The Federal Trade Commission (FTC) won another decisive victory in its effort to fight health care provider consolidation when the U.S. Court of Appeals for the Seventh Circuit reversed a district court’s decision denying the FTC’s request to enjoin a merger between Advocate Health Care Network and NorthShore University HealthSystem, both operators of hospital networks in Chicago’s northern suburbs. The decision should cause health care providers to examine even more carefully any consolidation efforts—even those that providers undertake to mitigate the effects of the Affordable Care Act.

In overturning the district court decision denying the FTC’s injunction preventing the merger, the Seventh Circuit forcefully rejected the district court’s analysis of the geographic market. The Court of Appeals endorsed the FTC’s use of the “hypothetical monopolist test”—the economic tool the FTC commonly uses in hospital merger cases. The test asks whether, in a given region, the merged entity could impose a profitable "small but significant non-transitory increase in price," which is "typically about 5%." The court found that, through use of this test, the FTC had proven that its proposed geographic area was correct.

In endorsing the FTC’s theory of the case, and finding a narrow geographic market, the court identified “three notable features” in markets for hospital services:

• First, there tend to be only a few hospitals in a geographic market, given that patients prefer nearby hospitals.
• Second, “patients vary in their hospital preferences,” based on doctor, reputation, location, and other factors, although some patients simply will not travel.
• Third, “consumers do not directly pay the full cost of hospital care,” but, instead, insurance companies pay for much, if not most or all, of the cost.

Of additional note, the court excluded from the geographic market hospitals considered “academic centers,” concluding that community hospitals, which focus on general acute hospital care, like those involved in the proposed merger, are not similarly situated to academic centers. The court also made clear that the relevant buyers were insurers, not patients. And the evidence showed that insurers need either the Advocate or the North Shore hospitals in a network in order to offer a viable product. Notably absent from the decision was any discussion of the pressures facing health care providers, which has sparked the recent wave of consolidations. Unless the parties abandon the transaction, they will have to prevail in an administrative proceeding in front of the FTC in order to consummate the merger.