FTC Again Finds Success in High-Profile Hospital Merger Appeal

by Foley & Lardner LLP
Contact

Foley & Lardner LLP

For the second time in recent weeks, the Federal Trade Commission (FTC) prevailed in its challenge of a high-profile hospital merger. This time, the appeal stemmed from a June 14, 2016, order by Judge Jorge Alonso of the Northern District of Illinois denying the FTC’s motion to enjoin the merger of the thirteen-hospital Advocate Health Care Network and the four-hospital NorthShore University Health System, both located in Chicago’s northern suburbs. The decision provides additional guidance to hospitals contemplating mergers or other combinations as to how courts and enforcers may analyze these transactions.

Judge Alonso’s decision to deny the FTC’s injunction motion focused on the FTC expert economist’s application of the “hypothetical monopolist” test in defining the relevant geographic market. More specifically, Judge Alonso’s decision criticized the FTC expert’s decision to exclude certain academic medical centers from its geographic market, as well as the expert’s assumption that patients generally prefer access to hospitals that are close to home. Ultimately, it was this reasoning with which the Seventh Circuit disagreed.

On October 31, 2016, the Seventh Circuit unanimously reversed and remanded Judge Alonso’s decision, holding that Judge Alonso’s geographic market finding was “clearly erroneous.” Central to the Seventh Circuit’s decision was its conclusion that Judge Alonso misapplied the hypothetical monopolist test, misunderstood the realities of the health care marketplace, and erred in finding evidence of patient preference for local hospital services to be “equivocal.”

Re-affirming the Hypothetical Monopolist Test

The basis for the panel’s decision was, in large part, the perceived failure on the part of Judge Alonso to properly apply the hypothetical monopolist test. In broad strokes, the hypothetical monopolist test asks whether the merged entity could profitably raise prices to commercial payors within a given geographic market above competitive levels. If it could do so without sacrificing profits, then under that test that region is a relevant geographic market.

According to the Seventh Circuit, however, Judge Alonso’s analysis improperly focused on the effect a price increase stemming from the proposed Advocate-NorthShore merger would have on patients rather than on the commercial payors. The court held that commercial payors are the appropriate focus, where they are the entities that would decide whether it is necessary to accept a price increase in order to assemble a saleable network, or whether there are alternative, acceptable providers.

Alongside the Third Circuit’s similar holding in the recent FTC v. Hershey-Pinnacle decision, the Seventh Circuit’s opinion further supports the hypothetical monopolist test as the analysis that may be applied by courts and enforcers.

Acknowledging the “Commercial Realities” of the Health Care Marketplace

The Seventh Circuit also took issue with Judge Alonso’s conclusion that the FTC’s economist improperly assumed that patients prefer local hospitals. According to Judge Alonso, this assumption relied on “equivocal” evidence that ignored some patients’ preference for seeking general acute care near their workplaces or based on unrelated relationships with outpatient providers.

Rejecting Judge Alonso’s conclusion, the Seventh Circuit held that the evidence underlying the local-preference assumption was not “equivocal.” Instead, the panel held that the evidence clearly established that a large portion of patients prefer to receive care close to home and, indeed, that insurers cannot feasibly market plans to their customers (Chicago-area employers employing North Shore residents) that exclude both Advocate’s and NorthShore’s northern-suburb hospitals.

More specifically, the Seventh Circuit noted that the evidence demonstrated that 80 percent of patients within the FTC’s proposed geographic market travelled 15 miles or less to reach their preferred hospital. And, while the evidence indicated that some patients may be willing to travel outside the proposed geographic market to seek general acute care, the “silent majority” would not. This, according to the panel, would likely lead to commercial payors paying higher prices to keep the merged entity’s hospitals in network.

Part and parcel of this conclusion was the panel’s opinion that insurers market plans with an eye toward what the employers will buy to offer to their employees. While individual patients may, from time to time, travel to alternative hospitals outside the proposed market, the Seventh Circuit opined that employers may reject participating in otherwise “broadly appealing” plans that exclude Advocate and NorthShore hospitals because such plans would not appeal to large groups of employees, many of whom reside in the northern suburbs.

In summing up the issues, the Seventh Circuit concluded that the geographic market question in hospital mergers “asks in essence, how many hospitals can insurers convince most customers to drive past to save a few percent on their health insurance premiums?” In the panel’s estimation, “[w]e should not be surprised if that number is very small.”

Ultimately, because Judge Alonso’s decision failed to properly address this key question, the Seventh Circuit decided that his decision warranted reversal.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Foley & Lardner LLP | Attorney Advertising

Written by:

Foley & Lardner LLP
Contact
more
less

Foley & Lardner LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.