By Jeffrey May, J.D.
The FTC’s failure to shoulder its burden of proving a relevant geographic market compelled the federal district court to deny the agency’s request for a preliminary injunction blocking the proposed merger of Advocate Health Care Network and NorthShore University HealthSystem. Last week, the court issued its order denying the FTC’s motion to halt the proposed combination of two of the leading providers of general acute care inpatient hospital services in Chicago’s northern suburbs, pending administrative proceedings. The court has now issued a redacted, amended memorandum opinion and order, explaining its reasoning. The FTC has filed a notice of appeal in the matter, and the court has enjoined consummation of the proposed merger, pending appellate review (FTC v. Advocate Health Care Network, June 20, 2016, Alonso, J.).
The parties did not dispute a relevant product market for general acute care (GAC) inpatient hospital services sold to commercial payers and their insured members. GAC services are defined as a cluster of medical services that require a patient to be admitted at least overnight.
Advocate and NorthShore, however, took issue with the FTC's relevant geographic market. The agency limited the relevant geographic market to Chicago's "North Shore Area" in northern Cook or southern Lake Counties in Illinois. The proposed market included six of the merging hospitals—Advocate Lutheran General Hospital, Advocate Condell Medical Center, NorthShore Evanston Hospital, NorthShore Skokie Hospital, Glenbrook Hospital, and Highland Park Hospital—as well as Vista East Hospital, Northwest Community Hospital, Presence Resurrection Hospital, Northwestern Lake Forest Hospital, and Swedish Covenant Hospital.
Destination hospitals. The FTC's expert used flawed criteria to identify the relevant geographic market, in the court's view. The court agreed with the defendants that the expert did not offer an economic basis for excluding so-called "destination hospitals"—such as Northwestern Memorial Hospital, Rush University Hospital, and University of Chicago Hospital—from the market. The defendants pointed out that one of the excluded destination hospitals—Northwestern Memorial—was the second or third choice for patients who used five of the six party hospitals in the North Shore area. For the remaining party hospital, Northwestern Memorial ranked above other hospitals in the market as an alternative. Moreover, the court noted that, even if the expert had offered some basis for excluding hospitals that attracted patients from throughout the Chicago metropolitan, the rationale "assumes the answer to the very question the geographic market exercise is designed to elicit." It assumed that the destination hospitals were not substitutes for the merging parties. The expert's exclusion of destination hospitals also ignored the "commercial realities" of the industry, the court held.
"Overlap" criterion. The court also found problematic the expert's decision to include hospitals "that overlap with [i.e., draw patients from the same area as] both Advocate and NorthShore" rather than those that overlap with just one of the systems. Citing the defense expert, the court noted that the postmerger system could be constrained by constraining any one of its hospitals. Requiring a hospital to constrain both merging parties to be included in the geographic market made little sense, according to the court.
This case is No. 1:15-cv-11473.
Attorneys: James Thomas Greene for the FTC. Blake Lee Harrop, Attorney General's Office, for State of Illinois. John Robert Robertson (Hogan Lovells) and Robert Walter McCann (Drinker Biddle & Reath LLP) for Advocate Health Care Network. Dan K. Webb (Winston & Strawn LLP) for NorthShore University HealthSystem.
Companies: Advocate Health Care Network; NorthShore University HealthSystem
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