Antitrust Law Daily Wrap Up, ACQUISITIONS & MERGERS—N.D. Ill.: Court outlines reasons for enjoining Advocate-NorthShore merger, (Mar 17, 2017)

By Jody Coultas, J.D.

In an order explaining a March 7 grant of a preliminary injunction that led Advocate Health Care Network and NorthShore University HealthSystem—two of the leading providers of general acute care inpatient hospital services in Chicago’s northern suburbs—to call off a proposed merger, the federal district court in Chicago noted that the FTC was likely to succeed on the merits of its claims that the merger violated Section 7 of the Clayton Act. The district court was revisiting the injunction issue because the U.S. Court of Appeals in Chicago had overturned an October 2016 ruling, denying the agency's request for temporary relief pending an administrative challenge to the transaction, which was valued at approximately $2.2 billion (FTC v. Advocate Health Care Network, March 16, 2017, Alonso, J.).

Advocate Health Care Network, which is the parent of Advocate Health and Hospitals Corp. is a health care system that includes eleven hospitals. NorthShore University HealthSystem is a health care system that includes four hospitals.

In December 2015, the FTC filed an administrative complaint and a court action seeking a preliminary injunction. Last June, the federal district court in Chicago denied the request for a preliminary injunction blocking the deal, after finding that the FTC and the State of Illinois did not meet their burden of showing that there was a likelihood that they will succeed on the merits of their antitrust claims.

Geographic market. The parties agreed that the relevant product market is inpatient general acute care services sold to commercial payers and their insured members, but did not agree on the boundaries of the relevant geographic market. The relevant geographic market is "[the] area in which the seller operates, and to which the purchaser can practicably turn for supplies." The FTC argued that, based on the Seventh Circuit’s opinion, because many patients in the proposed North Shore Area would have limited or no access to nearby hospitals if their insurance plan did not provide access to any of the eleven hospitals in the North Shore Area, insurers would surely pay a small but significant non-transitory increase in price in order to be able to offer patients in that region a health plan that includes access to local hospitals. While the insurer representatives testified that they could not sell a plan that excludes both Advocate and NorthShore, Defendants argued that the testimony was inconsistent, biased, and ultimately not credible.

In light of the Seventh Circuit’s guidance, the court found that the relevant geographic market was properly defined by the FTC’s expert as the "North Shore Area" and included six of the merging hospitals. The fact that some patients were willing to travel outside the North Shore Area for general acute care services did not suggest that there was no "silent majority" in the North Shore Area that was reluctant to travel and that the hospitals in the area could use as leverage to charge supra-competitive prices. Defendants did not offer any evidence to demonstrate that a healthcare plan that excluded both Advocate and NorthShore would be successful among patients living in the North Shore Area. There was also no evidence that an insurer had ever offered a commercially-successful healthcare plan that enrolled large numbers of patients within the North Shore Area but did not include Advocate or NorthShore in its network.

Effect of competition. The court found that the proposed merger would substantially lessen competition in the North Shore Area and issued the injunction. If the companies were to merge, they would control 60% of the market, followed by Northwest Community (14%), Swedish Covenant, (8%), Vista East (6%), Northwestern Lake Forest (6%), and Presence Resurrection (6%).The market concentration that would result from the merger was well beyond the level that the FTC’s Horizontal Merger Guidelines identify as presumptively likely to enhance market power. Because the Seventh Circuit found that the market concentration evidence alone established the presumption of illegality, the burden of disproving anticompetitive effects fell on Defendants. Defendants ignored the voluminous factual evidence, including "ordinary course" documents, showing that Advocate and NorthShore are close competitors who dominate the North Shore Area and whose merger would necessarily entail substantial harm to competition, which bolsters the presumption of anticompetitive effects.

The FTC’s expert calculated that the merger would cause an average price increase of 8% across the six party hospitals in the North Shore Area, resulting in an annual increase of inpatient general acute care (GAC) reimbursement paid to those hospitals of about $45 million. The court found no error with the expert’s model, and that the expert persuasively demonstrated that the merger was likely to cause a significant price increase resulting in a loss to consumers.

Defendants’ rebuttal. Defendants attempted to rebut the evidence of anticompetitive effects by relying on insurer testimony and their experts’ opinions. However, the insurers’ support for the merger was "equivocal, unenthusiastic, and without a factual basis." Insurers are not in a position to know precisely how a merger will affect consumer welfare, and any support given to the proposed merger in this case may have been motivated by a belief the merger would improve their own competitive positions. The court also rejected Defendants’ expert’s testimony that the repositioning of competitors will offset or prevent the anticompetitive effects that the FTC’s expert identified without stronger evidence than the generalized testimony Defendants have offered. The Seventh Circuit already rejected the similar argument that there will be no anticompetitive price effects because the diversion ratios show that patients within the North Shore Area view hospitals outside the area as close substitutes.

Efficiencies. The FTC’s Horizontal Merger Guidelines and some lower courts recognize that defendants in a horizontal merger case may rebut the government’s prima facie case by presenting evidence of efficiencies offsetting the anticompetitive effects, the court noted. Where the merger would result in high market concentration levels, as in this case, the defendants must provide proof of "extraordinary efficiencies" based on a "rigorous analysis" that ensures that the proffered efficiencies represent more than "mere speculation and promises about post-merger behavior." Further, the efficiencies must be "merger-specific," i.e., "they must be efficiencies that cannot be achieved by either company alone."

Defendants failed to carry their burden of proving that efficiencies will offset the anticompetitive effects, according to the court. Although NorthShore would move to Advocate’s lower reimbursement rates and result in immediate savings to insurers (and by extension, to consumers), the savings were merely a temporary benefit and did nothing to alleviate the problem of the merged firm’s market power. Also, Defendants failed to show that consumer benefits due to enrollment in a High-Performing Network would offset anticompetitive effects of the merger.

The case is No. 15 C 11473.

Attorneys: Kevin Hahm for the FTC. Blake Lee Harrop, Attorney General's Office, for State of Illinois. John Robert Robertson (Hogan Lovells US LLP) and Robert W. McCann (Drinker Biddle & Reath LLP) for Advocate Health Care Network and Advocate Health and Hospitals Corp. Dan K. Webb (Winston & Strawn LLP) for Northshore University HealthSystem.

Companies: Advocate Health Care Network; Advocate Health and Hospitals Corp.

Cases: AcquisitionsMergers Antitrust FederalTradeCommissionNews IllinoisNews