FTC’s Evanston Healthcare Ruling Draws Wide-Ranging Reactions

The Federal Trade Commission’s August 6 decision—holding the combination of Chicago-area hospitals anticompetitive but not requiring divestiture of the acquired hospital—has drawn a wide variety of responses.

The decision upheld an administrative law judge’s ruling that Evanston Northwestern Healthcare’s 2000 acquisition of Highland Park Hospital violated Section 7 of the Clayton Act (CCH Trade Regulation Reporter, FTC Complaints and Orders Transfer Binder 2001-2005 ¶15,814). The Commission 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 managed care organizations (MCOs).

However, the Commission reversed the ALJ’s requirement that ENH divest Highland Park Hospital, finding that the extended period of time between the transaction and the conclusion of the litigation “would make a divestiture much more difficult, with greater risk of unforeseen costs and failures.”

Rather than requiring divestiture, the Commission ordered that ENH establish separate and independent contract negotiating teams—one for Evanston and Glenbrook Hospitals and another for Highland Park Hospital—that will allow MCOs to negotiate separately with the hospitals. This arrangement is intended to re-inject competition between the hospitals for the business of MCOs.

The Commission decision (In the Matter of Evanston Northwestern Healthcare Corp.) appears at CCH 2007-2 Trade Cases ¶75,814.

“Thrilled” with Outcome

According to an August 6 news release, ENH was “thrilled” that Highland Park Hospital will remain within the ENH system.

The FTC recognized the “significant improvements” in patient care services at Highland Park Hospital, post merger, as its principal rationale to overturn divestiture, said Mark R. Neaman, President and Chief Executive Officer of Evanston Northwestern Healthcare.

“Our investments in excess of $150 million, at Highland Park Hospital, have dramatically improved the breadth, depth and quality of healthcare services in the region,” Neaman said. “Our success in expanding comprehensive, quality care at competitive prices has increased patient access and treatment, not made 'victims' of select HMOs.”

Unusual Strategy

In an article from a law firm newsletter, Denise Gunter of the Nelson Mullins law firm said that this case is noteworthy for being the FTC's first opinion in a hospital merger case in several years, for the unorthodox remedy, and for the unusual strategy of bringing a post-transaction agency action.

“Prior to the Evanston case, the FTC's usual method for dealing with potentially anticompetitive hospital mergers was to file a motion for preliminary injunction in the federal district courts where the merging hospitals are located to stop the merger before it happens. This strategy was not always successful, and in the 1990s, the FTC and Department of Justice suffered a string of defeats in hospital merger cases . . . . In 2002, the FTC reinvented its hospital merger enforcement strategy by launching several investigations into already-completed hospital mergers. The FTC's reasoning was that by looking back at "done deals" the FTC would be able to establish that certain hospital mergers actually lead to higher prices, rather than simply relying on a prediction of what could happen if the merger occurred. Instead of filing these cases in the local federal district courts where the hospitals are located, the FTC decided it would file these cases in the FTC's own administrative court in Washington, D.C.”

According to Ms. Gunter, the case offers a number of lessons:

1. The FTC’s hospital merger enforcement program is alive.

2. Never underestimate the power of managed care company witnesses.

3. Health care providers must watch their language, as in documents indicating that ENH senior officials made the acquisition to increase their bargaining leverage in order to raise prices.

4. If you are going to acquire or merge, do it right by integrating operations swiftly and thoroughly.

Remedy “Without Teeth”

An article questioning the effectiveness of the remedy (“Federal order to increase hospital competition in Evanston lacks teeth”) was published August 9 on “Medill Reports,” an online publication of Northwestern University’s Medill School of Journalism.

Laura Onstot writes that “observers are questioning whether it will be possible, as a practical matter, for [ENH] to successfully comply with a key FTC order: to negotiate prices with health insurers separately from its parent company.”

According to Leemore S. Dafny, assistant professor of Management & Strategy at Northwestern University’s Kellogg School of Management, the requirement of separate negotiations with MCOs will not create real competition between the hospitals since they will still be working for a common owner.

“As a remedy, I find it unlikely that it will address the anti-competitive conduct that the FTC was originally concerned about,” she said.