services (DRHS), which all parties acknowledge constitutes a merger for purposes of antitrust analysis. On June 10, 1994, the government filed a complaint seeking injunctive relief against the merger as a violation of § 7 of the Clayton Act, 15 U.S.C. § 18, and of § 1 of the Sherman Act, 15 U.S.C. § 1. The parties agreed to waive a preliminary injunction hearing in order to proceed to trial on the matter. After expedited discovery, the matter was tried to the bench. Two weeks of testimony was heard and several hundred items were moved into evidence.

I. Findings of Fact

A. Hospital Background

Dubuque is situated within Dubuque County, Iowa, which in 1993 had a population of 86,403. Dubuque lies on the Mississippi River, at a point where Iowa adjoins the southwestern portion of Wisconsin and the northwestern portion of Illinois.

Mercy is an acute care hospital which, in 1994, had approximately 320 staffed beds, 9980 acute care patient discharges and an average daily census of 127. Mercy’s acute care commercial discharges for 1994 were estimated to be 3622 and the average daily acute care commercial census was 44. Finley is also an acute care hospital and, in 1994, was estimated to have 124 staffed beds, 5247 acute care patient discharges and an average daily census of 63. Finley’s acute care commercial discharges for 1994 were estimated to be 2175 and the average daily acute care commercial census was 21.

There are seven rural hospitals in the area: Galena-Stauss Hospital in Galena, Illinois, 15 minutes from Dubuque, has 25 licensed beds and an average daily census of 3. Southwest Health Center in Platteville, Wisconsin, 30 minutes from Dubuque, has 35 licensed beds and an average daily census of 11. Lancaster Memorial Hospital in Lancaster, Wisconsin, 30 minutes from Dubuque, has 35 licensed beds and an average daily census of 10. Delaware County Memorial Hospital in Manchester, Iowa, 40 minutes from Dubuque, has 58 licensed beds and an average daily census of 12. Jackson County Public Hospital in Maquoketa, Iowa, 30 minutes from Dubuque, has 99 licensed beds and an average daily census of 12.4. Guttenberg Memorial Hospital in Guttenberg, Iowa, 40 minutes from Dubuque, has 37 licensed beds and an average daily census of 7. Finally, Central Community Hospital in Elkader, Iowa, 60 minutes from Dubuque, has 29 licensed beds and an average daily census of 3-4.

These hospitals primarily serve patients who are closer to the rural hospital than to any other hospital. The rural hospitals mainly provide primary care services and do not provide the breadth of services Mercy and Finley offer. Guttenberg provides the largest array of services in that it offers 68% of the same Diagnosis Related Groups (DRGs) 1 Mercy and Finley provide. Galena-Stauss has the smallest array of services, providing care for only 11.5% of the same DRGs Mercy and Finley provide.

*972 There are several regional hospitals within 70 to 100 miles of Dubuque which generally offer the same or greater range of services as provided by Mercy and Finley. Allen Memorial Hospital in Waterloo, Iowa has 194 staffed beds and an average daily census of 145. Covenant Medical Center in Waterloo, Iowa has approximately 322 staffed acute care beds with an average daily census of 173. St. Luke’s Methodist Hospital in Cedar Rapids, Iowa has 441 staffed beds with an average daily census of 284. Mercy Medical Center in Cedar Rapids, Iowa has 353 staffed beds and an average daily census of 193. St. Mary’s Medical Center in Madison, Wisconsin has 345 staffed beds and an average daily census of 265. Freeport Memorial Hospital in Freeport, Illinois has 143 staffed beds and an average daily census of 70. University of Wisconsin Hospital and Clinics in Madison, Wisconsin has 496 staffed beds and an average daily census of 386. Meriter Hospital in Madison, Wisconsin has 429 staffed beds and an average daily census of 258. The University of Iowa Hospitals and Clinics in Iowa City, Iowa (UIHC) has 868 staffed beds and an average daily census of 677.

Mercy and Finley’s patient bases are composed of individuals covered by government insurance programs, traditional indemnity insurance and managed care payers. Managed care payers include health maintenance organizations (HMO’s), and preferred provider organizations (PPO’s). HMO’s generally charge a set fee which covers all of an enroll-ee’s health care needs, including hospitalizations. HMO’s generally restrict the doctors and hospitals from which an enrollee can receive care to those physicians and hospitals providing a discounted rate to the HMO. HMO’s often work with the hospitals when an enrollee is hospitalized to insure that the costs of the hospitalization remain as low as possible. HMO’s may have their own clinics to which enrollees are obligated to go for office visits and most outpatient needs. HMO’s generally stress preventative care and require preapproval prior to being hospitalized in order to keep the rate of hospitalizations low.

PPO’s generally negotiate discounted rates with physicians and hospitals and then require their enrollees to receive their care from the discounted care providers or risk being denied reimbursement. PPO’s generally do not have their own clinics and do not stress preventative care. In contrast to the managed care payers, the indemnity health insurers have not traditionally attempted to gain discounted rates from physicians or hospitals. 2 Instead, these traditional insurers cover a percentage of the health care costs with the remainder being paid by the insured. HMO’s and PPO’s have only recently established themselves in Iowa, but already 25% of Mercy and Finley’s patients are covered by managed care payers. Of the remaining 75% of Mercy and Finley’s inpatients, 50% are covered by Medicare and Medicaid and the other 25% are covered by traditional indemnity insurance.

A hospital will discount its stated charges to managed care payers in order to entice the managed care entity to send more enroll-ees to their hospital for inpatient care. Mercy currently gives discounts to the following managed care entities: Medical Associates, Heritage National Health Plan, Self-Insured Systems Corporation (SISCO), Alliance Select PPO (a Blue Cross plan), HMO of Wisconsin, Wisconsin Education Association Insurance and the Affordable Health Plan. Finley contracts with Blue Cross/Blue Shield of Iowa, Alliance Select PPO Program (a Blue Cross plan), Heritage National Health Plan, Inc., Heritage Preferred, Medical Associates HMO, HMO of Wisconsin, Blue Cross of Illinois PPO, BeefAmerica Operating Co., Pro America Network, Inc., American Health Care Advisory Association, Hospice of Du-buque County, and Collaborative Medical for Religions (a charitable contribution).

Medical Associates is a physician-owned medical practice which operates the Medical Associates HMO in the Dubuque area. The HMO has approximately 30,000 enrollees. The Medical Associates HMO accounts for 11-12% of Mercy’s net revenues. Physicians *973 employed by Medical Associates refer patients to Mercy for inpatient and outpatient care constituting approximately 80% of Mercy’s yearly revenue. Heritage National Health Plan operates a PPO which covers 5,000 lives in the Dubuque area. Nationally it covers 280,000 persons. It accounts for 2-3% of Mercy’s net revenues. SISCO is a third-party payer which administers self-insured employee health plans and also contracts for reduced rates for some of its employer-customers. Blue Cross has a state-run managed care plan in which it offers the hospital a contract on a “take it or leave it” basis. The hospital can either agree to the stated rates or not be on the plan’s preferred provider list. It accounts for 8-9% of Mercy’s net revenues. Affordable accounts for less than 1% of Mercy’s revenues. HMO Wisconsin accounts for less than 0.5% of Mercy’s revenues. Medicare and Medicaid account for 46-47% of Mercy’s net revenues. Traditional indemnity insurance accounts for 26% of Mercy’s revenues.

Medical Associates has a clinic in Dubuque in which it sees patients for regular office visits. It also operates an outpatient clinic in Dubuque which directly competes with Mercy and Finley for outpatient procedures. In addition to its Dubuque Clinic, Medical Associates has permanent facilities in Bellevue, Iowa; East Dubuque, Illinois; and Galena, Illinois. It operates outreach clinics in Belle-vue, Iowa; Dyersville, Iowa; Lancaster, Wisconsin; Maquoketa, Iowa; Platteville, Wisconsin; Boscobel, Wisconsin; Elkader, Iowa; Guttenberg, Iowa; Manchester, Iowa; Oel-wein, Iowa; Darlington, Wisconsin; Clinton, Iowa; and Montieello, Iowa. These outreach clinics are primarily conducted in order to obtain secondary referrals for Medical Associates’ specialists.

B. Health Care Market Trends

Traditionally, hospitals competed on the basis of amenities and perceptions of quality. Only in the last ten to fifteen years have hospitals begun to compete on the basis of price. To a large degree, this competition has occurred because of the arrival of managed care. These large purchasers shop on the basis of price and are able to induce hospitals to discount stated charges in return for the managed care payer’s promise to direct a larger volume of patients to the hospital. Hospitals must employ cost containment measures in order to become more cost efficient so that they can afford to give discounts to the managed care payers. Competition for Medicare, Medicaid and traditional indemnity patients still occurs on the basis of amenities and perceptions of quality.

Managed care entities are capable of inducing their enrollees to receive inpatient care at a specific hospital. The entity does this in one of the following ways: (1) by only paying the hospitalization costs if the enroll-ee is treated at a specified hospital, or (2) by requiring the enrollee to pay a higher percentage of the enrollee’s hospitalization costs (a co-pay) if the enrollee chooses to be hospitalized at a non-preferred hospital. Managed care entities are gaining sophistication in their ability to induce patients to be hospitalized at a preferred hospital. However, the managed care entities do not always show price sensitivity when they establish requirements. For example, Medical Associates may be charged a lower rate by one hospital for a certain DRG, however, the physicians who admit the patients may not be aware of the rate differential and consequently do not encourage patients to go to the cheaper hospital.

Traditionally, when people decided where to receive inpatient care, they considered the following factors: where their physician had hospital privileges and could therefore take care of them during the hospitalization; what hospital was convenient; the reputation of the hospital; and the amenities the hospital offered. Patients have only recently added out-of-pocket expenses to this list. (Traditional indemnity insurance covered a specific portion of the fees no matter which hospital was utilized and patients generally had little knowledge of whether hospital prices varied for their specific hospitalization needs.)

The advent of managed care has resulted in individuals also considering what their out-of-pocket expenses will be. Under traditional indemnity insurance a certain percentage of a hospitalization is covered without regard to the hospital used. Managed care enroll- *974 ees are much more aware of their out-of-pocket expenses resulting from a hospitalization because the policies generally state that expenses incurred at certain hospitals will either not be covered or will require a higher co-pay.

People who continue to be covered by either traditional insurance or by Medicare and Medicaid remain largely insensitive to price differentials. The government dictates hospital fees for the care of Medicare and Medicaid patients, and such fees are often below the cost of providing the services. This causes “cost shifting” of the costs of these services to non-Medicare and non-Medicaid patients. Patients covered by traditional indemnity insurance have been charged full charges which take into account the need to cost shift. Even though managed care groups negotiate with the hospitals for rates below full charges, the rates are greater than those charged Medicare and Medicaid patients and include some cost shifting.

Price competition is important among the managed care groups. Generally, the managed care payer will negotiate the best rates and the greatest discounts possible with area hospitals and physician groups. Based on the rates obtained, the managed care payer determines the premium it must charge en-rollees for services. The managed care group next approaches businesses to try to convince them to offer their managed care plan to their employees. Thirty-five to 40% of the managed care premium is due to inpatient hospital charges, so the rates negotiated with the hospitals significantly impact the premium charged by the managed care payer and affects the cost competitiveness of the managed care entity receiving the discount.

Hospitals contract at discounted rates with the managed care entity when they feel the managed care payer can induce its enrollees, through financial incentives or otherwise, to use the contracting hospital. A hospital will generally only contract with the managed care entity if it feels that (1) by giving a discount, the managed care entity will shift a higher volume of patients to the hospital, or (2) by refusing to give a discount, the managed care entity will shift a significant volume of patients away from the hospital.

Managed care plans influence which physicians and hospitals an enrollee chooses by offering incentives to use certain care providers (i.e., a reduction in co-pay or a total waiver of co-pay), by requiring a co-pay if the enrollee uses a different care provider or hospital, or by simply requiring the enrollee to use designated hospitals and care providers to receive reimbursement.

Along with the rise of managed care has come the increased use of outpatient services for procedures which traditionally required overnight hospitalization. The length of hospital stays are also becoming significantly shorter because of the increased use of home care and because managed care payers closely monitor the length of time an enrollee is hospitalized. This results in less hospital utilization and a decrease in the average daily census. Because hospitals have high fixed costs, the loss of patient volume requires hospitals to broaden their service area in order to maintain patient census and resulting cash flow.

Prior to the trend in shorter and fewer hospitalizations and to the advent of cost competition, hospitals had their own “catchment area” from which they drew their patients and from which other hospitals generally did not try to encroach upon the residing population. The main competition between regional hospitals was in the “fringe area,” the area half-way between two regional hospitals. However, the competitive market has changed and is continuing to change at a rapid pace.

Hospitals, needing to maintain their patient volume, have begun to establish outreach efforts in the fringe areas as well as deep in the heart of what used to be considered another hospital’s catchment area. The efforts include the establishment of hospital owned clinics and the purchase of physician practices in towns up to 50-60 miles from the hospital. These clinics have succeeded in capturing patients and referring them to their associated hospital for inpatient care.

Outreach efforts also include climes established by private physicians’ groups. The physician clinics are used to broaden the referral base for the clime’s various special *975 ties. The clinics refer patients back to the hospital where the physicians have admitting privileges for inpatient and outpatient services. Consequently, when a physicians’ group extends its market area by opening an outreach clinic, it also extends the market area of the hospital with which the group is associated. Once an outreach clinic is established, the hospital and specialty referral patterns from the community where it is located change significantly within a short period of time (often within two months). Clinics can generally be established in a matter of weeks as they are often opened in existing hospitals or clinics. Both hospital and physician-owned clinics have proven they induce outreach patients to receive hospital care at the associated hospital, even if another regional hospital is closer.

There is a great deal of evidence showing that these national trends exist in the Du-buque area. Mercy’s inpatient volume decreased by approximately 15% from 1990 to 1994. In order to maintain its present patient volume and revenues, Mercy must gain market share in what it considers its “secondary market,” the area outside of Dubuque County. This can only be done on a significant level by establishing outreach clinics. Mercy has not established any of its own outreach clinics, but depends on the managed care payers which use Mercy to do so— primarily Medical Associates.

C. Other Findings of Fact

Additional findings of fact are made under the Conclusions of Law section and throughout the legal analysis. In addition, attached as Appendix A, are the facts to which the parties have stipulated.

II. Conclusions of Law

A. Anti-trust Analysis

Section 7 of the Clayton Act provides, in part, that “no person ... shall acquire the whole or any part of the assets of another person ... where ... the effect of such acquisition may be substantially to lessen competition.” 15 U.S.C. § 18 (1973 & Supp.1995); United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 589, 77 S.Ct. 872, 875, 1 L.Ed.2d 1057 (1957) (Section 7 is “designed to arrest in its incipieney ... the substantial lessening of competition....”). To meet the requirement of Section 7, the government must show a reasonable probability that the proposed transaction would substantially lessen competition in the future. FTC v. University Health Inc., 938 F.2d 1206, 1218 (11th Cir.1991); FTC v. Warner Communications, Inc., 742 F.2d 1156, 1160 (9th Cir.1984). Section 1 of the Sherman Act requires the same analysis. 2 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 304c., at 9 (1995); United States v. Rockford Mem. Corp., 898 F.2d 1278, 1281-86 (7th Cir.), cert. denied, 498 U.S. 920, 111 S.Ct. 295, 112 L.Ed.2d 249 (1990).

To determine whether there is a reasonable probability of a substantial lessening of competition, the courts have focused on whether the merger will cause the merged entity to have enough market power such that it could profitably increase prices. Whether the merger will cause an anticompetitive effect is not “the kind of question which is susceptible of a ready and precise answer in most cases.” United States v. Philadelphia National Bank, 374 U.S. 321, 362, 83 S.Ct. 1715, 1740, 10 L.Ed.2d 915 (1963). Generally, the plaintiff attempts to prove its case by showing that the merged entity will have a large percentage of the relevant market such that, either individually or through collusion, its hold over the market will enable it to profitably raise prices above competitive levels. The government may make a prima facie showing that the merger will result in anticompetitive effects by showing that the merged entity will have an undue share of the relevant market. Id., at 363, 83 S.Ct. at 1741; University Health, Inc., 938 F.2d at 1218. Thus before a court can determine the effect of a merger on competition, it must first define the relevant market.

The relevant market is defined by identifying those “producers that provide customers of defendants]’ ... firms with alternative sources for the defendants]’ product or service.” 2A Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law ¶ 530a, at 150 (1995). A properly defined market excludes other potential sup *976 pliers (1) whose product is too different (product dimension of the market) or too far away (relevant geographic market) and (2) who are not likely to shift promptly to offer defendants’ customers a suitably proximate alternative. Id. “Those who can readily shift into offering such a product are in the market.” Id.

Although a great deal of emphasis is placed on market share statistics, they are not conclusive indicators of anticompetitive effects. United States v. General Dynamics, 415 U.S. 486, 498, 94 S.Ct. 1186, 1194, 39 L.Ed.2d 530 (1974). If the government is able to make a prima facie case, the defendants can overcome the presumption of illegality by showing that the market-share analysis gives an inaccurate reflection of the acquisition’s probable effect on competition within the relevant market. United States v. Citizens & Southern Nat’l Bank, 422 U.S. 86, 120-21, 95 S.Ct. 2099, 2118, 45 L.Ed.2d 41 (1975). To rebut the government’s case, the defendants may produce “ ‘[njonstatistical evidence which casts doubt on the persuasive quality of the statistics to predict future anti-competitive consequences.’ ” University Health Inc., 938 F.2d at 1218 (quoting Kaiser Aluminum & Chem. Corp. v. FTC, 652 F.2d 1324, 1341 (7th Cir.1981)). Factors which courts have previously considered to be relevant include “ ‘ease of entry into the market, the trend of the market either toward or away from concentration, and the continuation of active price competition.’ ” Id. When determining whether a merger will have an anticompetitive effect, the court must view the merger functionally within the context of its industry’s “ ‘structure, history, and probable future.’ ” General Dynamics, 415 U.S. at 498, 94 S.Ct. at 1194 (quoting Brown Shoe v. United States, 370 U.S. 294, 322 n. 38, 82 S.Ct. 1502, 1522 n. 38, 8 L.Ed.2d 510 (1962)).

If the defendant is successful in rebutting the government’s statistical evidence, the government then has the burden of presenting additional evidence that the merger will lessen competition and this burden “ ‘merges with the ultimate burden of persuasion, which remains with the government at all times.’ ” University Health Inc., 938 F.2d at 1219 (quoting United States v. Baker Hughes Inc., 908 F.2d 981, 983 (D.C.Cir.1990)).

B. Relevant Product Market

The' parties have agreed that the relevant product market is acute care inpatient services offered by both Mercy and Finley. This definition excludes inpatient psychiatric care, substance abuse treatment, rehabilitation services, and open-heart surgery. This limits the product market to those services for which Mercy and Finley currently compete for inpatients.

C. Relevant Geographic Market

The burden is on the government to prove the relevant geographic market. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, -, 113 S.Ct. 884, 890, 122 L.Ed.2d 247 (1993). The relevant market is hotly disputed by the parties. The government asserts that the geographic market includes Du-buque County, Iowa and a half-circle with a 15 mile radius extending from Dubuque County’s eastern edge into Illinois and Wisconsin. This geographical area would include Mercy, Finley and Galena-Stauss Hospital. Currently, 88% of the patients within the market use the three hospitals within the market. Only about 2% of the 88% use Galena-Stauss; the remainder use Mercy and Finley. Approximately 76% of the patients at the three hospitals come from within the market.

The defendants assert that the proper geographic market includes Mercy, Finley, the seven closest rural hospitals and the regional hospitals situated in Cedar Rapids, Waterloo, Iowa City, Davenport, and Madison. Mercy and Finley’s market share of the patients within this geographical area is approximately 10%. The government does not contest that if this is the relevant market, the merger is not illegal.

The parties dispute whether the government has properly defined the relevant geographic market by trying to show whether DRHS could (1) profitably raise prices by 5% to managed care entities, or (2) profitably raise prices by completely eliminating pres *977 ent discounts to managed care entities. In the event the court finds the government has not met its burden as to the proposed geographic market, the government has proposed an alternative market encompassing only the City of Dubuque.

The government defined its market based on (1) the views of the major purchasers of health care services in the Dubuque area, (2) where physicians have privileges, (3) the views of physicians, and (4) patient flow data. Looking at the views of the major managed care providers in the Dubuque area, the government finds it significant that Medical Associates HMO and the Heritage Plan both feel their health care plans must include one of the Dubuque hospitals in order for the plan to be marketable to Dubuque employers. The government argues this is evidence that there is no market substitute for the Dubuque hospitals.

The government then looked at the overlap of physicians who were currently on staff at the area hospitals. The government showed that there is a great deal of physician staff overlap between the staffs of Mercy and Finley, but very little between the rural hospitals and Mercy or Finley. Seventy-six percent of Mercy’s physicians were shown to be on staff at Finley and over 90% of Finley’s physicians were on staff at Mercy. The government concludes from these statistics that (1) those patients who currently use a physician with privileges at Mercy and Finley cannot switch to a rural hospital due to their loyalty to their physician and their physician’s inability to admit them at a rural facility, and (2) Mercy and Finley are seen by physicians as being comparable hospitals as physicians are willing to work out of either of them. By contrast, Dubuque physicians are not willing to work out of the rural hospitals, hence the rurals are not comparable and therefore they are not substitutes for Mercy and Finley.

The government also asserts that Dubuque physicians would not seek privileges at the rural hospitals as they do not see the rural hospitals as being able to provide the broad range of services which the majority of their patients require and because the rurals are not adequately staffed and do not have the equipment to do many inpatient surgical procedures.

The government then goes on to look at the inflow and outflow of patients from the market. The “Elzinga-Hogarty” test was employed by the government to argue that the relevant geographical market was quite limited. This test looks at the empirical data to determine (1) the area from which the hospitals draw their patients and (2) where the residents in that area go for hospital care. When both numbers are at 90%, the market definition is said to be “strong”. Numbers at 75% are said to constitute a “weak” market definition. Robert Pitofsky, New Definitions of Relevant Market and the Assault of Antitrust, 90 Columbia Law Rev. 1805 (1990); Elzinga & Hogarty, The Problem of Geographic Market Delineation Revisited: The Case of Coal, 23 Antitrust Bull. 1, 2 (1978).

Looking at the government’s proposed market definition — Dubuque County and a fifteen mile radius into Illinois and Wisconsin — 76% of Mercy’s and Finley’s inpatients come from within this defined market, and 88% of those residing within the market seek care within the market. Shrinking the market to include only the City of Dubuque, 55% of'Mercy and Finley’s inpatients come from within the market and 91% of those residing in Dubuque seek hospital care at either Mercy or Finley. Defining the market as a twenty-five mile radius around Dubuque, 85% of Mercy’s and Finley’s patients come from within the market and 89% of those persons within the market seek care inside the market. Broadening the market to a 35 mile radius around Dubuque, 89% of Mercy and Finley’s inpatients come from within the market and 82% of the persons within that market seek care at Mercy or Finley.

Finally, the government asserts that the regional hospitals are not in the relevant geographic market as they only compete for patients at the “fringes,” the area located at the midpoint between Dubuque and a particular regional hospital. The government reasons that people will not travel greater distances than necessary for inpatient care and, therefore, only those patients at the midway point between two regional hospitals could be *978 induced to switch hospitals due to price concerns. The government concludes that DRHS would have the ability to raise prices as the rurals do not act as a competitive alternative to DRHS and the regional centers are only a competitive force at the fringes of Mercy’s and Finley’s service areas and therefore could not induce enough people to switch hospitals to defeat a price rise by DRHS.

The defendants criticize the government’s market definition as being dependent on incorrect assumptions, and as not accounting for current market trends. The defendants also assert that the government’s geographical market is too small because a 5% price increase would be easily defeated by patients who would choose to travel to other hospitals for cheaper care. In reaching this result, the defendants challenge the government’s assumptions of strong doctor-patient loyalty, that outreach clinics only have an effect on hospital use at the fringes of a hospital’s service area, and that there are significant barriers to entry into this market.

1. Analysis of the Relevant Geographic Market

The court finds that the government’s case rests too heavily on past health care conditions and makes invalid assumptions as to the reactions of third-party payers and patients to price changes. The government’s case also fails to undergo a dynamic approach to antitrust analysis, choosing instead to look at the situation as it currently exists within a competitive market.

In determining the relevant geographic market, the court must determine “the market in which the seller operates and to which the purchaser can practicably turn for supplies.” Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327, 81 S.Ct. 623, 628, 5 L.Ed.2d 580 (1960); Philadelphia National Bank, 374 U.S. at 359, 83 S.Ct. at 1739. The analysis must focus not merely on where patients have gone for acute inpatient services, but where they could practicably go should DRHS become anticompetitive. Bathke v. Casey’s General Stores, Inc., 64 F.3d 340, 345 (8th Cir.1995); Morgenstern v. Wilson, 29 F.3d 1291, 1295-1296 (8th Cir. 1994), cert. denied, — U.S. -, 115 S.Ct. 1100, 130 L.Ed.2d 1068 (U.S.1995). This requires a fluid analysis. It is not sufficient to take a snapshot of the current situation and define the relevant geographic market to be synonymous with the current service areas of the defendant hospitals. See, Bathke, 64 F.3d at 345; Morgenstern, 29 F.3d at 1295; In the Matter of Hospital Corporation of America, 106 FTC 361, 466 (1985), aff'd, Hospital Corporation of America v. FTC, 807 F.2d 1381 (7th Cir.1986), cert. denied, 481 U.S. 1038, 107 S.Ct. 1975, 95 L.Ed.2d 815 (1987); Drs. Steuer & Latham v. Nat. Med. Enterprises, 672 F.Supp. 1489, 1511 (D.S.C.1987), aff 'd, 846 F.2d 70 (4th Cir.1988).

In order to determine the actual geographic market, current market behavior must be put into a dynamic analysis which looks at possible competitive responses from other hospitals, third party payers and consumers. In this light, it is important to note that the government’s reliance on the Elzinger-Ho-garty test is merely a starting point — it states where Mercy and Finley are currently attracting patients and the area from which most patients seek services from either Mercy or Finley. This is the snapshot of the market as it exists under current conditions and does not pretend to answer the question of what would happen if there was an attempt to exercise market power by one of the market participants. See Robert Pitof-sky, New Definitions of Relevant Market and the Assault of Antitrust, 90 Co-lum.L.Rev. 1805 (1990).

The government’s case in general makes the mistake of relying too heavily on past conditions in the hospital industry and discounts the effects of outreach efforts, the strong emphasis that regional hospitals place on expanding their service areas and the willingness of managed care enrollees to make changes in their health care for financial reasons.

The government’s case relies on several assumptions and conclusions that are not supported by the evidence. One of the assumptions is that there is strong doctor-patient loyalty. This assumption supports the argument that patients cannot be enticed *979 to use a non-Dubuque hospital because the patient already has a Dubuque doctor to whom the patient is very loyal.

There are several problems with this assumption. First, the evidence shows that' many hospital patients do not have an established physician relationship, or, are admitted by a specialist who is not the patient’s regular physician.

Secondly, the evidence does not support a finding of strong patient-physician loyalty that prevents patient shifting for financial reasons. The medical professionals testified there is a large amount of patient shifting that occurs when an employer changes or modifies a health insurance plan so as to encourage usage of a particular physician or group of physicians. Testimony also shows that managed care entities have been very successful in enrolling patients in HMO’s that require switching physicians or agreeing to be seen by any available physician. 3

The government’s assertion that the outreach clinics have little effect on hospitalization patterns is also erroneous. There are several communities where referral practices have been dramatically altered due to outreach efforts. Most notably Manchester, Independence and Clarion, Iowa. While the effect of the outreach clinics has not been quantified, the fact that they are established is significant as it is only through the generation of inpatient and outpatient referrals that these clinics become profitable. Outreach efforts have been characterized by the regional hospitals as being pivotal in their efforts to expand patient volume at a time when all other trends are causing them to lose volume. In other words, without growth in these areas most hospitals acknowledge they would incur a significant decrease in revenue. The start-up of outreach clinics cannot be justified based solely upon the direct business they obtain on site. They are economically justified due to the increased referrals they bring to the physicians and hospitals sponsoring them. Outreach clinics generally attract patients from a fifteen mile radius and these clinics have been established within twenty-five miles of Dubuque. 18.8% of Mercy and Finley’s patients come from within fifteen miles of an outreach clinic associated with another regional hospital.

The government attempts to argue that outreach clinics are only effective in shifting patients from the fringe areas to other hospitals as people will not agree to be hospitalized at a hospital a significant distance away from their home and family. The government argues that most hospitalizations require two pre-operative visits to the hospital, the actual hospitalization and two or three post-operative visits to the hospital and patients will not want to incur the expense and inconvenience of travel for these visits. However, the evidence was clear that one reason why the outreach clinics are so effective in altering hospitalization practices is because the pre- and post-operative visits take place at the outreach clinic and the patient is only required to travel to the hospital for the actual surgical procedure.

In fact, people will use outreach clinics which are associated with hospitals that are a significant distance from their hometown. To illustrate, the Platteville and Lancaster areas are 25 miles from Dubuque and sixty to seventy miles from Madison, Wisconsin, yet Medical Associates, which refers persons back to Dubuque for inpatient care, meets strong competition in these communities from the Dean Clinic which refers its patients to St. Mary’s Hospital in Madison.

The fact that the residents of southwest Wisconsin are willing to drive to Madison for their inpatient needs also shows that the government’s assumption that persons within twenty-five miles of Dubuque will only go to Dubuque for their inpatient needs is an incorrect assumption. The government has also failed to account for the fact that there are several zip codes within 25 miles of Du-buque which currently send over one-third of their inpatients to other hospitals. Looking at the zip codes encompassing Cuba City, Wisconsin; Galena, Illinois; New Vienna, Iowa; Potosi, Wisconsin; and Hazel Green, Wisconsin, there were 930 discharges in a six month period from these zip codes and only *980 560 were discharged from Mercy or Finley (60.2%). 179 of these discharges were to hospitals other than Mercy, Finley, the seven rurals or the University of Iowa (19.2%). Obviously, these persons are already being attracted to hospitals outside the immediate area. Discharges from these five zip codes account for 7.7% of Mercy and Finley’s total discharges.

The main point made by the government which the court does agree with is the inability of the rural hospitals to prevent DRHS from acting in an ant