Federal District Court Blocks Merger Between Two Chicago Health Systems

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John B. Garver III, James J. Waters and Laurie C. Smith
American Health Lawyers Association
March 31, 2017

A federal district court in Illinois unsealed its opinion on March 16 in the case of Federal Trade Commission and State of Illinois v. Advocate Health Care, Advocate Health and Hospitals Corporation, and NorthShore University HealthSystem, setting forth the reasons for issuing a preliminary injunction to block a proposed merger between Advocate Health Care and NorthShore University Health System that, if consummated, would have created the 11th-largest nonprofit health system in the United States, with over $7 billion in annual revenue. Judge Jorge Alonso’s 37-page opinion provides valuable guidance to health systems contemplating mergers that may face antitrust scrutiny by the Federal Trade Commission. After the court issued the preliminary injunction, Advocate and NorthShore promptly walked away from the merger. This case has taken a number of twists and turns. Advocate and NorthShore originally won at the district court level, but the FTC appealed. Last October, the Seventh Circuit reversed and remanded the case back to the district court. Not surprisingly, in light of the Seventh Circuit’s ruling, the district court this time ruled against Advocate and NorthShore. Had Advocate and NorthShore not abandoned the merger, procedurally, the next step would have been for them to continue to fight in front of the FTC’s administrative law judge.

The FTC has broad discretion to challenge mergers that may substantially lessen competition and cause significant harm to consumers. In this case, Advocate and NorthShore together would have operated six out of 11 inpatient hospitals in the “North Shore” area (comprising northern Cook County and southern Lake County) and would have held a 60 percent market share of patient admissions. But, looking at the market share of patient admissions was not the crux of the analysis. The most relevant “buyers” of health care, wrote the court, are insurance companies, not individuals, because insurers must bargain with health systems for inclusion in provider networks. Insurance executives unanimously testified that it would be impossible to successfully market any health insurance product in the North Shore area without either Advocate or NorthShore in the provider network. The FTC also presented evidence that the merger would increase the average price for general acute inpatient services by 8 percent, resulting in $45 million in additional revenue to the health systems, enough to give rise to a presumption of illegality under the FTC’s merger guidelines.

Market concentration aside, the two health systems presented credible reasons for pursuing the merger which they argued would actually lower costs for patients and insurers. First, the parties argued that merging would have enabled the implementation of cost-saving, risk-based contracts across both health systems. NorthShore presently relies on traditional fee-for-service contracts with providers (with around 90 percent of its revenues being fee-for-service), while Advocate obtains more than two-thirds of its revenues from risk-based contracting intended to increase quality and decrease cost. The merger, the parties argued, would have enabled NorthShore to provide health care with the benefit of Advocate’s risk-based contracting experience and engage in “large-scale full risk contracting,” decreasing overall cost and increasing overall quality. Second, Advocate argued the merger would have provided the scale and geographic coverage needed to offer an ultra-narrow-network, Advocate-only health insurance product in the North Shore area at a low cost directly to employers—essentially cutting out insurance companies as middlemen and offering Advocate-only health plans directly to employers at affordable prices.

Despite the health systems’ reasons, the federal court blocked the merger. The district court noted that Illinois’s Certificate of Need process for new hospitals entering the market is lengthy and uncertain, providing a key barrier to entry to potential entrants that may otherwise counteract any anticompetitive effects of the merger. In addition, the FTC presented evidence that Advocate and NorthShore have a history of upgrading medical facilities and investing in new technologies to remain competitive with one another—a benefit to patients that could have been lost upon consummation of the merger. In response to arguments that other hospitals existed outside of the FTC’s target geographic area, the court noted that inpatient hospital care is a local industry because patients often prefer to seek care close to home. In fact, in a previous appeal related to the merger, the Seventh Circuit noted that 80 percent of patients generally choose hospitals within a 20-minute drive, reflecting that patients are highly averse to traveling long distances for hospital care and that the relevant geographic markets for antitrust matters with respect to hospitals are often small.

While there are many implications of the federal court’s decision, we note two takeaways here. First, effects on health insurers, not patients, as the main purchasers of health care services, may likely be the crux of the analysis in evaluating the potential economic anticompetitive outcomes of any merger. Second, because patients (and, by extension, health insurers) generally purchase health care locally, the geographic market for analyzing anticompetitive effects of a merger may be small, spanning only a few counties or so.

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