Analysis: Decision time in Advocate/NorthShore merger battle

Advocate Health Care and NorthShore University HealthSystem are coming closer to a crucial decision. Is their desire to merge, creating one of the largest not-for-profit health systems in the nation, worth the expensive, time-consuming battle?

The suburban health systems suffered a blow yesterday when a federal appeals court essentially sided with anti-trust regulators who are against the merger. The 7th U.S. Circuit Court of Appeals ruled that a lower court's decision not to halt the marriage over concerns about stifling competition was “erroneously flawed.”

Now Downers Grove, Ill.-based Advocate, the largest hospital network in the state with 12 hospitals, and Evanston, Ill.-based NorthShore, a four-hospital system, must decide what to do next.

Among the options, they can go back to district court and continue the battle, but the judge can't once again side with the health systems' key argument: that how the Federal Trade Commission defined the health systems' geographic market and determined it was bad for consumers was flawed.

There's the FTC's own administrative hearing, slated for Nov. 21. Then there's the Supreme Court, if it would even hear the case.

“Maybe it's time for those two systems to say this marriage is not meant to be in this decade,” says Allan Baumgarten, an independent consultant who analyzes hospital markets across the country.

In a joint statement, the health systems said they were disappointed in yesterday's ruling.

“We believe that blocking this merger will be a loss to consumers and further underscores the conflicting message with the objectives of the Affordable Care Act,” the statement said. “While our legal teams review the decision, we remain confident our merger would lower costs and improve outcomes for consumers.”

They declined further comment.

The FTC, on the other hand, said in a statement that it was “pleased” with the latest ruling. “We are looking forward to proving our case,” Debbie Feinstein, director of the FTC's Bureau of Competition, said in the statement.

Advocate and NorthShore first proposed merging in 2014. Combined, the 16-hospital system would stretch from north suburban Libertyville to downstate Normal. The hospital networks had a total of $7.02 billion in annual revenue in 2015.

The FTC took its case to court in December, alleging the merger would “substantially lessen competition and cause significant harm” to consumers by increasing health care costs. The new system, which would be called Advocate NorthShore Health Partners, would create the 11th largest nonprofit hospital network in the nation and command about 60 percent of hospital services in the northern suburbs, the FTC alleged.

Advocate and NorthShore countered that the FTC wrongly defined their market, that their North Shore market share is closer to nearly 30 percent, and that they would save consumers up to $1.1 billion a year with a new health insurance plan.

How could the hospitals win? They could offer to divest some facilities, but that would defeat the purpose of their goal to bulk up in an effort they say would better serve patients.

They already offered the FTC a guarantee that they wouldn't raise prices significantly and would charge market rates, a deal antitrust regulators apparently balked at.

They could just affiliate to join forces without merging, but then they might not be able to jointly negotiate contracts with insurers to get better reimbursement rates.

In the meantime, this case is being watched nationwide. Closer to home, hospitals looking to add heft in the era of Obamacare are waiting to see how the Advocate-NorthShore case will impact just how big they can get without raising antitrust concerns.In a wave of consolidation, academic medical centers in particular, such as Northwestern Medicine and University of Chicago Medicine, are going after community hospitals. This helps keep patients in their neighborhoods, but provides a steady referral base to the academics when patients need to see specialists

"Decision time in Advocate, NorthShore merger battle: stick it out or bail" originally appeared on the website of Crain's Chicago Business.