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A Return to Evanston: FTC Revisits Old Ground in Yet Another Hospital Merger Challenge

Last week, the Federal Trade Commission ("FTC" or "Commission") authorized staff to file an administrative complaint and to seek in federal court a temporary restraining order and a preliminary injunction to block the proposed merger of Advocate Health Care Network (Advocate) and NorthShore University HealthSystem (NorthShore) in the Chicago area.  In the Matter of Advocate Health Care Network, Advocate Health and Hospitals Corporation, and NorthShore University HealthSystem, FTC Docket No. 9369 (December 17, 2015).  The FTC alleged that the combined entity would operate the majority of the hospitals in the North Shore area of Chicago, and control more than 50% of the general acute care inpatient hospital services.

Health care antitrust enthusiasts may recognize some of the hospitals in this new case.  In 2004, as a result of the FTC hospital merger retrospective, the FTC sued NorthShore (then known as Evanston Northwestern Healthcare), alleging that its 2000 acquisition of Highland Park Hospital had resulted in higher prices.  In 2007, the full Commission found the transaction to be anticompetitive and ordered a conduct remedy requiring the parties to negotiate separate contracts with managed care plans.

This new matter stems from the September 2014 affiliation agreement between Advocate and NorthShore—a transaction valued at $2.2 billion.  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.

This is the FTC’s third hospital merger challenge in recent weeks, following the agency’s actions seeking to block proposed transactions in Pennsylvania and West Virginia.  As with those two challenges, the FTC here 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.”  Pointing to Illinois’s Certificate of Need ("CON") regulations as an additional barrier to entry, the Commission also contended that entry or expansion by other competing hospitals would not be timely or sufficient.

As is common in antitrust merger cases, the central dispute here will likely focus on the 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.”  According to the Complaint, this area comprises the “main area of competition between NorthShore’s four hospitals and the two Advocate hospitals with which NorthShore most directly competes.”  By the FTC’s calculations, approximately 73% of patients residing within the North Shore Area stay there to receive inpatient hospital services.  “Based on commercial [general acute care] inpatient admissions of patients residing within the six-county Chicagoland metropolitan area [which includes Cook, DuPage, Kane, Lake, McHenry, and Will Counties] and seeking care in the North Shore Area,” the FTC alleged that the hospitals will 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 is presumptively unlawful under the 2010 Merger Guidelines.

The FTC contends that Advocate and NorthShore are close—if not each other’s closest—competitors, based on price as well as various non-price dimensions.  Highlighting the quality and service competition between the parties, the FTC noted that they “track each other’s quality and brand recognition” and “have substantially invested in improving and expanding their services and facilities to compete against one another.”  Thus, the Commission contends, the transaction will not only increase the cost of health care, but will also diminish the health systems’ incentive to increase service offerings and improve the quality of healthcare.  Just as the FTC did in its recent hospital merger actions in Pennsylvania and West Virginia, the agency here also pointed to party documents that suggest the two health systems view each other as close competitors.  For example, the Complaint mentions NorthShore ordinary course business documents that “identify Advocate’s ‘approach to risk’ and ‘ACO strategy’ as significant competitive threats.”

The FTC’s near back-to-back hospital merger challenges over the past 45 days illustrate the agency’s continued intense scrutiny of provider consolidation.  Hospitals considering merging should take note of the FTC’s significant requirements for an efficiencies defense, close attention to and use of statements in ordinary course documents that demonstrate head-to-head competition, sensitivity to the existence of CON regulations as a potential barrier to entry, and the FTC’s consistent challenge of transactions deemed presumptively anticompetitive based on market share and market concentration levels under the Merger Guidelines.

The 2007 Evanston Northwestern win is widely recognized as the FTC’s first victory in a litigated hospital merger case after a rather long string of losses in the 1990s.  The FTC has been on a hospital merger winning streak ever since.  Whether or not past is prologue in the current Chicagoland matter remains to be seen.

The evidentiary hearing before the administrative law judge is set for May 24, 2016.

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Dionne Lomax