Tuesday, August 07, 2007

Chicago-Area Hospital Acquisition Was Anticompetitive, FTC Rules

Evanston Northwestern Healthcare Corp.’s acquisition of Highland Park Hospital in 2000 was anticompetitive and violated Section 7 of the Clayton Act, according to a Federal Trade Commission decision announced on August 6. However, the violation did not require Evanston Northwestern Healthcare to divest Highland Park, as was previous ordered by an administrative law judge (CCH Trade Regulation Reporter, FTC Complaints and Orders Transfer Binder 2001-2005, ¶15,814).

The Commission opinion, authored by Chairman Deborah Platt Majoras, upheld the October 2005 administrative law judge's ruling, with some modifications, and ordered an alternate remedy to restore competition in the market.

The Commission requires Evanston Northwestern Healthcare (ENH) to establish separate and independent contract negotiating teams—one for Evanston and Glenbrook Hospitals and another for Highland Park Hospital—that will allow managed care organizations (MCOs) to negotiate separately for the competing hospitals, “thus re-injecting competition between them for the business of MCOs.”

The administrative law judge had held that the acquisition “substantially lessened competition” and resulted in higher prices for insurers and healthcare consumers for general acute care inpatient services sold to manage care organizations. The ALJ ruled that ENH should be required to divest Highland Park Hospital altogether within 180 days. ENH appealed the ALJ decision.

Exercise of Market Power

By a 5-0 vote, the Commission affirmed the administrative law judge’s rulings that the acquisition violated Section 7 of the Clayton Act, that the evidence “demonstrates that the transaction enabled the merged firm to exercise market power, and that the resulting anticompetitive effects were not offset by merger-specific efficiencies.”

The record “shows that senior officials at Evanston and Highland Park anticipated that the merger would give them greater leverage to raise prices, that the merged firm did in fact raise its prices immediately and substantially after completion of the transaction, and that the same senior officials attributed the price increases in part to increased bargaining leverage produced by the merger.”

In addition, the “econometric analyses performed by both complaint counsel’s and respondent’s economists also strongly supported the conclusion that the merger gave the combined entity the ability to raise prices through the exercise of market power.”

Divestiture as Remedy

Although the Commission upheld the ALJ decision and largely adopted the findings of fact and conclusions of law, it did not agree with the determination that divestiture was the appropriate remedy. The long period of time between the closing of the transaction and the conclusion of the litigation “would make a divestiture much more difficult, with greater risk of unforeseen costs and failures,” the Commission wrote.

Instead, the Commission imposed an injunctive order, requiring ENH and Highland Park to negotiate independently with MCOs and therefore compete for their business.

ENH was ordered to submit a report within 30 days, detailing the implementation of the injunctive relief imposed by the Commission.

Concurring Opinions

Commissioners J. Thomas Rosch and Jon Liebowitz issued separate concurring opinions.

Commissioner Rosch based his finding of a Section 7 violation on “the unique competitive dynamics of hospital markets, stemming from the bargaining between hospitals and managed care organizations (MCOs) over inclusion in MCO networks.” The elimination of competition between Evanston and Highland Park enabled ENH to “engage in system (all-or-nothing) supra-competitive pricing.”

In his short concurrence, Commissioner Liebowitz said he joined the Commission in its conclusion that the merger violates the Clayton Act, as identified in Count One of the Complaint, and the remedy. He further joined Commissioner Rosch’s finding that the merger violated the Clayton Act as alleged in Count Two of the Complaint.

A press release regarding the Commission’s opinion and Order (In the Matter of Evanston Northwestern Healthcare Corporation, Docket 9315) and the 91-page Opinion of the Commission appears on the FTC website.

The Commission decision appears at CCH 2007-2 Trade Cases ¶75,814.

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