After a number of losses by the federal government in cases seeking to enjoin hospital mergers, the Federal Trade Commission (“FTC”) has won at least a preliminary victory in its challenge of a hospital merger that was consummated almost six years ago. The FTC successfully challenged Evanston Northwestern Healthcare Corporation’s (“ENH”) acquisition of Highland Park Hospital (“Highland Park”) through an administrative trial. Although the FTC Administrative Law Judge (“ALJ”) Stephen J. McGuire ruled in favor of the FTC, lengthy appeals are expected. The decision has been appealed to the full Commission and then if the Commission sides in favor of the FTC, that decision would likely be appealed to the Seventh Circuit. Given that the FTC has prevailed at least at this initial stage of the litigation process, the FTC staff’s confidence in challenging hospital mergers may increase slightly.

Background

ENH acquired Highland Park in January 2000. As a result, ENH’s Evanston and Glenbrook Hospitals, both located in Cook County, Illinois, were combined with Highland Park, which was the closest hospital to the north and located in Lake County. The FTC investigated alleged enormous price increases that followed the merger and then filed an administrative complaint challenging the merger in February of 2004. The FTC’s Complaint alleged that following the merger, ENH was able to charge significantly higher prices to health insurers, thus leading to higher costs to the purchasers of health insurance and the consumers of hospital services.

Trial

Judge McGuire issued an initial decision that was made public on October 21, 2005. The trial lasted eight weeks. Unlike past hospital merger cases, Judge McGuire had the benefit of a mountain of actual data, evidence, and witness testimony from insurers indicating that prices increased significantly and, at least in the FTC’s view, as a result of anticompetitive conduct. In the typical merger case, by contrast, the antitrust agencies do not have actual evidence of post-merger conduct, and the presentation of proof inevitably contains a substantial element of predictive judgments. Judge McGuire himself observed in his opinion that this trial presented a rare opportunity to examine the actual effect of concentration on price and he stressed that there was significant post-acquisition evidence to evaluate in assessing whether the probable effect of the merger substantially lessened competition.

Given this mountain of evidence, Judge McGuire concluded that ENH’s acquisition resulted in “substantially lessened competition” and higher prices for general acute care inpatient services sold to managed care organizations in a relevant geographic market that included seven hospitals. Judge McGuire found the evidence of price increases that were imposed following the merger to be compelling. ENH did not dispute the price increases rather it contended that evidence of price increases standing alone is, as a matter of law, insufficient to demonstrate competitive harm, and that in any event those price increases were occasioned by forces other than an increase in market power caused by the merger, including among other things measurable improvements in quality of care. Judge McGuire rejected ENH’s pro-competitive justifications for the price increases and found that the price increases were a direct consequence of the exercise of enhanced market power. He didn’t provide much guidance with regards to ENH’s claim that it had increased the quality of care through improvements and this might be an area where the Commission or the Seventh Circuit will have to provide more guidance. While it might be difficult to evaluate that substantial improvements to quality of care justify price increases, it seems clear that they should be evaluated.

While the ALJ ruled in favor of the FTC with regards to the hospital merger resulting in anticompetitive effects and that a divestiture was required, the ALJ did not entirely rule in the FTC’s favor. The ALJ ruled in favor of the FTC under Count 1 of its Complaint that included alleged market definitions. The ALJ dismissed Count II of the FTC’s Complaint, which was based solely on competitive effects, as moot. The FTC had contended that in this situation where the competitive effects were clear that it is not necessary to define markets. The ALJ disagreed and opined that had it been necessary to review Count II, he would have dismissed it because the FTC did not define the relevant markets.

The ALJ ruled in favor of the FTC that the hospital merger is anticompetitive and order EHN to divest a hospital within 180 days of the order. Both the FTC and EHN have appealed the decision to the full Commission. EHN is appealing the entire decision and the FTC is appealing the portion of the decision that applies to Count II. If the FTC wins at the Commission, EHN will more than likely appeal the decision to the Seventh Circuit for its review. This process would take about a year or so.

Practical Considerations

It is important to understand that this decision only provides the FTC with a temporary win. This decision will be reviewed by the full Commission and the Commission will provide more guidance on how to evaluate hospital mergers. In addition to the Commission’s opinion, there is a strong chance that the Seventh Circuit will review this decision as well. More will be learned from these future decisions. That being said, the FTC can enjoy this initial victory.

Recently merged hospital systems and those that will merge in the future should keep the following practical considerations in mind. First, the FTC will continue to be very selective about which future hospital mergers or consummated mergers to challenge whether it eventually wins the Evanston case or not. Second, a merged hospital system cannot assume that the FTC will not investigate a consummated deal. Indeed, the FTC will conduct an analysis of hospital mergers after the fact to determine whether an investigation should be opened and whether a challenge is necessary. A challenge is more likely if there are two hospital systems or less in a specific geographic area. As in the ENH-Highland Park case, the relevant geographic and product markets will remain hot issues for dispute. Third, the FTC learns about problematic hospital mergers by monitoring local news articles and customer complaints. Therefore, post merger price increases to managed care organizations should not be substantially greater than those that have taken place historically. If merged hospitals abnormally increase prices to these payers, they will likely complain to the FTC, which could cause a lengthy and burdensome investigation and possibly a forced divestiture of a hospital. This means that health care providers should be less aggressive in seeking rate increases. To the extent price increases are necessary to pay for substantial improvements that lead to higher quality of care, the hospital systems should document this claim because the onus may be on the hospital systems to prove it. Fourth, merged hospital systems should integrate and realize bona fide and actual efficiencies as the FTC is less likely to break up hospital operations that are truly integrated and achieving real efficiencies.

Authored by:
Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com