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June 20, 2016 01:00 AM

Judge slams FTC's market definition in Advocate, NorthShore merger case

Lisa Schencker
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    A federal judge denied the Federal Trade Commission's request to temporarily block a merger between two Chicago-area health systems because the FTC didn't correctly define the hospitals' geographic market, according to the judge's opinion released Monday.

    Last week, U.S. District Judge Jorge Alonso declined to grant the FTC a preliminary injunction to halt a merger between Advocate Health Care and NorthShore University HealthSystem.

    Alonso didn't release his reasoning for the decision until Monday, to allow the parties time to ask for redactions of sensitive parts of the opinion. Alonso's reasoning was eagerly anticipated, given that the loss was the second in a row for the FTC after years of scoring victories fighting mergers and acquisitions among hospitals, health systems and physician groups.

    Alonso wrote in his opinion that he agreed with the hospital systems that the criteria the FTC's expert used to define the systems' geographic market were “flawed.” He wrote that he disagreed with the expert's reasoning for excluding hospitals such as Northwestern Memorial Hospital, Rush University Medical Center, University of Chicago Hospital, Cancer Treatment Centers of America and Lurie Children's Hospital.

    He also wrote that he disagreed with the FTC expert's decision to include only hospitals in the market that overlapped with both systems rather than just one.

    Advocate and NorthShore said in a statement Monday afternoon that the opinion “reaffirms our position and the realities of the Chicago market.”

    The FTC did not immediately respond to a request for comment. The FTC is appealing the decision to the 7th U.S. Circuit Court of Appeals, and the District Court has agreed to freeze the deal pending the outcome of that appeal.

    Downers Grove, Ill.-based Advocate has 12 hospitals and Evanston, Ill.-based NorthShore consists of four campuses in the northern suburbs.

    Lisl Dunlop, a partner at Manatt, Phelps & Phillips, said she believes the judge's opinion has a good chance of being sustained upon appeal. The opinion differs significantly from another recent opinion in a case the FTC lost against a merger between Penn State Hershey Medical Center and PinnacleHealth System in Pennsylvania.

    In that opinion, the Pennsylvania judge wrote that the agency too narrowly defined the systems' geographic market by not accounting for the distances many patients travel to reach the hospitals. He also slammed the FTC for challenging certain mergers despite the administration's push to create a climate that encourages mergers.

    The FTC and many experts have criticized that Pennsylvania opinion for focusing on the geographic location of patients rather than the merger's potential effects on commercial insurers, among other things.

    Dunlop, however, said this new opinion in the Chicago-area case focuses more directly on the FTC's evidence presented as part of the case.

    “This is a slightly more nuanced approach to geographic market definition,” Dunlop said.

    Dunlop said the decision might inspire the FTC to impose “a little bit of discipline in their geographic market definition, but I don't think it's going to stop them from enforcing” antitrust law.

    Richard Feinstein, a former director of the FTC's Bureau of Competition, said Alonso's opinion is also different from that in the Pennsylvania case in that he didn't address the broader relationship between the Affordable Care Act and antitrust laws. Attorneys for the Chicago-area systems brought the issue up during closing arguments, but Alonso still stayed away from it in his opinion.

    Feinstein, who is now a partner at Boies, Schiller and Flexner, called that issue “conspicuously absent” from the opinion.

    In the case, 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 NorthShore 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 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.

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