Federal Trade Commission et al v. Advocate Health Care Network et al
Filing
485
REDACTED AMENDED Memorandum Opinion and Order. Signed by the Honorable Jorge L. Alonso on 6/20/2016. Notice mailed by judge's staff (ntf, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FEDERAL TRADE COMMISSION
and STATE OF ILLINOIS,
Plaintiffs,
v.
ADVOCATE HEALTH CARE,
ADVOCATE HEALTH AND
HOSPITALS CORPORATION, and
NORTHSHORE UNIVERSITY
HEALTHSYSTEM,
Defendants.
)
)
)
)
)
)
)
)
)
)
)
)
)
)
No. 15 C 11473
Judge Jorge L. Alonso
AMENDED1 MEMORANDUM OPINION AND ORDER
Plaintiffs have sued defendants to enjoin them from consummating their proposed merger
pending completion of the FTC’s administrative trial on the merits of plaintiffs’ antitrust claims.
For the reasons set forth below, the Court denies the motion.
Background
Parties
Advocate Health Care Network, which is the parent of Advocate Health and Hospitals
Corp., is a health care system that includes eleven hospitals: (1) BroMenn Medical Center; (2)
Christ Medical Center; (3) Condell Medical Center; (4) Eureka Hospital; (5) Good Samaritan
Hospital; (6) Good Shepherd Hospital; (7) Illinois Masonic Medical Center; (8) Lutheran
General Hospital; (9) Sherman Hospital; (10) South Suburban Hospital; and (11) Trinity
1
When the parties submitted their proposed redactions to the Court’s sealed Memorandum
Opinion and Order, they pointed out two citation errors, both on page 11, which the Court has
corrected.
Hospital. See http://www.advocatehealth.com/hospital-locations (last visited May 31, 2016).
NorthShore University HealthSystem is a health care system that includes four hospitals: (1)
NorthShore Evanston Hospital; (2) NorthShore Glenbrook Hospital; (3) NorthShore Highland
Park Hospital; and (4) NorthShore Skokie Hospital. See http://www.northshore.org/locations
(last visited May 31, 2016). In September 2014, Advocate and NorthShore signed an affiliation
agreement to merge and create Advocate NorthShore Health Partners. (See DX3118, Affiliation
Agreement.) “The combined entity would operate 15 GAC [general acute care] hospitals in
Illinois and would generate approximately $7.0 billion in revenue.” (Pls.’ Findings of Fact &
Conclusions of Law (“PFFCL”) ¶ 3.)
Health Care Contracting
Commercial health insurers (also called payers) try to create networks of health care
providers that are attractive to potential members.
(Id. ¶ 12; Defs.’ Findings of Fact &
Conclusions of Law (“DFFCL”) ¶ 21; Preliminary Injunction Hr’g Tr. (“Tr.”) 75:11-16 [NortonCIGNA]; id. at 148:12-18 [Hamman-Blue Cross Blue Shield of Illinois (“BCBSIL”)].) Among
the factors insurers consider when determining whether to include a hospital in a network are
“the attractiveness of that hospital, the quality, the reputation of that hospital, . . . its willingness
to . . . meet certain price points,” and its geographic coverage. (Tr. at 149:3-11 [HammanBCBSIL]; see id. at 74:18-75:7 [Norton-CIGNA].)
Hospitals compete to be included in insurers’ networks and negotiate reimbursement
rates and services with the insurers. (PFFCL ¶ 9; Tr. 76:8-19 [Norton-CIGNA]; id. at 149:12-20
[Hamman-BCBSIL]; JX 9, Englehart Investigative Hearing (“IH”) Tr. at 142:2-9).) A hospital
has more bargaining leverage if there are fewer substitutes for it that can be included in the
2
insurer’s network; the insurer has more leverage if there are more substitutes for the hospital.
; id. at 150:22-151:22 [Hamman-BCBSIL];
.)
The Chicago market is dominated by one commercial payer, BCBSIL, which has about 4
million members in the Chicago area. (Tr. at 145:9-11 [Hamman-BCBSIL]; id. at 1121:3-8
[Beck-United]; id. at 1175:13-22 [Nettesheim-Aetna]; id. at 1412:18-25 [Sacks-Advocate].) The
other payers include United Health Group, Aetna, CIGNA, and Humana, which have about 1.5
million, 389,000, 350,000, and 172,000 members, respectively, in the area. (Tr. 72:2-4 [NortonCIGNA]; id. at 1115:4-6 [Beck-United]; DX1515.0002, Carrier Market Share Calculation;
DX1862.0005, Advocate/Aetna Collaboration Discussion Guide.)
Insurers pay health care providers under fee-for-service (“FFS”) or risk-based contracts.
Under FFS contracts, the payer pays a set fee for every service the provider gives to a patient.
(Tr. 85:16-18 [Norton-CIGNA].) Risk-based contracts “[are] a set of payment arrangements in
which providers hold some degree of financial risk.” (PX 6001, Jha Report ¶ 10.) These
arrangements include, from the lowest to the highest level of risk: shared savings, bundled
payments, partial capitation, and full capitation/global risk. (Id. ¶ 24.) “Under shared savings
agreements, [a ]payer[] and [a] provider[] agree to a target or benchmark level of spending that
they believe a certain population is likely to incur,” and if the provider spends less than the target
amount, it will split with the payer the difference between the target and the actual amount spent.
(Id.) “Under bundled payment contracts, providers are given a lump sum of money to finance all
of the care needed for a patient’s single episode [of care].” (Id.) Under a partial capitation
arrangement, the provider is paid a set amount per patient for a negotiated set of health care
services. (Id.) The services that are not subject to capitation are paid on an FFS basis. (Id.)
3
Under a full capitation arrangement, a provider is paid a set amount per patient per month for all
of that patient’s health care services. (Id.) Ninety percent of NorthShore’s commercial revenues
come from FFS contracts; less than a third of Advocate’s commercial revenues come from FFS
contracts. (DFFCL ¶ 50; Tr. at 785:10-13 [Golbus-NorthShore]; id. at 1410:18-20 [SacksAdvocate].)
Rationale for the Merger
Advocate’s alleged rationale for the merger is “to create a new, low-cost, high
performing network (“HPN”) insurance product that can be sold . . . throughout Chicagoland,”
which it claims it cannot do “unless and until the merger with NorthShore is consummated due
to [Advocate’s] geographic gap east of Interstate 94.” (DFFCL ¶¶ 38, 49.) Northshore’s alleged
rationale for the merger is “[to] engage in large-scale full risk contracting,” which it says it
cannot do “absent a merger, because it lacks: (1) sufficient geographic coverage; and (2)
utilization management tools, care management tools, physician workflows and experience, . . .
which Advocate can provide.” (Id. ¶ 52.)
Discussion
Section 7 of the Clayton Act prohibits a merger “in any line of commerce or in any
activity affecting commerce in any section of the country, the effect of [which] may be
substantially to lessen competition, or tend to create a monopoly.” 15 U.S.C. § 18. The Court
may preliminarily enjoin a violation of § 7 “[u]pon a proper showing that, weighing the equities
and considering the Commission’s likelihood of ultimate success, such action would be in the
public interest.” 15 U.S.C. § 53(b). “Therefore, ‘in determining whether to grant a preliminary
4
injunction . . . , a district court must (1) determine the likelihood that the FTC will ultimately
succeed on the merits and (2) balance the equities.’” FTC v. OSF Healthcare Sys., 852 F. Supp.
2d 1069, 1073 (N.D. Ill. 2012) (quoting FTC v. Univ. Health, Inc., 938 F.2d 1206, 1217 (11th
Cir. 1991)). “[T]o demonstrate such a likelihood of ultimate success, the FTC must raise
questions going to the merits so serious, substantial, difficult and doubtful as to make them fair
ground for thorough investigation, study, deliberation and determination by the FTC in the first
instance and ultimately by the Court of Appeals.” FTC v. Tenet Health Care Corp., 186 F.3d
1045, 1051 (8th Cir. 1999) (quotations omitted). “A showing of a fair or tenable chance of
success on the merits will not suffice . . . ; Section 7 deals in probabilities not ephemeral
possibilities.” Id. However, “the statute requires a prediction, and doubts are to be resolved
against the transaction.” FTC v. Elders Grain, Inc., 868 F.2d 901, 906 (7th Cir. 1989).
“Determination of the relevant product and geographic markets is ‘a necessary predicate’
to deciding whether a merger contravenes the Clayton Act.”
United States v. Marine
Bancorporation, Inc., 418 U.S. 602, 618 (1974) (quoting United States v. E. I. Du Pont De
Nemours & Co., 353 U.S. 586, 593 (1957)); see Tenet Health Care, 186 F.3d at 1051 (“It is . . .
essential that the FTC identify a credible relevant market before a preliminary injunction may
properly issue.”); OSF Healthcare, 852 F. Supp. 2d at 1075 (quoting Tenet Health Care, 186
F.3d at 1052) (“‘[A] monopolization claim often succeeds or fails strictly on the definition of the
product or geographic market.’”).
The parties agree that the relevant product market in this case is inpatient general acute
care services sold to commercial payers and their insured members (“GAC services”). (PFFCL ¶
15; Tr. at 1270:3-6 (defense expert McCarthy conceding that the relevant product market is GAC
services).) GAC services are a cluster of medical services that require a patient to be admitted to
5
a hospital at least overnight.
(PFFCL ¶ 16; Tr. at 78:18-19 [Norton-CIGNA]); see OSF
Healthcare, 852 F. Supp. 2d at 1075 (“This is a ‘cluster market’ of services that courts have
consistently found in hospital merger cases, even though the different types of inpatient services
are not strict substitutes for one another. See FTC v. ProMedica Health Sys., Inc., No. 3:11 CV
47, 2011 WL 1219281, at *54 (N.D. Ohio Mar. 29, 2011) (collecting cases); see also United
States v. Rockford Mem’l Corp., 898 F.2d 1278, 1284 (7th Cir. 1990) (upholding a similar GAC
product market).”).
The parties do not agree, however, on the relevant geographic market, i.e., “[the] area in
which the seller operates, and to which the purchaser can practicably turn for supplies.” United
States v. Phila. Nat’l Bank, 374 U.S. 321, 359 (1963) (quotation omitted). There is no formula
for determining the geographic market; rather, it should be identified in “a pragmatic [and]
factual” way and should “correspond to the commercial realities of the industry.” Brown Shoe
Co. v. United States, 370 U.S. 294, 336-37, (1962) (quotation omitted). The geographic market
“need not . . . be defined with scientific precision,” United States v. Connecticut National Bank,
418 U.S. 656, 669 (1974), but “must be sufficiently defined so that the Court understands in
which part of the country competition is threatened,” Federal Trade Commission v. Cardinal
Health, Inc., 12 F. Supp. 2d 34, 49 (D.D.C. 1998). “The FTC’s failure to sufficiently define the
relevant geographic market can be grounds to deny the requested injunction.” Id.
Plaintiffs contend that the relevant geographic market, which their expert Steven Tenn
refers to as the “North Shore Area,” includes 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
6
Forest Hospital, and Swedish Covenant Hospital, all of which are located in northern Cook or
southern Lake Counties. (PX 6000, Tenn Report ¶¶ 9-11, 14-15, 18, 72.)2 Tenn constructed this
market based on the location of the hospitals and by including: (1) local hospitals and excluding
what he called destination hospitals, i.e., Northwestern Memorial Hospital, Rush University
Hospital, University of Chicago Hospital, Loyola University Hospital, Cancer Treatment Centers
of America, and Lurie Children’s Hospital; (2) hospitals “with at least a two percent share in the
area from which the relevant Advocate and NorthShore hospitals attract patients”; and (3)
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. (Id. at n.175; Tr. at 453:22-23, 463:2465:12.)
Tenn’s rationale for the first criterion was that:
[T]he purpose of the geographic market definition is to illuminate the
competitive impact of the proposed transaction.
Here the competitive concern is that Advocate and NorthShore are
substitutes for commercial payers when they’re putting together provider
networks in the northern Chicago suburbs. The destination hospitals do not -- are
not located in the northern Chicago suburbs and, therefore, do not fulfill this role
for commercial payers.
And, therefore, I include local hospitals which do fulfill this role.
(Id. at 454:1-11.) His rationale for the second criterion was that “competing hospitals that attract
a greater number of admissions from the same areas as the relevant Advocate and NorthShore
hospitals are likely to be more significant competitors to Advocate and NorthShore,” and two
2
Tenn also opined that the four NorthShore hospitals as well as Advocate’s Lutheran General
and Condell Hospitals constitute a relevant geographic market. (See PX 6000, Tenn Report ¶ 76.)
However, he “focus[ed] [his] analysis on . . . the North Shore Area.” (Id. ¶ 79.)
7
percent was a reasonable and conservative threshold. (Id. at 463:10-464:14.) His rationale for
the third criterion was:
[T]he concern is that a significant fraction of patients view Advocate and
NorthShore as their first and second choices. And, therefore, it’s natural to look
at, for that set of patients, what alternative hospitals would be the next best
alternative. And those competing hospitals are likely to be in the areas which
overlap with both Advocate and NorthShore.
(Id. at 465:6-12.)
After identifying the market, Tenn tested whether it passed the hypothetical monopolist
test; that is, whether a hypothetical monopolist that owned all of the hospitals in the market
could raise prices by a small but significant amount (“SSNIP”) at one or more of the merging
hospitals. FTC Horizontal Merger Guidelines § 4.1.1. A market passes the test if the hospitals
in it “are sufficiently close substitutes that the internalization of substitution by a hypothetical
monopolist would make it profitable to [impose a SSNIP].” (PX 6000, Tenn Report ¶ 57.) Tenn
measured the level of substitution by calculating diversion ratios, that is, the fraction of patients
who use one hospital for GAC services that would switch to another hospital, if their first-choice
hospital were no longer available. (Id. ¶¶ 95-98.) He determined that 48% of the patients
admitted to one of the eleven hospitals in the North Shore Area would substitute to one of the
other hospitals in the North Shore Area, if their chosen hospital were no longer available. (Id. ¶
99.) This “level of intra-market diversion,” Tenn opined, “is sufficiently high . . . to pass the
hypothetical monopolist test.” (Id. ¶ 100.)
Defendants contend that plaintiffs’ proposed market is too narrow because it arbitrarily
excludes so-called destination hospitals and other “firms ‘with relevant production, sales, or
service facilities in that region.’” (DFFCL ¶ 86 (quoting Merger Guidelines § 4.2.1); see Merger
Guidelines § 4.2.1 (“Geographic markets based on the locations of suppliers encompass the
8
the seller operates, and to which the purchaser can practicably turn for supplies”). Moreover, his
assumption that the destination hospitals are not substitutes is based on the notion that patients
prefer to receive GAC services near their homes (see Tr. at 454:15-457:4), a point on which the
evidence is equivocal. (Compare id. at 330:9-11 (Dechene of Northwestern testifying that
“people prefer to receive inpatient hospital care near to where they live”); JX 27 Steele Dep. at
25:15-17 (defense expert testifying that “patients tend to go to nearby or local hospitals”), PX
2008, Hall [NorthShore] IH Tr. at 187:9-18 (testifying that “[f]or more ordinary in-patient
procedures, . . . patients prefer to receive care closer to home”), with Tr. at 158:1-2, 246:12-23
(Hamman of BCBSIL testifying that “people get most routine care,” which is largely outpatient,
“close to where they live”); id. at 330:14-16 (Dechene testifying that Northwestern “seeks to
provide care where patients live and work”), id. at 1130:8-11 (Beck of United Healthcare
testifying that “some patients prefer to receive care near their homes,” but where a patient
receives care is “really a personal decision of each member”); id. at 83:15-84:8 (Norton of
CIGNA testifying that CIGNA’s members in northern Cook and Southern Lake Counties
“[t]ypically . . . seek care in their own communities, but some . . . travel to where they work or
for a higher level of care”); id. at 1169:15-22 (Nettesheim of Aetna testifying that in Chicago,
people “live[] in one place and work[] in another and often receive[] [medical] services at both
locations,” and that “there was up to a 40-mile difference between where people lived and
worked, . . . utiliz[ing] services at both ends”);
; JX 28,
calculated.
10
Tallarico [Advocate] Dep. 272:20-23 (“[W]hen . . . something is considered routine, [patients]
expect to be able to stay within their local health community”).) Finally, Tenn’s exclusion of
destination hospitals ignores “the commercial realities of th[is] industry,” Brown Shoe, 370 U.S.
at 336 (quotation and footnote omitted), specifically that: (1) payers negotiate a single contract
with a hospital system for both inpatient and outpatient services (see Tr. at 241:15-20 [HammanBCBSIL]; id. at 76:20-77:1, 78:13-16, 79:24-80:5 [Norton-CIGNA]; id. at 1117:10-15 [BeckUnited]); JX 19, Maxwell Dep. [Humana] at 98:16-99:1; DX 1878 Montrie Dep. [Land of
Lincoln] at 98:11-20); (2) outpatient services are on the rise and inpatient services on the decline
(see Tr. at 767:4-11 (Golbus of NorthShore testifying that “[t]here’s been tremendous growth [in
outpatient services] over the last five years as technology and advances in medical care have
made it much more easy to do these procedures outside the inpatient environment,” inpatient
services are “[c]ontinually” declining, and “for most patients today, an inpatient admission is a
very rare or never event”); id. at 659:16-18 (Neaman of NorthShore testifying that two-thirds of
NorthShore’s revenues come from outpatient services); JX 19, Maxwell Dep. at 95:1-97:16
(testifying on behalf of Humana that inpatient volume is “trending down” and expected to
continue to decline)
; and
(3) outpatient services are a key driver of hospital admissions (see Tr. at 345:19-346:10
(Dechene testifying that outpatient facilities and doctor’s offices are “front doors” to the
hospital); id. at 1116:14-18 (Beck testifying that “a member’s physician relationship influence[s]
where they seek hospital care”); JX 24, Reilly Dep. at 45:7-12 (testifying on behalf of Presence
11
that “physicians . . . have a very significant effect on patient’s [sic] choice of hospitals for
inpatient services”); JX 3, Bagnall Dep. at 37:2-8 (testifying on behalf of University of Chicago
Medical Center that “patients don’t shop for inpatient providers, they shop for physicians” and
“it’s the physician who makes the decision of what inpatient facility that patient goes to”);
; JX
19, Maxwell Dep. at 94:1-24 (testifying on behalf of Humana that hospitals “extend their
geographic breadth” by opening outpatient centers and doctor’s offices further from the hospital,
and the doctor “plays a significant role [in determining] where [a] patient goes to seek care”); JX
23, Primack [Advocate] Dep. at 76:6-14 (“[O]rganizations’ satellite facilities . . . are funnels to
an organizational partnership of patient referrals”); DX 1878, Montrie Dep. at 81:1-4 (testifying
on behalf of Land of Lincoln that “a patient’s physician plays a significant role in where the
patient goes to seek care”); DX 1880 Pugh [FTC] Dep. at 370:15-19 (testifying that “referring
physicians play a role in their patients’ choices for inpatient services”)).
The third criterion Tenn used to construct the market, including hospitals that overlap
with both Advocate and NorthShore rather than just one of them, is also problematic. Tenn
states that this criterion is designed to determine which hospitals “would be the next best
alternative” for the patients whose first and second hospital choices are the merging parties. (Tr.
at 465:6-12.) However, instead of analyzing data to make this determination, Tenn simply
assumes the answer – that “those . . . hospitals are likely to be in the areas which overlap with
both Advocate and NorthShore.” (Id. at 465:10-12.) But, as defense expert McCarthy pointed
12
out, “you can constrain the postmerger system by constraining any [one] of its hospitals” (id. at
1224:7-8), so requiring a hospital to constrain both parties to be included in the geographic
market makes little sense.
In short, plaintiffs have not shouldered their burden of proving a
relevant geographic market. Absent that showing, they have not demonstrated that they have a
likelihood of succeeding on their Clayton Act claim. Therefore, the Court denies plaintiffs’
motion for a preliminary injunction [152].
SO ORDERED.
ENTERED: June 20, 2016
__________________________________
HON. JORGE L. ALONSO
United States District Judge
13
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?