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Federal Trade Commission v. Advocate Health Care

United States District Court, N.D. Illinois, Eastern Division

March 16, 2017

FEDERAL TRADE COMMISSION and STATE OF ILLINOIS, Plaintiffs,
v.
ADVOCATE HEALTH CARE, ADVOCATE HEALTH AND HOSPITALS CORPORATION, and NORTHSHORE UNIVERSITY HEALTHSYSTEM, Defendants.

          REDACTED MEMORANDUM OPINION AND ORDER

          HON. JORGE L. ALONSO United States District Judge.

         Plaintiffs, the Federal Trade Commission (“FTC”) and the State of Illinois, have sued defendants to enjoin them from consummating their proposed merger, pending completion of the FTC's administrative trial on the merits of plaintiffs' antitrust claims. This Court held a preliminary injunction hearing over nine days in April and May of 2016. The Court initially denied the motion for preliminary injunction, holding that plaintiffs had not met their burden of proving a relevant geographic market, but on appeal, the Seventh Circuit reversed and remanded for further proceedings, holding that this Court's decision was based on erroneous factual findings. The Court has received additional briefing from the parties, and it now reconsiders plaintiffs' motion for preliminary injunction in light of the guidance the Seventh Circuit has provided. This opinion sets forth the Court's findings of fact and conclusions of law pursuant to Federal Rules of Civil Procedure 52(a)(2).[1] For the reasons set forth below, the Court grants the motion.

         BACKGROUND

         Parties

         Defendant Advocate Health Care Network, which is the parent of Advocate Health and Hospitals Corp. (collectively, “Advocate”), is a health care system that includes eleven hospitals: (1) BroMenn Medical Center; (2) Christ Medical Center; (3) Condell Medical Center; (4) Eureka Hospital; (5) Good Samaritan Hospital; (6) Good Shepherd Hospital; (7) Illinois Masonic Medical Center; (8) Lutheran General Hospital; (9) Sherman Hospital; (10) South Suburban Hospital; and (11) Trinity Hospital. See http://www.advocatehealth.com/hospital-locations (last visited January 26, 2017). Defendant NorthShore University HealthSystem (“NorthShore”) is a health care system that includes four hospitals: (1) NorthShore Evanston Hospital; (2) NorthShore Glenbrook Hospital; (3) NorthShore Highland Park Hospital; and (4) NorthShore Skokie Hospital. See http://www.northshore.org/locations (last visited January 26, 2017). In September 2014, Advocate and NorthShore signed an affiliation agreement to merge and create Advocate NorthShore Health Partners (“ANHP”). (See DX3118, Affiliation Agreement.) “The combined entity would operate 15 GAC [general acute care] hospitals in Illinois and would generate approximately $7.0 billion in revenue.” (Pls.' Proposed Findings of Fact (“PFF”) ¶ 3, ECF No. 446.)

         Health Care Contracting

         Commercial health insurers (also called payers) try to create networks of health care providers that are attractive to potential members. (Id. ¶ 12; Defs.' Proposed Findings of Fact (“DFF”) ¶ 21, ECF No. 459; Preliminary Injunction Hr'g Tr. (“Tr.”) 75:11-16 [Norton-CIGNA]; id. at 148:12-18 [Hamman-Blue Cross Blue Shield of Illinois (“BCBSIL”)].) Among the factors insurers consider when determining whether to include a hospital in a network are “the attractiveness of that hospital, the quality, the reputation of that hospital, . . . its willingness to . . . meet certain price points, ” and its geographic coverage. (Tr. at 149:3-11 [Hamman-BCBSIL]; see Id. at 74:18-75:7 [Norton-CIGNA].)

         Hospitals compete to be included in insurers' networks and negotiate reimbursement rates and services with the insurers. (PFF ¶ 9; Tr. at 76:8-19 [Norton-CIGNA]; id. at 149:12-20 [Hamman-BCBSIL]; JX 9, Englehart Investigative Hr'g (“IH”) Tr. at 142:2-9, ECF No. 453-9).) A hospital has more bargaining leverage if there are fewer substitutes for it that can be included in the insurer's network; the insurer has more leverage if there are more substitutes for the hospital. (Tr. at 106:23-107:3 [Norton-CIGNA]; id. at 150:22-51:22 [Hamman-BCBSIL]; ___ .) The Chicago market is dominated by one commercial payer, BCBSIL, which has about 4 million members in the Chicago area. (Tr. at 145:9-11 [Hamman-BCBSIL]; id. at 1121:3-8 [Beck-United]; id. at 1175:13-22 [Nettesheim-Aetna]; id. at 1412:18-25 [Sacks-Advocate].) The other payers include United Health Group, Aetna, CIGNA, and Humana, which have about 1.5 million, ___, 350, 000, and ___ members, respectively, in the area. (Tr. at 72:2-4 [Norton-CIGNA]; id. at 1115:4-6 [Beck-United]; DX1515.0002, Carrier Market Share Calculation; DX1862.0005, ECF No. 460-8; Advocate/Aetna Collaboration Discussion Guide, ECF No. 460-12.)

         Insurers pay health care providers under fee-for-service (“FFS”) or risk-based contracts. Under FFS contracts, the payer pays a set fee for every service the provider gives to a patient. (Tr. at 85:16-18 [Norton-CIGNA].) Risk-based contracts “[are] a set of payment arrangements in which providers hold some degree of financial risk.” (PX 6001, Jha Report ¶ 10, ECF No. 450-2.) These arrangements may take any of a number of different forms. (Id. ¶ 24.) For example, in their most extreme form, known as a full capitation or global risk arrangement, a provider is paid a set amount per patient per month for all of that patient's health care services, regardless of the extent of the care that patient ultimately requires or how much it costs. (Id.) Ninety percent of NorthShore's commercial revenues come from FFS contracts; less than a third of Advocate's commercial revenues come from FFS contracts. (DFF ¶ 50; Tr. at 785:10-13 [Golbus-NorthShore]; id. at 1410:18-20 [Sacks-Advocate].)

         Rationale for the Merger

         Advocate's alleged rationale for the merger is “to create a new, low-cost, high performing network (“HPN”) insurance product that can be sold . . . throughout Chicagoland, ” which it claims it cannot do “unless and until the merger with NorthShore is consummated due to [Advocate's] geographic gap east of Interstate 94.” (DFF ¶¶ 38, 49.) NorthShore's alleged rationale for the merger is “[to] engage in large-scale full risk contracting, ” which it says it cannot do “absent a merger, because it lacks: (1) sufficient geographic coverage; and (2) utilization management tools, care management tools, physician workflows and experience, . . . which Advocate can provide.” (Id. ¶ 52.)

         DISCUSSION

         Section 7 of the Clayton Act prohibits a merger “in any line of commerce or in any activity affecting commerce in any section of the country, the effect of [which] may be substantially to lessen competition, or tend to create a monopoly.” 15 U.S.C. § 18. The Court may preliminarily enjoin a violation of § 7 “[u]pon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest.” 15 U.S.C. § 53(b). “Therefore, ‘in determining whether to grant a preliminary injunction . . ., a district court must (1) determine the likelihood that the FTC will ultimately succeed on the merits and (2) balance the equities.'” FTC v. OSF Healthcare Sys., 852 F.Supp.2d 1069, 1073 (N.D.Ill. 2012) (quoting FTC v. Univ. Health, Inc., 938 F.2d 1206, 1217 (11th Cir. 1991)). “[T]o demonstrate such a likelihood of ultimate success, the FTC must raise questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals.” FTC v. Tenet Health Care Corp., 186 F.3d 1045, 1051 (8th Cir. 1999) (quotations omitted). “Although the district court may not ‘simply rubber-stamp an injunction whenever the FTC provides some threshold evidence, ' the FTC ‘does not need detailed evidence of anticompetitive effect at this preliminary phase.' Instead, ‘at this preliminary phase it just has to raise substantial doubts about a transaction.'” OSF Healthcare, 852 F.Supp.2d at 1074 (quoting FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1035-36 (D.C. Cir. 2008)) (internal citations omitted).

         I. LIKELIHOOD OF SUCCESS ON THE MERITS

         A. Geographic Market

         “Determination of the relevant product and geographic markets is ‘a necessary predicate' to deciding whether a merger contravenes the Clayton Act.” United States v. Marine Bancorporation, Inc., 418 U.S. 602, 618 (1974) (quoting United States v. E.I. Du Pont De Nemours & Co., 353 U.S. 586, 593 (1957)); see Tenet Health Care, 186 F.3d at 1051 (“It is . . . essential that the FTC identify a credible relevant market before a preliminary injunction may properly issue.”); OSF Healthcare, 852 F.Supp.2d at 1075 (“In fact, ‘[a] monopolization claim often succeeds or fails strictly on the definition of the product or geographic market.'”) (quoting Tenet Health Care, 186 F.3d at 1052).

         The parties agree that the relevant product market in this case is inpatient general acute care services sold to commercial payers and their insured members (“GAC services”). (PFF ¶ 15; Tr. at 1270:3-6 (defense expert Dr. Thomas McCarthy conceding that the relevant product market is GAC services).) GAC services are a cluster of medical services that require a patient to be admitted to a hospital at least overnight. (PFF ¶ 16; Tr. at 78:18-19 [Norton-CIGNA]). See OSF Healthcare, 852 F.Supp.2d at 1075 (“This is a ‘cluster market' of services that courts have consistently found in hospital merger cases, even though the different types of inpatient services are not strict substitutes for one another. See FTC v. ProMedica Health Sys., Inc., No. 3:11 CV 47, 2011 WL 1219281, at *54 (N.D. Ohio Mar. 29, 2011) (collecting cases); see also United States v. Rockford Mem'l Corp., 898 F.2d 1278, 1284 (7th Cir. 1990) (upholding a similar GAC product market).”).

         The parties do not agree on the boundaries of the relevant geographic market. The relevant geographic market is “[the] area in which the seller operates, and to which the purchaser can practicably turn for supplies.” United States v. Phila. Nat'l Bank, 374 U.S. 321, 359 (1963) (internal quotation omitted). There is no formula for determining the geographic market; rather, it should be identified in “a pragmatic [and] factual” way and should “correspond to the commercial realities of the industry.” Brown Shoe Co. v. United States, 370 U.S. 294, 336-37 (1962) (quotation omitted). The geographic market “need not . . . be defined with scientific precision, ” United States v. Connecticut National Bank, 418 U.S. 656, 669 (1974), but it “must be sufficiently defined so that the Court understands in which part of the country competition is threatened, ” FTC v. Cardinal Health, Inc., 12 F.Supp.2d 34, 49 (D.D.C. 1998).

         1. Geographic market analysis of plaintiffs' expert Dr. Tenn

         Plaintiffs contend that the relevant geographic market, which their expert Steven Tenn refers to as the “North Shore Area, ” includes six of the merging hospitals-Advocate Lutheran General Hospital, Advocate Condell Medical Center, NorthShore Evanston Hospital, NorthShore Skokie Hospital, Glenbrook Hospital, and Highland Park Hospitals-as well as Vista East Hospital, Northwest Community Hospital, Presence Resurrection Hospital, Northwestern Lake Forest Hospital, and Swedish Covenant Hospital, all of which are located in northern Cook or southern Lake Counties. (PX 6000, Tenn Report ¶¶ 9-11, 14-15, 18, 72, ECF No. 450-1.) Dr. Tenn explained in his report that this area of “overlap” between the four NorthShore hospitals and their two most significant Advocate competitors, Advocate Lutheran General and Advocate Condell, is the “primary area of competition between Advocate and NorthShore.” (Id. ¶ 17.) In fact, Dr. Tenn explained that these six party hospitals alone constitute “a relevant geographic market in which it would be appropriate to assess the transaction.” (Id. ¶ 76.)

         However, in an effort to be “conservative, ” he “focus[ed] [his] analysis on a broader geographic market, ” defined to include the five additional competing hospitals. (Id. ¶ 79.) He selected these hospitals based on their location, including hospitals “with at least a two percent share in the area from which the relevant Advocate and NorthShore hospitals attract patients” and hospitals “that overlap with [, i.e., draw patients from the same area as] both Advocate and NorthShore.” (Tr. at 453:22-23, 463:2-65:12.) He excluded a number of academic medical centers and specialized hospitals, which he called “destination” hospitals, i.e., Northwestern Memorial Hospital, Rush University Hospital, University of Chicago Hospital, Loyola University Hospital, Cancer Treatment Centers of America, and Lurie Children's Hospital, because these hospitals draw patients from not just the North Shore Area but from all over the Chicago metropolitan area. (Tenn Report ¶ 85 at n.175.) As Dr. Tenn recognized, and as the evidence showed, patients generally prefer to receive GAC services close to home. (PFF ¶¶ 26-27, 41.) See FTC v. Advocate Health Care Network, 841 F.3d 460, 474 (7th Cir. 2016) (“FTC”). Based on this preference, employers require-and insurers must offer-health plans that provide patients with access to in-network hospitals near where they live. (PFF ¶¶ 26-32.) See FTC, 841 F.3d at 473-75. Thus, although many patients travel from the North Shore Area to these destination hospitals, Dr. Tenn nevertheless excluded them from his analysis because these hospitals cannot fulfill the function of providing local care within the North Shore Area. (Tr. at 454:4-9 (“Here the competitive concern is that Advocate and NorthShore are substitutes for commercial payers when they're putting together provider networks in the northern Chicago suburbs. The destination hospitals . . . are not located in the northern Chicago suburbs and, therefore, do not fulfill this role for commercial payers.”).)

         After identifying the market, Dr. Tenn tested whether it passed the hypothetical monopolist test; that is, whether a hypothetical monopolist that owned all of the hospitals in the market could profitably impose a small but significant non-transitory increase in price (“SSNIP”) (i.e., 5% or more) at one or more of the merging hospitals due to the hypothetical monopolist's “internalization of substitution” in the region. (PFF ¶ 33; Tenn Report ¶¶ 57, 71.) See DOJ/FTC Horizontal Merger Guidelines §§ 4, 4.1.1, 4.2, 4.2.1, available at https://www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf (last visited Jan. 31, 2017).

         Tenn measured the level of substitution by calculating diversion ratios, that is, the fraction of patients who use one hospital for GAC services that would switch to another hospital if their first-choice hospital were no longer available. (Tenn Report ¶¶ 95-98.) He determined that 48% of the patients admitted to one of the eleven hospitals in the North Shore Area would substitute to one of the other hospitals in the North Shore Area if their chosen hospital were no longer available. (Id. ¶ 99.)

         This “level of intra-market diversion, ” Tenn opined, “is sufficiently high . . . to pass the hypothetical monopolist test.” (Id. ¶ 100.) Dr. Tenn concluded that he had identified a relevant geographic market.

         2. Geographic market: procedural history

         In its prior opinion in this case, this Court rejected Dr. Tenn's analysis and denied the motion for preliminary injunction because it found that plaintiffs did not prove a relevant geographic market. In particular, the Court found that Dr. Tenn provided no compelling reason for excluding destination hospitals from the geographic market, considering that (a) the very diversion ratios he calculated show that patients consider some destination hospitals, particularly Northwestern Memorial, to be close substitutes for some of the merging hospitals, and (b) the evidence did not unequivocally support Dr. Tenn's assumption that patients prefer to receive hospital care near their homes. (See Am. Mem. Op. & Order, June 20, 2016, ECF No. 484.)

         The Seventh Circuit reversed and remanded for reconsideration of the motion for preliminary injunction, explaining that “the geographic market question is . . . most directly about ‘the likely response of insurers, ' not patients, to a price increase, ” because “[i]nsured patients are usually not sensitive to retail hospital prices, while insurers respond to both prices and patient preferences.” FTC, 841 F.3d at 471 (quoting Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke's Health Sys., Ltd., 778 F.3d 775, 784 (9th Cir. 2015)). As a result, “insurers are the most relevant buyers.” FTC, 841 F.3d at 475. Although Dr. Tenn's diversion ratios showed that certain hospitals outside of the North Shore Area, particularly Northwestern Memorial, draw large numbers of patients from the North Shore Area, this fact did not fatally undermine Dr. Tenn's geographic market analysis because “measures of patient substitution like diversion ratios do not translate neatly into options for insurers.” Id. Insurance executives “unanimous[ly]” testified that “an insurer's network must include either Advocate or NorthShore to offer a product marketable to employers.” Id. at 474. This testimony was supported by “strong, not equivocal” evidence that patients generally prefer to receive hospital care locally. Id. Economists studying hospital markets have long recognized the “silent majority fallacy”: even if evidence shows that some patients are willing to travel for care, it does not follow that more would do so to avoid a price increase; it may be that there is a “silent majority” that would pay supra-competitive prices to receive hospital services close to home rather than travel. Id. at 470. Thus, even if it is true that large numbers of patients who live in the North Shore Area travel outside the Area to hospitals such as Northwestern Memorial for GAC services, it is error “to focus on the patients who leave a proposed market instead of on hospitals' market power over the patients who remain, which means that the hospitals have market power over the insurers who need them to offer commercially viable products to customers who are reluctant to travel farther for general acute hospital care.” Id. at 476.

         On remand, the parties take dramatically different approaches to the geographic market issue. Plaintiffs' position is that the Seventh Circuit's opinion all but resolves the issue. The Seventh Circuit held that there is strong evidence that an insurer would not be able to sell a plan that does not include either Advocate or NorthShore. Insurers unanimously testified to that effect, and the record as a whole supports that testimony because “the overwhelming weight of the evidence” shows “(1) the large proportion of patients who prefer hospitals close to their homes and (2) the resulting need for insurers to offer networks that include community hospitals close to their customers' homes.” Id. at 475 n. 4. It follows inevitably from the Seventh Circuit's opinion, plaintiffs argue, that because many patients in the proposed North Shore Area would have limited or no access to nearby hospitals if their insurance plan did not provide access to any of the eleven hospitals in the North Shore Area, insurers would surely pay a SSNIP in order to be able to offer patients in that region a health plan that includes access to local hospitals. According to plaintiffs, there is no need on remand to delve into the details of Dr. Tenn's analysis or reduce this case to a “battle of the experts” with respect to determining the relevant geographic market; the Seventh Circuit's decision is conclusive on that issue.

         Defendants argue that, while insurer representatives may have testified that they cannot sell a plan that excludes both Advocate and NorthShore, they also offered some contrary testimony (see DFF ¶¶ 259-60; Tr. at 280:9-14 [Hamman-BCBSIL]), and it falls to this Court to make “credibility determinations about inconsistent testimony.” (Defs.' Post-Remand Resp. Br. at 4.) According to defendants, some insurers, especially BCBSIL, which sees the defendants' proposed merger as a threat to its own business, may have their own competitive reasons for opposing the defendants' proposed merger, and therefore the Court should view the testimony of these insurers' representatives skeptically. (See DFF ¶¶ 211-17.) Because, defendants argue, the insurers' testimony that they cannot sell a plan that excludes both Advocate and NorthShore is inconsistent, biased, and ultimately not credible, this Court must rely on expert testimony in order to define the relevant geographic market. Further, defendants renew their attack on Dr. Tenn's analysis, arguing that the Seventh Circuit's opinion in this case reveals Dr. Tenn's reliance on diversion ratios to be a fatal flaw. Defendants argue that if it is error to rely on Dr. Tenn's patient-centric diversion ratios because insurers, not patients, are the “most relevant buyers, ” then it must be error to accept Dr. Tenn's conclusions with regard to the scope of the geographic market and the question of whether a hypothetical monopolist could impose a SSNIP because they, too, depend heavily on diversion ratios.

         The Court shares some of defendants' concerns about the credibility of the insurers' testimony, which may indeed be self-serving, but even taking their testimony with a grain of salt, the record as a whole supports the view that insurers genuinely believe that a plan that excludes Advocate and NorthShore is not viable in the North Shore Area. Defendants point to BCBSIL's “Project Remedy, ” a recent attempt by BCBSIL to ___ (See DFF ¶¶ 259-62.) But there is no inconsistency in BCBSIL's testimony on this point. True, in his testimony about Project Remedy, Mr. Steve Hamman, a BCBSIL executive, testified that ___ but he went on to clarify that, ___ (Tr. at 280:5-281:3 [Hamman-BCBSIL].) Defendants argue that the Seventh Circuit “did not examine” this testimony (Defs.' Post-Remand Resp. Br. at 4), but it would have added nothing to its analysis if it did; the Seventh Circuit specifically recognized that a plan that excluded NorthShore and Advocate might well be successful with patients outside the North Shore Area. See FTC, 841 F.3d at 474 (“One company offers a network in the Chicago area without either of the merging parties, but . . . fewer than two percent of those individual members live near NorthShore's hospitals.”). (See also PFF ¶ 77.)

         Defendants cannot undermine plaintiffs' proposed geographic market definition simply by showing that a plan that excludes both Advocate and NorthShore from its network might attract some enrollees in the North Shore Area because some-or even many-patients are willing to travel outside the market for hospital care. They also have to establish that “enough patients would buy a health plan . . . with no in-network hospital in the proposed geographic market” and instead “turn to hospitals outside the relevant market, ” FTC v. Penn State Hershey Medical Center, 838 F.3d 327, 343 (3d Cir. 2016)), that insurers are unlikely to agree to pay supra-competitive prices to hospitals in the Area in order to be able to offer attractive products to patients who live within the geographic market but might be “reluctant to travel [outside it] for general acute hospital care, ” FTC, 841 F.3d at 476. Testimony that an insurer has actually offered a commercially-successful healthcare plan that enrolled large numbers of patients within the North Shore Area but did not include Advocate or NorthShore in its network might have sufficed. Cf. Penn State Hershey, 838 F.3d at 343. But the defendants offered no such testimony in this case, nor did they offer any evidence to demonstrate that a healthcare plan that excluded both Advocate and NorthShore would be successful among patients living in the North Shore Area. In the absence of any such evidence, as the Seventh Circuit explained, the fact that some patients are willing to travel outside the North Shore Area for GAC services does not suggest that there is no “silent majority” in the North Shore Area that is reluctant to travel and that the hospitals in the Area can use as leverage to charge supra-competitive prices.

         In any case, even if the Court indulges defendants and undertakes another close examination of Dr. Tenn's work, it must conclude, in light of the guidance the Seventh Circuit has provided, that Dr. Tenn has appropriately delineated the relevant geographic market.

         3. Tenn's reliance ...


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