The rift between healthcare providers and payers widened last week when the Federal Trade Commission filed an antitrust complaint against a prominent suburban Chicago health system.
In its 12-page administrative complaint-the FTC's first hospital merger challenge in six years-the agency alleged that three-hospital Evanston (Ill.) Northwestern Healthcare exploited its market clout after a 2000 merger to extract exorbitant price increases from health insurers and fix prices on behalf of its physicians. Much of the information supporting the antitrust lawsuit came from HMOs and PPOs, some of which reported rate increases of up to 190% by Evanston Northwestern hospitals and doctors.
The complaint also marks a shift in the FTC's enforcement policy. In the past, the commission challenged hospital mergers before they were consummated, attempting to prove that the deal would likely produce anticompetitive effects and raise prices. But, apparently learning from past courtroom defeats, the FTC has for the first time challenged a consummated merger based on the actual behavior of the hospital partners, using real market data from payers. For hospitals, that means initial antitrust clearance doesn't give them carte blanche but rather years of looking over their shoulders.
"This is at best unprecedented," said Evanston Northwestern President and Chief Executive Officer Mark Neaman. "We've never seen any other retrospective legal reviews. This appears to us to be some new doctrine and principles the FTC is trying to follow. It's an important issue for the hospital industry. Will institutions be willing to take such costly financial risks knowing that the federal government could come back later and challenge them? It could create a pall over the industry."
In the administrative complaint filed Feb. 10 and approved by the commission in a 4-1 vote, the FTC alleged that shortly after Evanston Northwestern purchased Highland Park (Ill.) Hospital in 2000 and merged it with its Evanston (Ill.) Hospital and Glenbrook Hospital in Glenview, Ill., it "significantly" raised prices to payers and consumers, violating Section 7 of the Clayton Act, which prohibits mergers that lessen competition or create a monopoly. The FTC also charged that the system illegally negotiated to fix the prices of physician services after it folded the Highland Park Independent Physician Group into the ENH Medical Group in violation of Section 5 of the FTC Act, which forbids unfair methods of competition.
Evanston Northwestern is required to respond within 20 days of the complaint and an administrative judge will meet with both parties within two weeks after receiving the system's response. A May 10 initial hearing date has been set. At deadline, Evanston Northwestern had not filed its response.
Recent focus on price fixing
The FTC last challenged a hospital merger in 1998, when it tried to block the purchase of Doctors Regional Medical Center by Tenet Healthcare Corp.'s Lucy Lee Hospital in Poplar Bluff, Mo. Its recent healthcare enforcement actions, however, have focused on alleged physician price fixing.
At the heart of the FTC complaint against Evanston Northwestern are the post-merger price increases the agency alleges the system demanded from major private payers. United Healthcare of Illinois saw a 52% increase in hospital prices at Evanston and Glenbrook hospitals and a 38% rate hike at Highland Park Hospital. United's PPO saw a 190% rate increase at the Evanston and Glenbrook hospitals and a 20% increase at Highland Park. In 2000 Evanston Northwestern raised Aetna's rates by 45% to 50% over three years and Humana's by 50% to 60%, according to the complaint. The system allegedly proposed large rate increases to Blue Cross and Blue Shield of Illinois, but after the payer challenged the hikes as illegal, the system withdrew them.
In addition to hospital price increases, Evanston Northwestern allegedly negotiated not only on behalf of its 485 employed physicians, but also on behalf of its 450 affiliated physicians after merging the physician groups of the three hospitals, substantially increasing the price of physician services charged to local payers.
The FTC defined the geographic market the system served as a 15-mile corridor north of Chicago that stretched 10 miles west of Lake Michigan.
Richard Feinstein, who was assistant director of the FTC's Bureau of Competition at the time of the merger, said he couldn't recall specifics of the case and declined comment.
Neaman vigorously disputed the FTC allegations. "We believe the merger has done nothing but improve the quality of care and that the investments to date have been significant," he said, citing $85 million already invested and $50 million in construction under way. While he admitted prices went up in 2000, Neaman said, "Our prices today are very competitive in the Chicago marketplace for teaching institutions. This is potentially tragic to even consider trying to break up this merger after all the value it has produced for patients and their families."
Consolidations drive costs
The lawsuit comes on the heels of mushrooming healthcare costs industrywide. Last week the CMS estimated the nation's healthcare tab would reach $1.8 trillion in 2004, or 15.5% of the nation's gross domestic product, and predicted healthcare spending would nearly double to $3.4 trillion in 2013, reaching 18.4% of GDP (See story p. 8). Some studies suggest hospital prices constitute 35% to 50% of those costs. Several organizations, including the Blue Cross and Blue Shield Association and the Center for Studying Health System Change, have attributed some of the mounting costs to hospital consolidations.
Managed-care organizations have pointed the finger at hospitals for some of their annual double-digit premium increases. The hospital industry recently struck back by releasing what it called a "value study" to prove the economic value of healthcare and counter accusations that it was responsible for the nation's growing healthcare costs (Feb. 2, p. 6).
Blue Cross and Blue Shield of Illinois and United Healthcare of Illinois, two of the plans providing data to the FTC, declined to comment on the antitrust litigation. But Mohit Ghose, a spokesman for managed-care trade association AAHP-HIAA, said hospital consolidations have contributed to rising healthcare costs. He would not comment directly on the FTC complaint.
Rising prices were one factor cited by FTC Chairman Timothy Muris when he announced the FTC's retrospective study of previously consummated hospital mergers in 2002 (See related story p. 16). Most of the merged hospitals the agency studied were in small or midsize markets, like Wilmington, N.C.; Poplar Bluff; and Waukegan, Ill.
When the FTC took on 651-bed Evanston Northwestern, however, it didn't tackle a small-town monopoly but rather a prestigious teaching hospital and major metropolitan health system that last year reported net revenue of nearly $1 billion. The system has been named a Solucient 100 Top hospital for nine consecutive years and ranks 25th on Verispan's list of top integrated health systems. Credit-rating firms have assigned high bond ratings to Evanston Northwestern, with Moody's Investors Service giving it an Aa2 and Standard & Poor's an AA plus.
The system's hospitals are located in Chicago's wealthy North Shore suburbs and have earned top reputations for quality, ranking among the nation's best on the U.S. News & World Report Best Hospitals Guide for the treatment of hormonal disorders, neurology and neurosurgery, and orthopedics. System CEO Neaman chaired the American College of Healthcare Executives in 2002 and Modern Healthcare ranked him 85th on its list of the "100 Most Powerful People in Healthcare."
Unscrambling the eggs
In its challenge, the FTC is seeking a historic remedy: Evanston Northwestern's divestiture of Highland Park Hospital. In its complaint the FTC said the system estimated that hospital's 1999 fair market value to be $233 million.
Jim Unland, president of the Health Capital Group, a Chicago-based healthcare consulting company, said several local systems would be likely candidates to buy Highland Park Hospital if the FTC prevails. But given the agency's evolving definition of market power, Unland said he couldn't predict who would risk a bid. "Who would be a likely buyer? Some of that would depend on the FTC arguments," Unland said.
He said three regional systems have the financial resources and existing hospitals to go after the hospital. He said Chicago-based Resurrection Health Care Corp., and Oakbrook, Ill.-based Advocate Health Care, the region's largest system, are logical contenders. But he said eight-hospital Advocate, which already owns hospitals in north suburban Park Ridge and Barrington, is facing its own ongoing FTC inquiry now (Nov. 10, 2003, p. 4). Advocate and FTC sources declined to specify the allegations and no action has been taken.
Resurrection, an eight-hospital system that owns Evanston Northwestern rival St. Francis Hospital in Evanston, could face similar market power scrutiny, Unland said. Janesville, Wis.-based Mercy Health System, which has no existing Illinois hospitals, has filed a certificate-of-need request to build a hospital in Crystal Lake, Ill., a neighboring community. Two-hospital Mercy, which Unland said owns numerous physician practices in the area, could also be a darkhorse bidder.
Resurrection spokeswoman Phyllis Pavese declined to comment on the antitrust complaint and whether its St. Francis Hospital, located three miles away from Evanston Northwestern's flagship in Evanston, has hired antitrust counsel to protect its interests.
David Loveland, Evanston Northwestern's senior vice president of corporate relations, questioned why the FTC chose to bring the physician price-fixing allegations when the system was willing to settle those in a consent decree-as 13 of 14 other independent practice associations charged in complaints by the FTC in the last two years have done.
The 13th independent physician association to settle price-fixing allegations, San Francisco-based Brown & Toland Medical Group, signed a consent decree last week to settle allegations similar to those brought by the FTC. FTC Chairman Muris has promised to go after price fixing and restraint of trade in physician services as consolidations among physician groups have grown.
William Plested III, M.D., who chairs the American Medical Association Board of Trustees, said the heightened FTC focus on physicians wastes resources. "It should dedicate more of its time and energy looking into the unfair leverage health plans have gained over physicians through their consolidation and market dominance."
Former FTC attorney David Balto, now in private practice with White & Case, said to prevail the FTC must prove that the price increases were the result of the merger. "(Evanston Northwestern Healthcare) had a credible story that the merger has led to improvements in quality of care and that's an important aspect of competition," Balto said. "How the FTC will balance that against the alleged price increases could determine the outcome."
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