In January of 2000, Evanston Northwestern Healthcare Corporation acquired Highland Park Hospital in a transaction valued at more than $200 million. Four years later, the Federal Trade Commission (FTC) challenged the merger on the grounds that the merger substantially reduced competition. In October of 2005, an FTC administrative law judge (ALJ) sided with the FTC, and ordered the sale of Highland Park Hospital within 180 days.
The divestiture order broke the FTC's decade-long losing streak of challenging hospital mergers in court. Contributing to the FTC's success is that the Evanston case was the first time a merger was challenged post-merger, rather than on a pre-merger basis.
A. ALJ Opinion
The FTC's complaint alleged that the merger violated Section 7 of the Clayton Act, which prohibits acquisitions that substantially lessen competition. The ALJ ruled that the relevant product market was general acute care inpatient services sold to managed care organizations (MCOs). The ALJ rejected Evanston's argument that the product market should also include outpatient services, noting that inpatient and outpatient services were not interchangeable.
The ALJ determined the relevant geographic market to be seven hospitals in the northern Chicago suburbs. The ALJ declined to include other Chicago area hospitals, on the basis that health care consumers would demand that local hospitals be included in their MCO networks.
In reviewing the merger, the ALJ applied the FTC's horizontal merger guidelines, and determined that the relevant market was highly concentrated, that the merger led to a significant increase in concentration, and was, therefore, likely to create or enhance market power or facilitate its exercise. The ALJ also reviewed post-merger evidence that Evanston exercised this market power to obtain price increases significantly above its pre-merger prices, and substantially larger than price increases obtained by other comparison hospitals.
B. Evanston's Defenses
The ALJ rejected Evanston's "learning about demand" defense. Evanston argued that its price increases were not the result of post-merger market power, but instead the result of Evanston learning from its review of Highland Park's MCO contracts that Evanston had been significantly underpricing its own MCO contracts. The ALJ also determined that Evanston's procompetitive justifications of quality of care improvements at Highland Park were not enough to justify the anticompetitive risks.
The ALJ determined that full divesture of Highland Park from Evanston was the most effective remedy to restore competition to pre-merger levels, rejecting Evanston's various alternative remedies. The divestiture order required Evanston to sell Highland Park to an FTC approved buyer and in an FTC approved manner. The order further requires Evanston to provide transitional services to the buyer for up to a year after the sale to ensure that Highland Park remains competitive in the marketplace.
C. On Appeal
Evanston has appealed the decision on the grounds that: 1) the geographic market used by the ALJ was much too narrow, in that it didn't consider other Chicago area hospitals; 2) the FTC failed to prove that the increase in prices was the result of market power, rather than Evanston learning that its prices were lower than its competitors prices; 3) the ALJ failed appropriately to consider the procompetitive effects of the merger; and 4) divesture was not appropriate because it would ultimately harm health care consumers.
Five associations and municipalities have filed briefs in support of Evanston - The Advisory Board Company, the American Hospital Association, the Business Roundtable, the City of Highland Park, and the Joint Commission on Accreditation of Health Care Organizations. Oral arguments were heard on May 17, 2006, and the parties are awaiting a decision on the appeal.
The bottom line irony of this matter is quite simple, namely if a goal of a hospital merger is to acquire enough market power to raise prices, and that goal is achieved, then the risk of antitrust exposure is very real.