FTC loss may spur more hospital deals

A judge delivered the Federal Trade Commission a major setback last week in one of its biggest hospital cases in years, and experts say the decision could embolden even more hospitals to consolidate.

The federal judge in Chicago on Tuesday declined to grant the FTC a preliminary injunction to temporarily stop a merger between Downers Grove, Ill.-based Advocate Health Care and Evanston, Ill.-based NorthShore University HealthSystem. The decision was the second loss in a row for the FTC, after years of scoring victories in cases involving mergers and acquisitions among hospitals, health systems and physician groups.

“Decisions like this are going to give others looking at mergers some hope that you're not necessarily dead in the water, that arguments around market efficiencies and population health management could really carry some weight,” said Roger Strode, a partner at Foley & Lardner who focuses on healthcare transactions.

U.S. District Judge Jorge Alonso said the FTC had not shown a likelihood that it would ultimately win the case on its merits. Alonso kept the opinion under seal at the time, saying it contains “competitively sensitive information.” He gave the FTC and health systems until the end of last week to review the opinion and submit proposed redactions.

The battle appears far from over. The FTC quickly filed notice that it would appeal the ruling to the 7th U.S. Circuit Court of Appeals, and the court agreed to freeze the deal pending appeal. Advocate CEO Jim Skogsbergh told Modern Healthcare the systems are prepared to keep fighting for their deal, which they contend will lead to improvements for patients and lower overall costs of care.

Both leaders also said the decision's implications extend far beyond the Chicago area. The case has been watched closely across the country as healthcare systems continue to consolidate in deals that they say will improve quality and reduce costs—and that critics say are designed to boost providers' negotiating power with insurers.

“We really believe that today's decision is precedent-setting on both a national and regional level,” North-Shore CEO Mark Neaman said. “It's a real signal that as the landscape has, in fact, changed under the Affordable Care Act that healthcare delivery must change as well.”

Skogsbergh said the decision will “encourage greater conversation in a lot of markets around the country.” An FTC victory, he said, would have a chilling effect.

The FTC alleged that a combined NorthShore and Advocate would have enough bargaining leverage with insurers to increase prices because insurers would have a tough time creating marketable networks without Advocate and North-Shore hospitals.

The FTC said a merger would lead to an 8%, or $45 million, price increase and the systems would control 60% of general-acute inpatient hospital services in Chicago's northern suburbs if they combined.

Advocate and NorthShore, however, said they would actually control closer to 28% of those services in what they view as the correctly defined market. Advocate has 12 hospitals, most of them in Chicago and its suburbs—though only three of them are in communities north of the city. NorthShore consists of four campuses in the northern suburbs. The systems argue that they face fierce and growing competition, including from Northwestern Memorial HealthCare, a system anchored by a downtown Chicago academic medical center that has been expanding beyond the city.

Advocate and NorthShore also say they plan to offer a new insurance product that would cost 10% less than the lowest-priced comparable product available, saving consumers $210 million to $1.1 billion a year.

Last week's decision in Chicago followed another recent loss for the FTC in a hospital merger case. In May, a federal judge in Pennsylvania refused to grant the FTC a preliminary injunction to stop a merger between Penn State Hershey (Pa.) Medical Center and PinnacleHealth System in Harrisburg. The FTC is appealing that decision.

The judge in that case chided the FTC in his opinion, saying: “Our determination reflects the healthcare world as it is, and not as the FTC wishes it to be. We find it no small irony that the same federal government under which the FTC operates has created a climate that virtually compels institutions to seek alliances such as the hospitals intended here.”

The FTC is in a tough position in light of those two losses and recent state efforts to protect consolidating hospitals, said Tim Greaney, a former assistant chief in charge of healthcare antitrust enforcement at the U.S. Justice Department. “They have to pick their cases wisely and choose cases that are winnable,” Greaney said. “Now, there's a lot more uncertainty than there was a few weeks ago.”