FTC Market Definition Failed in Chicago Merger, Court Says

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By Matthew Loughran

June 21 — The FTC didn't properly define the geographic market affected by a proposed merger of two major nonprofit hospitals in the Chicago area, a federal judge said ( FTC v. Advocate Health Care, 2016 BL 196331, N.D. Ill., No. 1:15-cv-11473, 6/20/16 ).

In his recently unsealed opinion Judge Jorge L. Alonso of the U.S. District Court for the Northern District of Illinois rejected nearly every aspect of the methodology used by the Federal Trade Commission's expert in determining the market that would be affected by the proposed merger of Advocate Health Care and the NorthShore University HealthSystem.

The court's decision reflects the difficulty that the FTC faces when attempting to analyze the relevant geographic market for hospital mergers. Like a similar federal court decision in Pennsylvania in May, the court in this case faulted the enforcement agency for its assumptions on whether patients considered certain hospitals as reasonable substitutes for the merging parties.

“This is a milestone decision,” Lisl J. Dunlop, a partner and co-chair of the antitrust and competition group of Manatt, Phelps & Phillips LLP in New York, told Bloomberg BNA.

“The Advocate-NorthShore deal is one of the biggest to come along in the health-care space in a long time, and for the judge to find against the FTC is a pretty major development,” she added.

In its administrative complaint, the FTC valued the deal at approximately $2.2 billion. According to the court's opinion, the two merging entities have reported combined top line revenues of approximately $7 billion.

Effect of Decision Unclear

Dunlop warned that the true effect of either the court's decision in this merger or the similar ruling concerning the proposed Penn State Hershey Medical Center and PinnacleHealth System merger in Harrisburg, Pa., wouldn't be fully felt until after the appeals courts have their say.

“The problem is that both of these decisions are on appeal and it will be impossible to make general predictions about the effects of these cases until we get the appellate decisions,” she said.

The U.S. Court of Appeals for the Third Circuit is considering the appeal in the Penn State-Pinnacle merger on an accelerated schedule with oral arguments planned for July 26 ( FTC v. Penn State Hershey Med. Ctr., 3d Cir. No. 16-2365, 5/24/16 ) (102 HCDR, 5/26/16).

The U.S. Court of Appeals for the Seventh Circuit has accepted the appeal in the Advocate-NorthShore case (Docket No. 16-2492), and the hospitals have urged the appeals court to follow a similar schedule as the Third Circuit, setting oral argument for August.

Despite the similarities in the two cases, Dunlop warned that the analysis of the mergers involves looking at each case's individual facts and that it would be hard to draw sweeping conclusions from the fact that the FTC has lost court challenges to both.

“Every merger case is incredibly fact-specific, and even the two mergers here have very different business rationales behind them,” she said.

Dunlop pointed out that the Penn State-Pinnacle merger involved the question of how the merging parties could add capacity in order to survive, while the primary rationale behind the Advocate-NorthShore merger was to bring a new insurance product to the Chicago market.

Court Focused on Methodology

The judge's opinion—unsealed June 20 after confidential business information was removed—focused on the FTC's methodology in assessing the geographic market.

“The court really found the FTC analysis to be quite flawed, noting the use of concepts at odds with some basic notions of substitutability, and not supported with what I would call on the ground evidence of how competition really was or was not working,” J. Mark Waxman, an antitrust partner at Foley & Lardner LLP in Boston, told Bloomberg BNA.

The court said the agency should not have excluded so-called destination hospitals from the market definition.

According to the court, excluding these hospitals—Northwestern Memorial Hospital, Rush University Hospital, University of Chicago Hospital, Loyola University Hospital, Cancer Treatment Centers of America and Lurie Children's Hospital—ignores the economic realities of the general acute-care market in Chicago, where patients increasingly seek outpatient treatment and are directed to hospitals by their physicians not by the proximity of the hospital to their homes.

In addition, the court faulted the FTC for only including in its analysis hospitals that overlap in coverage with both Advocate and NorthShore facilities. The court agreed with the defense experts that hospitals that even only compete with one or the other of the moving parties should have been included because any of those hospitals could provide sufficient competition for a merged entity.

According to Waxman, although the court did mention that there was one dominant payer in the Chicago market—Blue Cross Blue Shield of Illinois—it was strangely silent about the effect that the merger would have on the insurance market.

“Oddly there were no references to evidence specifically from Blue Cross or any other payer about their actual negotiating history and experience in constructing networks, or even forward-looking views about what the merger would mean to their commercial members,” he said.

Advocate is represented by Hogan Lovells LLP and Drinker Biddle & Reath LLP. NorthShore is represented by Winston & Strawn LLP.

Attorneys from the FTC represent the commission and attorneys from the Illinois Attorney General's Office represent the state.

To contact the reporter on this story: Matthew Loughran in Washington at mloughran@bna.com

To contact the editor responsible for this story: Peyton M. Sturges at psturges@bna.com

For More Information

The court's opinion is at http://src.bna.com/f65.

The administrative complaint is at http://src.bna.com/f7o.

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