The Federal Trade Commission last week closed off an avenue that hospitals have used to escape the price-squeezing impact of managed-care consolidation. And those hospitals that dare to bypass the FTC's roadblock may be looking in their rearview mirrors for years to come to avoid prosecution for anticompetitive behavior.
In a precedent-setting healthcare antitrust ruling, FTC Chief Administrative Law Judge Stephen McGuire ruled last week that a 2000 hospital merger in suburban Chicago violated federal antitrust law because it gave the newly created three-hospital system the market power to illegally control prices. In siding with the FTC, which challenged the merger four years after it was consummated, McGuire ordered Evanston (Ill.) Northwestern Healthcare to divest one of its three hospitals, 160-bed Highland Park (Ill.) Hospital.
Beyond the immediate impact of the decision on the hospitals involved, the ruling could significantly affect future antitrust enforcement in the healthcare industry, particularly as it applies to hospitals and hospital systems hoping to consolidate to counter the growing market leverage of merging managed-care plans. The ruling, if upheld on appeal, would give the FTC and perhaps the U.S. Justice Department and state attorneys general, the power to retroactively challenge hospital mergers based on the hospitals' business practices well after the mergers were completed.
Until now, antitrust challenges of hospital mergers have been prospective in nature, meaning that the outcome of the cases turned on what the hospitals might do after they merged. And in those prospective challenges, merging hospitals typically won, successfully arguing that they wouldn't abuse their market share because of their not-for-profit status, wide areas of competition and other factors. The last time the federal government successfully challenged a proposed hospital merger was 1991.
Paul Ginsburg, president of the Center for Studying Health System Change, called McGuire's ruling an "enormously important decision, not only because it breaks the FTC's string of losses, but because of the novel doctrine of looking retrospectively at what mergers have done." He called the decision a "definitive win" for managed-care plans because it "puts hospitals on notice that their mergers can be challenged, which may influence their pricing."
James Skogsbergh, president and chief executive officer of eight-hospital Advocate Health Care based in Oak Brook, Ill., agreed.
`Doesn't bode well'
"If this decision is upheld it will become even harder for us (hospitals) to exert any kind of leverage in the marketplace," Skogsbergh said. "We are seeing unprecedented consolidation among payers and so may be left with four big national insurers. This doesn't bode well for providers."
The FTC began investigating the Evanston Northwestern-Highland Park merger along with at least six other known hospital mergers with its "look back" review in 2002. It filed an antitrust complaint against the deal in February 2004, alleging that the merged system exploited its market power to extract exorbitant price increases from managed-care plans, causing those plans, employers and consumers to pay higher prices for acute-care inpatient hospital services.
The FTC also alleged that the system and its ENH Medical Group illegally conspired to fix prices for physician services. Evanston Northwestern and the medical group denied the allegations and, while not admitting guilt, signed a consent decree promising not to collectively bargain on behalf of physician members. But Evanston Northwestern vowed to fight the complaint against the hospital merger. The case went to trial in February of this year, and the trial lasted two months; closing arguments were heard in July in Washington.
In that trial, the FTC defined the relevant geographic and service markets as consisting of only the three hospitals and inpatient services sold to managed-care payers. Evanston Northwestern argued the system competed in a much wider market consisting of at least nine hospitals and other services, including outpatient care.
In his 239-page decision, McGuire found that Evanston Northwestern violated Section 7 of the Clayton Act, which prohibits mergers that lessen competition.
McGuire ruled that "ENH exercised its enhanced post-merger market power to obtain price increases significantly above its pre-merger prices and substantially larger than price increases obtained by other comparison hospitals." After Highland Park was eliminated as a competitor, Evanston Northwestern could "convert existing price methodologies to managed-care organizations to much more favorable post-merger terms" than either Evanston Northwestern or Highland Park could have achieved on their own.
McGuire wrote that "divestiture is the most effective and appropriate remedy" to address the anticompetitive effects of the merger and ordered Evanston Northwestern to divest the hospital and its assets within six months. That order would be stayed upon the filing of an appeal, legal sources said. Mark Neaman, president and CEO of Evanston Northwestern, vowed to appeal to the full FTC and the 7th U.S. Circuit Court of Appeals in Chicago if necessary.
Neaman said if the decision stands it would cast a pall on hospital mergers. "If they think that five or six years later the FTC could come back to investigate after receiving a complaint from a payer who didn't like the outcome of a negotiation, they (the hospitals) might reconsider taking such a big risk."
First win for `look back' review
Thomas Brock, who with co-counsel Chul Pak tried the case for the FTC, said Judge McGuire's decision confirms that the 2002 FTC look-back study examining consummated hospital mergers was a wise investment in time and resources.
"This decision is also significant because it indicates that in the future proposed hospital mergers will be evaluated differently than in the past," said Brock, noting that in the earlier merger cases courts focused primarily on the patient's choice of hospitals, while this decision focuses on managed-care plans' ability to negotiate with hospitals."
Melinda Hatton, chief Washington counsel for the American Hospital Association, said the AHA is "deeply disappointed," but not surprised by this decision.
"After more than a decade of losing every single hospital merger case before a neutral federal judge, this time around the FTC has elected to stack the deck in its favor by hand-picking its own administrative law judge to oversee the case. It's like letting the home team pick the umpire. The result is never really in doubt."
Hatton also criticized the look-back review of previously consummated hospital mergers, saying the study "that led to this unwarranted prosecution has wasted millions of dollars and now could cost the communities that ENH cares for the services of one of its most trusted healthcare resources."
But Washington healthcare antitrust lawyer and former FTC official David Balto called the decision a "slam dunk for the FTC. The judge accepted the vast majority of the case. This creates a template for future enforcement actions and shows that the FTC can successfully litigate."
Chip Kahn, president of the Federation of American Hospitals, said he's reticent to view the case as a milestone. "One decision does not a trend make," Kahn said. "Past court decisions have mostly favored hospitals and will end up in court. If the FTC prevails through appeals it would be an indicator that the future might be different. But the compelling need to meet public demand for new technology and all the requirements placed on hospitals today is going to push consolidation so that capital will be available. That consolidation imperative remains. These forces are pushing towards more hospital systems. That's the future."
Hospitals vs. plans
The tenuous state of hospital-health plan relations may be reflected by the silence from some of the region's key players.
The Blue Cross and Blue Shield Association, Blue Cross and Blue Shield of Illinois, United HealthCare and Private Healthcare Systems either declined to comment or did not return Modern Healthcare phone calls. But managed-care plans and their lobbying group weren't the only healthcare organizations reluctant to discuss the decision and its impact on their business. The Illinois Hospital Association, Evanston Northwestern rival St. Francis Hospital in Evanston and its parent company, Chicago-based Resurrection Health Care, all refused to comment on the case or how it's likely to affect the already dicey relations between hospitals and payers.
FTC co-counsel Pak noted that if the FTC staff fails to persuade the full commission on appeal, the case ends. Pak estimated that the FTC has spent less than $5 million to research, investigate and prosecute the case, compared with more than $20 million spent by Evanston Northwestern to defend the merger.
But he said he felt confident the decision would be affirmed. Pak denied hospital industry assertions that the agency is unfairly focusing on hospitals.
"We're not targeting the hospital industry," Pak said. "We review all mergers under our jurisdiction and look into mergers at every level of the provider chain, from hospitals and physicians to drug companies and health plans and medical equipment producers. We look at how each merger impacts competition. And we'll continue to review every merger that comes to our attention."
Evanston Northwestern's Neaman said the system has given "no thought whatsoever" to any plan to divest Highland Park Hospital, citing a lengthy appeals process ahead.
Wellsprings Valuation principal David Felsenthal said it may be difficult for Evanston Northwestern to find a buyer that would pay what Highland Park Hospital is worth and what it's invested in it.
"I would think there are probably a very limited number of buyers that could afford it," Felsenthal said.
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