James Unland, President, The Health Capital Group, Chicago
Tom Campbell, Partner, Baker & McKenzie LLP, Chicago
On August 6, 2007 the full Federal Trade Commission (FTC) released its decision following an appeal by Evanston Northwestern Healthcare (ENH) of the Administrative Law Judge’s (ALJ) October 2005 ruling that had ordered ENH to divest itself of Highland Park Hospital, a hospital it had acquired in 2000 and substantially improved. The FTC had issued its original complaint on February 10, 2004. alleging anticompetitive behavior under Section 7 of the Clayton Act.
The FTC’s August 6, 2007 decision, written by its Chairman, essentially upheld the ALJ’s 2005 decision but, rather than require a divestiture, seeks to compel ENH to implement a completely separate hospital contracting procedure in that payors would be able to negotiate discreet rates with Evanston Hospital as opposed to Highland Park Hospital. The Chairman of the FTC wrote:
In this case, the transaction eliminated the pre-merger price competition between Evanston and Highland Park, as well as the MCOs’ option of contracting with one hospital but not the other. We can seek to remedy this competitive harm by requiring ENH to divest Highland Park or through injunctive restraints. After careful review of the record, we have determined that this is the highly unusual case in which a conduct remedy, rather than divestiture, is more appropriate.
In its press release of August 6, 2007, ENH quite understandably expressed delight that the FTC was not requiring the divestiture of Highland Park Hospital, stating that the “FTC ruling keeps Evanston Northwestern Healthcare intact.” However, make no mistake that the Chairman’s use of the term ‘highly unusual’ means that the FTC does not intend to give hospitals a blanket pass when it comes to divesting previously acquired entities; the odds are that future rulings of this type will require a divestiture. Moreover, a close look at the ruling itself is quite troubling in terms of both the ruling’s content and possible future FTC actions.
The prosecution of this merger challenge was controversial because it came four years after the transaction had been consummated and because there are so many alternative hospitals in the Chicago market that it is hard to see how the FTC’s theory that the hospitals gained market power by merging could be sustained. The Commission’s finding of illegality rests on two principal modes of proof: First, the Commission gave considerable weight to the testimony of managed care payors who said that Highland Park was an alternative that permitted them to threaten to exclude Evanston from their networks. This relied on opinion testimony with virtually no examples of past conduct where MCOs had in fact refused to contract with one or the other of the merging parties to bargain for a better deal.
The other principal basis for finding illegality was the analysis of the price increases that the merged hospital achieved after the merger. The opinion of FTC Chair Deborah Majoras gave considerable weight to the analysis and testimony of the expert retained by FTC Staff Counsel, Deborah Haas Wilson who examined the magnitude of price increases at the merged hospital and compare them to the magnitude of increases at other hospitals.
This approach to proving a hospital merger illegal has drawn fire from commentators. The price study did not consider whether the increased ENH prices were above competitive levels. It just identified a greater increase at ENH than at other area hospitals. Critics of the decision have pointed out that the antitrust laws are aimed at preventing the exercise of market power which means charging prices above competitive levels. That proof seemed to be missing in the record. (Speeding tickets are handed out for exceeding the speed limit, not for how fast one accelerates to reach the speed limit.)
The Majoras opinion found that the merged hospital would have market power and identified the harm to competition as resulting from unilateral effects as opposed to coordinated effects. In other words, in her view, the merged hospital by itself could control prices in the market place or exclude competitors. It did not need to collude with other market participants. To reach this conclusion the Majoras opinion had to discard the finding of the ALJ that “the four non-ENH hospitals in the geographic market would have the ability to constrain prices at ENH, either now or in the future, and could be utilized by managed care organizations to create alternate hospital networks.” The ALJ was referring to Lake Forest, Advocate Lutheran General, Rush North Shore and St. Francis Hospitals which he included in defining the geographic market in which ENH competes. Unlike an appellate court reviewing a trial court’s decision, the Commission does not need to give deference to the ALJ’s findings of fact. Instead the Commission can reach into the record and make its own findings and disregard what the ALJ decided. While the Commission’s procedures permit it to refind the facts, it is difficult to understand how it can come to the exact opposite conclusion from what the ALJ concluded based on the same record.
It turns out that a few days after the February 2004 filing of the FTC complaint, an FTC official addressed the Chicago chapter of the HFMA (the First Illinois Chapter) thanks to the efforts of the dynamic program chair, Elaine Scheye. This official, Mr. Jeffrey Brennan, stated in reference to the string of previous losses by the FTC, “I think it’s fair to say that there are many on the Agency’s staff who believe the Government should have won some of the prior hospital antitrust cases,” going on to express clear frustration and a determined desire to win a hospital case.
Many of us at that Chicago meeting concluded that the FTC would invent new ground rules and then pursue the ENH case on the basis of those ground rules. That is exactly what has happened. Space does not permit us to critique the reasoning of the FTC exhaustively item by item. A few general points, however, can be made along with an exhortation to CFOs and hospital attorneys to read the actual ruling or detailed summaries of it:
- This case represents a hard turn by the FTC in favor of payors who, as we all know, have themselves consolidated tremendously in recent years. Keep in mind that it was the payors who caused the FTC to become involved in this matter when they complained about what they regarded as rapid and excessive price increases by ENH post-merger.
- The question then arises: can payors in any market and with respect to any hospital ‘system’ essentially intimidate a local or regional system into fragmenting its payor contracting, transforming it from a ‘system’ contract into individual hospital contracts notwithstanding that the system is a single entity?
- Will the FTC, with or without complicity by payors, now start retrospectively assessing regional hospital systems or aggregations of hospitals under the same ownership, whether they be for-profit or not-for-profit? Given the narrow, if not myopic, definition of ‘the market’ in the ENH case (a three-hospital ‘system’ amidst many hospitals in the northern suburbs of Chicago), what is to prevent the FTC from looking at the hospitals in a local market under any common ownership even if the ownership is part of a national ‘chain’ or national ‘system’?
- As for the separate payor contracts within the ‘system’ that the FTC desires complete with what they call a ‘firewall mechanism,’ will the practical impact of that provision result in lower revenues to the system, and could such a provision adversely affect any obligated group with negative ramifications on both operations and access to capital?
The CEO of Evanston Northwestern Healthcare indicated that ENH may or may not take their case to the federal courts on appeal of the FTC’s decision, acknowledging that they have already spent considerable time and resources. He added, however, that the entire approach by the FTC from 2004 through the present should be very concerning to all hospitals. We agree, and we encourage top managers and hospital legal counsel to take these developments seriously and to study the FTC’s decision in this case.
