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Geographic Market Definition Trips Up FTC As Federal Court Rejects Challenge To Advocate-NorthShore Hospital Merger

Posted  June 22, 2016

By James J. Kovacs

The loss of the Federal Trade Commission (“FTC”) in a hospital merger case in the U. S. District Court for the Northern District of Illinois last week highlights just how tricky defining a proper geographic market can be for antitrust enforcers these days.

Following a six day hearing, Judge Jorge Alonso denied a request by the FTC and the State of Illinois in FTC v. Advocate Health Care to preliminarily enjoin the proposed merger between Advocate Health Care Network and Advocate Health and Hospital Corporation (“Advocate”) and NorthShore University HealthSystem (“NorthShore”).  If permitted to merge, the combined entity, along with employing thousands of physicians and owning practice and outpatient sites, would control 15 hospitals in Illinois.

In the complaint and request for the preliminary injunction to enjoin the merger, the FTC and Illinois alleged that the Advocate-Northshore merger would form the largest hospital system in “northern Cook County and southern Lake County,” more commonly known as the North Shore Area of Chicago, Illinois.  The complaint alleged that the North Shore Area geographic market contains 11 total hospitals, six of which are owned by the merging parties.  Under this market definition, Advocate-Northshore would control 55 percent of the general acute care (“GAC”) inpatient hospital services in the North Shore Area post-merger.  As a result, the merger would allegedly substantially lessen competition, enhancing Advocate-NorthShore’s ability to receive higher reimbursement rates from payers and diminishing their incentives to improve quality or innovate.  To bolster the argument of the defined geographic market, the plaintiffs claimed that approximately 73 percent of North Shore Area residents stay in the North Shore to “receive GAC inpatient hospital services.”

In denying the preliminary injunction, the Judge Alonso focused exclusively on the plaintiffs’ geographic market definition, which the court found to be fatally flawed.

While noting that there was “no formula for determining the geographic market,” Judge Alonso stated that prior case law dictated a pragmatic and factual definition corresponding to commercial realities of the industry.  As noted by the Court, plaintiffs’ economist Steven Tenn’s 11 GAC hospital North Shore Area geographic market definition did not consider “destination hospitals” such as Northwestern Memorial Hospital and Rush University Hospital, only included hospitals with at least a two percent market share, and only included hospitals that drew patients from both Advocate and Northshore, rather than those that drew patients from only one of the merging hospitals.

Judge Alonso deemed the criteria used by Tenn to form his geographic market definition as “flawed.”  In particular, Judge Alonso noted that excluding destination hospitals from the geographic market analysis “assumes the answer to the very question the geographic market exercise is designed to elicit; that is, are the destination hospitals substitutes for the merging parties?”  Moreover, the Court was not convinced of plaintiffs’ assertion that 73 percent of patients prefer GAC inpatient hospitals services near their home, citing numerous sources in the record indicating patients may choose to travel for care including to hospitals close to where the individual works.  Finally, Judge Alonso found that excluding destination hospitals ignored the commercial realities of the industry observing that payers contract for both inpatient and outpatient services, outpatient services are on the rise, and outpatient services are a key driver of hospital admissions.

Judge Alonso also took exception with Tenn’s exclusion of hospitals that did not draw patients from both of the merging parties.  Relying on defendants’ expert Thomas McCarty, the Court stated that “requiring a hospital to constrain both parties to be included in the geographic market makes little sense.”  As a result of these findings, the Court determined that plaintiffs’ failed to prove a relevant geographic market, and thus denied the preliminary injunction.

The Advocate-NorthShore decision comes on the heels of the FTC’s recent loss in a challenge to a similar hospital merger matter in the U.S. District court for the Middle District of Pennsylvania.  The FTC and Pennsylvania sued to block the merger Penn State Hersey Medical Center (“Hershey”) and Pinnacle Health System (“Pinnacle”), a combination of four Pennsylvania hospitals.  Plaintiffs alleged the merger would create a dominant provider with a 64 percent market share of GAC inpatient hospital services in the Harrisburg Metropolitan Statistical Area – an area that includes the Pennsylvania counties of Dauphin, Cumberland, Perry, and Lebanon.

In denying plaintiffs’ motion for preliminary injunction, Judge John Jones found that the plaintiffs’ alleged geographic market was “unrealistically narrow” and ignored “commercial realities.”  Relying on economic data, Judge Jones disagreed with the plaintiffs’ assertions that GAC inpatient hospital services are “local,” noting that 43.5 percent of Hershey’s patients and several thousand Pinnacle’s patients traveled “from outside of the FTC’s designated Harrisburg Area.”  The Court went on to note that the plaintiffs’ narrow geographic market ignored the “19 hospitals within a 65 minute drive of Harrisburg.”  However, unlike Judge Alonso, Judge Jones also considered other evidence in denying the preliminary injunction including defendants’ extended fixed-rate contract with large payers, compelling merger efficiencies, extensive repositioning by competitors, the defendants’ desires for increased risk-based contracting, and finally noting that hospitals must “adapt to an evolving healthcare system” and the Affordable Care Act.

However, the victories for the defendants in these two cases may be short lived.  Judge Alonso has granted a stay of the Advocate-NorthShore merger pending plaintiffs’ appeal of his decision to the Seventh Circuit.  While Judge Jones did not grant a stay, the Third Circuit halted the Hershey-Pinnacle merger pending its review.   As a result, in just over two years, the U.S. Courts of Appeals in the Third, Sixth, Seventh, and Ninth Circuits will have all authored opinions on hospital mergers.  The recent decisions by the Sixth and Ninth Circuits, however, upheld decisions blocking the proposed mergers.

For now, the lower court decisions in both Advocate-NorthShore and Hershey-Pinnacle stand as a warning sign to antitrust enforcers that geographic market definition is the crux of hospital merger review.  Moreover, both cases indicate that narrowly defined geographic markets that ignore patients’ propensities to travel or eliminate well-regarded hospitals within driving distances will not withstand scrutiny without more compelling evidence or data.  When the Advocate-NorthShore merger was initially challenged, the CEO of NorthShore complained that the FTC and Illinois had gerrymandered the geographic market, intentionally ignoring other Chicago area hospitals.  Judge Alonso essentially agreed with the defendants.

Moving forward, the FTC, the states, and even private plaintiffs seeking to block hospital mergers must carefully consider geographic market decisions.  While it is possible that markets may be defined as individual Metropolitan Statistical Areas or relatively small local areas, parties opposing mergers must also be prepared to have sufficient evidence and economic data indicating that patients, payers, and the so-called commercial realties agree with their geographic market definition.

Edited by Gary J. Malone

Tagged in: Antitrust Litigation,