On March 16, 2017, the US District Court for the Northern District of Illinois enjoined the proposed merger between two Chicago-area healthcare systems, Advocate Health Care Network and NorthShore University HealthSystem (FTC v. Advocate Health Care Network, No. 15C11473 (N.D. Ill. Mar. 16, 2017). The merger had been challenged by the FTC and the State of Illinois. The court initially denied the plaintiffs' motion for a preliminary injunction after rejecting the proposed geographic market definition. The case was appealed to the US Court of Appeals for the Seventh Circuit, which reversed and remanded the case for reconsideration.

On remand, the district court adopted the Seventh Circuit's analysis of the geographic market and granted the plaintiffs a preliminary injunction pending the outcome of the FTC's administrative trial on the merits. In enjoining the merger, the court found that plaintiffs demonstrated a likelihood of success on the merits because the merger was likely to cause competitive harm in the market for inpatient general acute care services sold to commercial payers and their insured members (GAC services) in a geographic region encompassing northern Cook and southern Lake counties in Illinois (the North Shore Area).

For more information on the FTC's challenges to hospital mergers, see Practice Note, Healthcare Competition: Providers and Insurers.

The parties agreed that the relevant product market is GAC services, which is a cluster of medical services that require a patient to be admitted to a hospital at least overnight.

The parties did not agree on the scope of the geographic market. In the initial district court proceeding, the court rejected the geographic market analysis of the plaintiffs' expert, Dr. Tenn. In particular, the court had found that Dr. Tenn improperly excluded destination hospitals, which are primarily academic medical centers or specialized hospitals that draw patients locally but also from a larger geographic region. The Seventh Circuit held that the district court had misapplied the geographic market analysis and remanded for reconsideration.

Dr. Tenn defined the geographic market as 11 hospitals located in northern Cook and southern Lake counties of Illinois. This included six of the merging hospitals and five additional competing hospitals that draw patients from the same area as both Advocate and NorthShore. He excluded more distant academic medical centers and specialized hospitals, known as destination hospitals, because they draw patients from not only the North Shore Area, but from all over the Chicago metropolitan area, and patients prefer to receive care close to home. Dr. Tenn's analysis also demonstrated that 48% of the patients admitted to one of the North Shore Area hospitals would transfer to one of the other hospitals in the area if their chosen hospital were no longer available. Based on this analysis, the plaintiffs' expert determined that a hypothetical monopolist could profitably impose a small but significant non-transitory increase in price (SSNIP).

In further support of the proposed geographic market, plaintiffs argued that:

On remand, the court found that in order to defeat the geographic market definition proposed by plaintiffs, defendants would have to establish that a plan that excludes both Advocate and NorthShore hospitals could still attract enrollees by showing that:

The defendants argued that:

The court acknowledged that some insurers may have self-serving incentives to testify against the merger. The weight of the evidence, however, demonstrated that a plan that excludes Advocate and NorthShore would not be viable in the North Shore Area.

With respect to diversion ratios, the court noted that the Seventh Circuit decision did not reject the use of diversion ratios entirely but merely criticized how the defendants and the district court in its initial opinion interpreted them. Specifically:

On remand, the district court held that while some patients may be willing to travel for care, this does not mean that the patients that do not currently travel for care would do so to avoid a price increase. The focus should not be on the patients who leave the market but instead on the hospitals' market power over the patients who remain. Therefore, even with evidence that some patients are willing to travel outside of the North Shore Area for GAC services, the court did not find defendants' evidence persuasive to overcome the plaintiffs' evidence that a majority of patients are reluctant to travel, which would provide the merged hospital system leverage for raising prices. Further, the court found that even if some of the hospitals in the region that may reasonably be included in the geographic market were added, the market concentration would remain high enough to render the merger presumptively unlawful. Accordingly, the court adopted plaintiffs' definition of the North Shore Area geographic market.

The court found there was sufficient evidence to support the presumption that the merger would be anticompetitive, including because the market in the North Shore Area is highly concentrated. The plaintiffs' expert provided evidence that:

The defendants aimed most of their rebuttal arguments at the model used by the plaintiffs' expert Dr. Tenn. The court noted first that the defendants could not carry their burden of rebuttal simply by undermining Dr. Tenn's model, because the model was not necessary to establishing the presumption of harm in the first place. The court also noted that the defendants ignored voluminous factual evidence, including ordinary course documents, showing that Advocate and NorthShore were close competitors whose merger would harm competition.

The court nonetheless evaluated the plaintiffs' model in light of the defendants' criticisms, but found that the defendants failed to undermine Dr. Tenn's conclusions that the merger was likely to increase prices above the 5% SSNIP threshold.

Defendants also attempted to rebut the anticompetitive effects evidence by relying on:

The court found both of these arguments unpersuasive. First, the court found that the insurer testimony relied on by the defendants was at best equivocal and not supported by factual evidence. The court also found that the defendants' experts' use of the economic model was flawed and did not lead to reliable conclusions about the likely price effects of the merger. The court noted, in particular, that the model's outcome contradicted the economic literature cited by the Seventh Circuit that shows that hospital mergers in concentrated markets tend to lead to significant price increases. The court found that the defendants failed to adequately explain why their merger was an outlier against the weight of the economic literature.

The defendants also argued that the merger would result in certain efficiencies to counteract possible anticompetitive effects, specifically that the merger would result in:

The court found that the proposed reimbursement savings, which were based on existing contractual provisions, would be at most a temporary benefit. The court noted that the lower rates will be eligible for renegotiation when current contracts expire and the short-term savings do not address the problem of the merged hospital system's market power.

A high-performing network (HPN) is a network that has very few providers, does not require a primary care physician to act as a gatekeeper to see specialists, and permits patients to see out of network providers at a 50% reimbursement rate. The defendants argued that they are unable to offer this product to large employers in the Chicago area without filling a geographic gap that would be addressed through the merger.

The defendants claimed that the HPN would:

Plaintiffs countered these assertions by demonstrating:

In accepting the plaintiffs' arguments, the court held that the defendants did not carry their burden of proving that the efficiencies will offset the anticompetitive effects. As a result, the court held that the plaintiffs demonstrated a likelihood of success on the merits and the preliminary injunction was granted.