Chicago Hospital Case Could Hinge on Efficiency Argument

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By Liz Crampton

Nov. 2 — An ongoing antitrust case against two urban hospitals seeking to merge in Illinois could hinge on a unique legal argument: whether combining will allow them to offer a new, lower-priced insurance product to patients.

If accepted by the courts, it would mark the first time an efficiencies argument in a hospital merger case has been successful.

But first, Advocate Health Care and NorthShore University Health System will have to decide whether to continue the fight, now that the U.S. Court of Appeals for the Seventh Circuit ruled against them and sent the case back to the district court for further proceedings.

The panel of judges endorsed the Federal Trade Commission’s geographic market definition in its 3-0 decision issued Oct. 31, which proved the government can win an antitrust case involving urban hospitals in a narrow market -- a victory for an agency that usually focuses on rural hospital mergers.

The Seventh Circuit’s holding is “obviously very good for the FTC,” said Bruce Sokler at antitrust partner at Mintz Levin. “On top of the Third Circuit opinion, they now have a tear of appellate stamps of approval for their hypothetical monopolist test and approach.”

“Advocate and NorthShore have positioned the merger that because of the merger -- and only the merger -- they’re going to put out a new insurance product. That’s not an efficiency that’s been addressed in any case,” Sokler said.

Uphill Battle

Focusing solely on the FTC’s geographic market, the Seventh Circuit didn’t mention the hospitals’ efficiences defense. Some take that as a sign the panel wants that part of the case to be further argued.

“The remand is very curious,” Douglas Ross, an antitrust partner at Davis Wright Tremaine, told Bloomberg BNA. “The court, having decided that the FTC might be right on the market, should have gotten to the hospitals’ argument that even if the merger is prima facie anticompetitive, it nonetheless should be permitted to proceed because the efficiencies are substantial. That court paid no attention to the efficiencies argument. That is surprising.”

Agencies cautiously nod to the efficiencies defense in the Horizontal Merger Guidelines, their framework for reviewing deals. “A primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products,” it says.

But past history shows it’s not easy to make a compelling efficiencies argument.

The Ninth Circuit’s decision in St. Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys. Ltd. has been used as a guidepost for hospitals defending mergers: “...a defendant can rebut a prima facie case with evidence that the proposed merger will create a more efficient combined entity and thus increase competition.”

Although that court cracked a window for the argument, it ultimately said it would “remain skeptical about the efficiencies defense in general and about its scope in particular.”

In September, the Third Circuit nearly slammed the window shut. In ruling for the FTC in its challenge to a merger of two Harrisburg, Penn. hospitals, the court came down hard on efficiencies, saying “...we are skeptical that such an efficiencies defense even exists.”

Persuasive Judge?

The primary goal of the Advocate-NorthShore merger is the creation of a new insurance product for group employers, the hospitals have argued.

Advocate said existing health plans in Chicago don’t reward providers for effective management of population health or for reducing the total cost of care by directing additional patients to them.

As a result, the healthcare provider determined the best strategy to gain market share and remain profitable is through the design of a “high performing network” – lower-cost, lower-priced products sold either through health plans or directly to employers, based on a benefit design that encourages patients to get their health care services from Advocate.

During the trial, several insurers testified they believe the insurance product would be commercially successful with Chicago employees and are prepared to distribute it.

The challenge for the defense, antitrust attorneys say, is keeping the deal together even longer than expected in order to reassert the claims.

“The message in this decision is muddled,” Ross said. “The court speaks strongly about what was wrong with the hospitals’ view of the market and suggests that the Federal Trade Commission was engaging in an appropriate hypothetical monopolist test. But the fact that they didn’t address the efficiencies argument does say the court is willing to go round two.”

To contact the reporter on this story: Liz Crampton in Washington at lcrampton@bna.com

To contact the editor responsible for this story: Tiffany Friesen Milone at tmilone@bna.com

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