United States: Chicago-Area Hospitals Abandon Fight To Save Merger From FTC Challenge

David Kully is a Partner in the Washington D.C. office

Christopher Carmichael is a Partner in the Chicago office

HIGHLIGHTS:

  • After the U.S. Court of Appeals for the Seventh Circuit ruled on Oct. 31, 2016, that the district court's refusal to enjoin the merger of two hospital systems in Chicago's northern suburbs was based on an improper antitrust analysis, the hospitals returned to the U.S. District Court for the Northern District of Illinois to try to save their merger and persuade the District Court not to enter the preliminary injunction sought by the Federal Trade Commission.
  • The District Court, guided by the Seventh Circuit's decision, determined that Chicago's North Shore area comprised the relevant geographic market. Because patients prefer to receive hospital services close to their homes, insurers selling health insurance to North Shore employers had to offer plans that provide access to North Shore hospitals. More distant hospitals were not reasonable substitutes for insurers or meaningful competitive constraints on the merging parties' hospitals.
  • If the merger had been allowed, the merging hospitals would have controlled 60 percent of the market for acute inpatient hospital services in the North Shore area.

Holland & Knight in November 2016 alerted Healthcare & Life Sciences readers to decisions by the U.S. Courts of Appeals for the Third and Seventh Circuits overturning prior district court decisions and finding for the Federal Trade Commission (FTC) in antitrust cases challenging mergers of hospital systems in Harrisburg, Pennsylvania and in Chicago's northern suburbs. (See Holland & Knight alert, " Appeals Court Decisions Strengthen FTC's Hand in Hospital Merger Challenges," Nov. 17, 2016.)

After the Third Circuit's decision, the Harrisburg hospitals – Penn State Hershey Medical Center and PinnacleHealth System – decided to drop their merger plans. (PinnacleHealth is now reportedly exploring possible affiliation with the University of Pittsburgh Medical Center.)

Advocate Health Care Network and NorthShore University HealthSystem, however, continued to fight to save their merger until March 7, 2017, abandoning their merger plans only when the U.S. District Court for the Northern District of Illinois, after remand from the Seventh Circuit, preliminarily enjoined the merger. The District Court released its decision to the public on March 16. The next step, had the hospitals elected to continue the fight, would have been a full trial before an FTC administrative law judge on the question of whether the merger would be likely to substantially lessen competition in violation of Section 7 of the Clayton Act.

District Court Decision

The District Court's decision re-evaluates, in light of the Seventh Circuit's opinion, the District Court's previous view that the merging parties competed in the provision of acute inpatient hospital services with dozens of hospitals across the Chicago area, making it unlikely that patients or insurers would pay higher prices after the merger. On reconsideration, the District Court concluded that the merging parties competed in the geographic market advocated by the FTC – Chicago's North Shore area – and that the FTC was entitled to the preliminary injunction it requested. The District Court's decision reiterates three key points on which both the Seventh and Third Circuit focused.

First, the decision confirms the Seventh Circuit's observations that "insurers are the most relevant buyers" in the antitrust analysis of hospital mergers. See Redacted Mem. Op. & Order at 10, FTC v. Advocate Health Care, et al., No. 15-C-11473 (N.D. Ill. Mar. 16, 2017). The insurers offering plans to employers in the North Shore area testified that they could not offer plans that did not include at least one of the merging parties' hospital systems. Even if some patients might be willing to leave the North Shore area for care, a "silent majority" of patients required access to local hospitals and would not consider more distant hospitals to be reasonable substitutes – making North Shore area hospitals essential to insurers seeking to reach those patients' employers. Seeid.

Second, the decision also confirms that basic acute care is a distinct market for which specialty care cannot be easily substituted. The District Court determined that if Advocate and NorthShore were allowed to merge, they would control 60 percent of the market for acute inpatient hospital services in the North Shore area and that their merger would "presumptively likely to enhance market power." Id. at 17. Other specialty or "destination" hospitals were not reasonable substitutes for the basic acute care provided by the local hospitals because those hospitals were too distant. While patients might travel to specialty or "destination" hospitals for specific procedures, patients still needed (and wanted) an acute care hospital nearby. 

Third, once a plaintiff successfully triggers the presumption of harm to competition in a merger case, it is difficult for merging parties to rebut the presumption by showing potential benefits from the merger. Advocate and NorthShore tried, but failed, to overcome the presumption by arguing that 1) in spite of the significant market share that Advocate would possess if the merger were allowed, purchasers would pay lower prices for acute inpatient hospital services after the merger, id. at 23-26; 2) other, nearby hospitals might "reposition" and compete harder after the merger to attract North Shore area patients, id. at 26-27; or 3) "efficiencies" from the merger would offset any potential harm. Id. at 28-36. The District Court found the hospitals' arguments to be too speculative to credit and – with respect to predictions that the increased market concentration caused by the merger would lead to lower prices – counterintuitive.

Considerations for Hospitals

The District Court's opinion, along with the decisions by the Third and Seventh Circuits, provides further guidance to hospitals contemplating mergers. When addressing future hospital mergers, courts will likely focus on local geographic markets where patients receive basic care, as well as on whether insurers can successfully market plans to employers that exclude the merging hospitals. Hospitals seeking to argue that procompetitive benefits would offset any harm from their mergers should be prepared to back up their assertions with concrete and persuasive evidence of those benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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