United States: The FTC And State Of Illinois Solidify Victory Blocking Chicago Hospital Merger

The Federal Trade Commission ("FTC") and the State of Illinois successfully concluded their challenge to the proposed merger of Advocate Health Care and NorthShore University Health System earlier this month, when the U.S. District Court for the Northern District of Illinois granted the plaintiffs' request for a preliminary injunction enjoining the health systems from consummating their proposed merger. The parties subsequently abandoned the transaction without appealing the district court's decision.

The district court had previously denied the motion for a preliminary injunction. It believed that the geographic market proposed by the plaintiffs was too narrow and found the evidence "equivocal" regarding the importance of patients having access to hospitals close to their homes. As such, it held that the plaintiffs had not met their burden of proving a relevant geographic market and thus, did not demonstrate a likelihood of success on the merits. However, in October 2016, the U.S. Court of Appeals for the Seventh Circuit reversed and remanded for further proceedings on the issue of geographic market definition, holding that the lower court erred in its factual findings regarding critical aspects of the geographic market, as well as the remaining preliminary injunction elements that the district court did reach in its first decision.

This decision is notable for several reasons. First, coupled with the Seventh Circuit's opinion, this decision embraces the FTC's analytical approach to defining an urban relevant geographic market, allowing the FTC to exclude "destination" hospitals and also to exclude proximate hospitals that they view as insufficient competitive alternatives to the merging parties. Second, the decision supports the FTC's diversion/willingness to pay bargaining models, even though the judge acknowledged that the FTC's model always produces a price increase. Finally, the merging parties unsuccessfully advanced an efficiency defense focused upon the offering of a high performance, lower cost network, which they claimed would produce savings that would dwarf any price increase predicted by the FTC's model. Not only does the decision consequently support the FTC's hospital merger enforcement program, it is yet another ruling that ups the ante on the ability of merging parties to persuade a court that the proposed efficiencies are sufficient to offset alleged anticompetitive effects.

Background

It was two and one-half years ago, September 2014, when Advocate and NorthShore first executed an affiliation agreement. Advocate, a not-for-profit health system, is the largest hospital system in the Chicago metropolitan area with 11 general acute care hospitals and a children's hospital. Five of its general acute care hospitals are located in Cook County, Illinois, and two are in Lake County, Illinois. NorthShore is a not-for-profit health system with four general acute care hospitals—three in Cook County and one in Lake County.

The FTC alleged that the proposed merger would result in increased bargaining leverage against health plans for the combined entity, allowing it to raise rates. Consistent with its position in other hospital merger challenges, the FTC also questioned whether the hospitals' efficiency claims were cognizable or merger specific, noting that the efficiency claims are "not nearly of the magnitude necessary to justify the Transaction in light of its potential to harm competition."1

What was notable from the outset in this case was the fact that it was the first challenge to a hospital consolidation in an urban setting, Chicagoland. So while it is common in many antitrust merger cases, the central dispute here — and the focus of interested observers — was the geographic market definition. The FTC defined the relevant geographic market as the "North Shore Area," defined as "the area bounded by six [general acute care] inpatient hospitals: [NorthShore] Evanston, Swedish Covenant Hospital, Presence Resurrection Medical Center, Northwest Community Healthcare Hospital, Advocate Condell, and Vista Medical Center East."2 According to the Complaint, this area comprised the "main area of competition between NorthShore's four hospitals and the two Advocate hospitals with which NorthShore most directly competes."3 By the FTC's calculations, approximately 73% of patients residing within the North Shore Area stay there to receive inpatient hospital services. The FTC alleged that the hospitals would collectively control 55% of the market, with the next largest hospital only having 15% of the market. Based on HHI market concentration levels (post-Transaction HHI of 3,517 representing an increase of 1,423 points), the FTC further alleged that the transaction was presumptively unlawful under the 2010 DOJ and FTC Merger Guidelines.

In its original opinion, the district court rejected the FTC's geographic market definition and denied the preliminary injunction. The court held that the plaintiffs failed to properly define the relevant geographic market, noting that there was no "economic basis" for the exclusion of certain nearby destination hospitals. According to the court, plaintiffs' economic expert, Dr. Steven Tenn, used "flawed criteria" to exclude certain hospitals from the market. The FTC appealed, arguing that the court "erred by basing its geographic market determination on an analysis of how the candidate market was constructed rather than whether it satisfied the hypothetical monopolist test."

Seventh Circuit Analysis on Geographic Market

The Seventh Circuit reversed and criticized the district court for improper application of the hypothetical monopolist test to determine the scope of the relevant geographic market and took issue with the lower court's emphasis on the distance some patients travel for care to assess the boundaries of the relevant geographic market. According to the Seventh Circuit, insurers are the most relevant buyers, noting that "the geographic market question is . . . most directly about 'the likely response of insurers,' not patients, to a price increase," because '[i]nsured patients are usually not sensitive to retail hospital prices, while insurers respond to both prices and patient preferences."4 The appellate court was further persuaded by testimony from managed care plans that the plan had to include at least one of the merging parties in order to sell a marketable insurance product to employers in the area, and highlighted that such testimony was supported by "strong, not equivocal" evidence that patients generally prefer to receive hospital care locally.5 Thus, it concluded that the lower court's focus on hospitals outside of the narrow geographic market failed to properly account for the "silent majority" of patients who seek treatment from local hospitals that would pay supra-competitive prices to receive hospital services close to home rather than travel.

District Court's Opinion on Remand

In light of the Seventh Circuit's opinion, the district court reversed course on several fronts. First, it accepted insurers as "the most relevant buyers" of general acute care inpatient services, noting, "[e]ven if it is true that large numbers of patients who live in the North Shore Area travel outside of the Area to hospitals such as Northwestern Memorial for GAC services, it is error 'to focus on the patients who leave a proposed market instead of on hospitals' market power over the patients who remain, which means that the hospitals have market power over the insurers who need them to offer commercially viable products to customers who are reluctant to travel farther for general acute hospital care.'" Despite acknowledging some of defendants' concerns about the credibility of the insurers' testimony which the court stated "may indeed be self-serving," it found that the record as a whole supports the view that "insurers genuinely believe that a plan that excludes Advocate and NorthShore is not viable in the North Shore Area." According to the court, "testimony that an insurer has actually offered a commercially-successful healthcare plan that enrolled large numbers of patients within the North Shore Area but did not include Advocate or NorthShore in its network might have sufficed," but "the defendants offered no such testimony in this case, nor did they offer any evidence to demonstrate that a healthcare plan that excluded both Advocate and NorthShore would be successful among patients living in the North Shore Area."

Second, the court accepted the analysis of plaintiffs' economic expert, Dr. Tenn, regarding the exclusion of certain "destination hospitals" (e.g., academic medical centers and specialty hospitals that attract patients from throughout the Chicago metropolitan area) from the proposed geographic market. While the court had previously found no economic basis for such facilities to be excluded and distinguished them from local community hospitals, it acknowledged that these hospitals are not in the northern Chicago suburbs and could not be used as substitutes to the merging parties by payers seeking to establish a provider network in northern Chicago. The court stated, "although many patients travel from the North Shore Area to these destination hospitals, Dr. Tenn nevertheless excluded them from his analysis because these hospitals cannot fulfill the function of providing local care within the North Shore Area."

Third, the court accepted Dr. Tenn's reliance on diversion ratios (which measure patient substitution) even though insurers, not patients, are the most relevant buyers. Diversion ratios demonstrate whether the level of substitution between the hospitals in the North Shore Area is high enough that the merged firm could profitably impose a small but significant non-transitory increase in price (SNIP) in the event of a merger. The court disagreed with the defendants on the appropriate use of diversion ratios, reiterating the Seventh Circuit's view that "even if diversion ratios show that a proposed geographic market excludes significant competitors, it does not necessarily follow that the geographic market is defined too narrowly."

Finally, while the court noted that it found that the market concentration evidence alone establishes the presumption of illegality, it cited Dr. Tenn's report regarding the anticompetitive effect of the merger, noting that the transaction would cause an average price increase of 8% across the six party hospitals in the North Shore Area, resulting in an annual increase of inpatient GAC reimbursement paid to those hospitals of about $45 million.

The court also rejected more general challenges to the FTC's model. Defendants argued that the model had no predictive power, because as Dr. Tenn admitted, the model always predicts a price increase if diversion ratios and contribution margins are positive. The court, however, found that the model was "useful because it reveals how strong the merged entity's profit-maximizing incentives to raise price will be based on their levels of substitution and potential profitability," and thus the "fact that the method predicts at least a small price increase whenever the inputs are positive does not represent a weakness."

Defendants also argued that Dr. Tenn's approach was inconsistent with commercial realities in the hospital industry because "hospital systems settle on prices by way of bilateral bargaining with insurers on a system-wide basis." To defendants, Dr. Tenn's model's focus on when a merged hospital system might have an incentive to raise prices at a particular hospital is inconsistent with commercial reality. Dr. Tenn countered by arguing that both a price-setting model and a bilateral bargaining-based model will generate identical predicted post-merger price increases, and he used a price-setting model "for ease of exposition". The court was unconvinced by the "relatively superficial criticism defendants have made" and concluded that "Dr. Tenn has persuasively demonstrated that the merger is likely to cause a significant price increase resulting in a loss to consumers."

The defendants' attempt to rebut competitive effects evidence was also broadly rejected by the court. The evidence in the record regarding payers who expressed support for the merger was viewed by the court as "equivocal, unenthusiastic, and without a factual basis." The court opined that defendants' argument that other hospitals could reposition themselves to defeat a price increase was "alluring." However, the court found that this argument was another version of an argument that the Seventh Circuit had rejected regarding diversion ratios. The court concluded that in light of the Seventh Circuit's guidance, it "cannot accept that the repositioning of competitors will offset or prevent the anticompetitive effects that Dr. Tenn has identified without stronger evidence than the generalized testimony defendants have offered."

With respect to efficiencies, the parties' major argument was that once the merger was consummated, the merged entity could offer a commercially-viable, cost saving narrow network product attractive to large employers. They estimated that savings of consumers would fall between $210 and $250 million in the aggregate, which would greatly outweigh any price increase. The court was unimpressed. It did not believe that the "efficiency" was merger specific and after a battle of experts regarding the true level of savings and the attractiveness of the product to consumers, also concluded that defendants had not carried its burden.

After this ruling, the parties abandoned the transaction. The FTC has now closed its administrative case, and this decision will be the last word on the matter.

A year ago, the district court here had ruled against the FTC. A district court in Pennsylvania had rejected an FTC challenge to the proposed Hershey merger, and the entire FTC hospital merger enforcement program looked like it could be in jeopardy. Now, the Third Circuit reversed in Hershey and entered the preliminary injunction — and the parties abandoned the transaction. The Seventh Circuit and the district court here ruled for the government — and the parties abandoned the transaction. As the current interim FTC Chair Maureen Ohlausen said:

"Historically, the Advocate and NorthShore hospital systems competed vigorously to be included in health insurance companies' hospital networks. Having reason to believe their merger would increase costs, and harm quality and innovation for patients and their families in the northern suburbs of Chicago, the Commission sued in federal district court and in the FTC's administrative process. The Seventh Circuit and ultimately the district court agreed, validating the FTC's analyses and methodologies. With the two hospital systems remaining separate, consumers will continue to reap the benefits of this competition, which include lower prices and higher quality service."

And the FTC's antitrust activity in the health care space continues to live and thrive.

Footnotes

1  In the Matter of Advocate Health Care Network, Advocate Health and Hospitals Corporation, and NorthShore University HealthSystem, FTC Docket No. 9369 (Dec. 17, 2015) (complaint), https://www.ftc.gov/system/files/documents/cases/151218ahc-pt3cmpt.pdf.

2  Id. at ¶23.

3  Id. at ¶24.

4  FTC v. Advocate Health Care Network, 841 F.3d 460, 471 (7th Cir. 2016).

5  Id. at 474.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Bruce D. Sokler
Dionne Lomax
Similar Articles
Relevancy Powered by MondaqAI
Reinhart Boerner Van Deuren s.c.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Reinhart Boerner Van Deuren s.c.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions