Markets Wired

In an administrative opinion and order made public today, the Federal Trade Commission ruled that Evanston Northwestern Healthcare Corp.’s (ENH) acquisition of Highland Park Hospital (Highland Park) in 2000 was anticompetitive and violated Section 7 of the Clayton Act. The Commission opinion, authored by Chairman Deborah Platt Majoras, affirmed an October 2005 ruling by Chief Administrative Law Judge (ALJ) Stephen J. McGuire, with some modifications, and ordered an alternate remedy to restore competition in the market.

The Commission’s order, which is available on the FTC’s Web site, requires ENH to establish separate and independent contract negotiating teams – one for Evanston and Glenbrook Hospitals, and another for Highland Park – that will allow managed care organizations (MCOs) to again negotiate separately for the competing hospitals, “thus re-injecting competition between them for the business of MCOs.” The remedy differed from that ordered by ALJ McGuire, who ruled that ENH should be required to divest Highland Park altogether.

The Commission Opinion: In its opinion, the Commission affirmed the ALJ’s decision that the transaction violated Section 7 of the Clayton Act, and that the evidence presented by complaint counsel “demonstrates that the transaction enabled the merged firm to exercise market power and that the resulting anticompetitive effects were not offset by merger-specific efficiencies.” The record, the Commission found, “shows that senior officials at Evanston and Highland Park anticipated that the merger would give them greater leverage to raise prices, that the merged firm did in fact raise its prices immediately and substantially after completion of the transaction, and that the same senior officials attributed the price increases in part to increased bargaining leverage produced by the merger.”

Further, the Commission found that the “econometric analyses performed by both complaint counsel’s and respondent’s economists also strongly supported the conclusion that the merger gave the combined entity the ability to raise prices through the exercise of market power.” The economic analyses, the Commission determined, “established that there were substantial merger-coincident price increases and ruled out the most likely competitive benign explanations for substantial portions of these increases.”

“The record does not support respondent’s position that these increases reflect ENH’s attempts to correct a multi-year failure by Evanston Hospital’s senior officials to charge market rates to many of its customers,” the Commission wrote, “or increased demand for Highland Park’s Services due to post-merger improvements.”

The Commission Order: The opinion and order approved by the Commission upholds the decision of the ALJ and adopts the findings of fact and conclusions of law as those of the Commission, except where they are inconsistent with the Commission’s opinion and order. While the Commission agreed with the ALJ that ENH’s acquisition of Highland Park violated Section 7 of the Clayton Act, it did not agree that a divestiture was warranted as a remedy. “The potentially high costs inherent in the separation of hospitals that have functioned as a merged entity for seven years,” the Commission wrote, “instead warrant a remedy that restores the lost competition through injunctive relief.”

Accordingly, while “structural remedies are preferred for Section 7 violations,” the Commission determined that “this is the highly unusual case in which a conduct remedy, rather than a divestiture, is more appropriate.” The Commission wrote that the long time that has elapsed between the merger’s closing and the conclusion of the litigation, “would make a divestiture much more difficult, with greater risk of unforseen costs and failures.” It therefore imposed an injunctive order, requiring ENH to establish separate and independent negotiating teams – one for Evanston and Glenbrook Hospitals, and another for Highland Park, “to allow MCOs to negotiate separately again for those competing hospitals, thus re-injecting competition between them for the business of MCOs.”

The Commission noted that ENH should be able to implement the required modifications to its contract negotiating procedures in a very short time. “In contrast, divesting Highland Park after seven years of integration would be a complex, lengthy, and expensive process.” The Commission ordered ENH, within 30 calendar days, to submit a detailed proposal to the FTC for implementing the injunctive relief imposed, and laid out specific steps to be taken to ensure the order is implemented correctly. Finally, it ruled that complaint counsel must submit any objections to ENH’s proposal within 30 calendar days after it is submitted, and that ENH must respond to complaint counsel’s filing within 10 calendar days.

Case Background: ENH acquired Highland Park in January 2000. The acquisition combined ENH’s Evanston and Glenbrook Hospitals – located in Cook County, Illinois – with Highland Park, the nearest hospital to the north. The administrative complaint approved and issued by the Commission in February 2004 alleged that following the acquisition, ENH was able to raise its prices charged to health insurers far above price increases of other comparable hospitals as a result of the transaction.

According to the Commission’s complaint, this resulted in higher costs to insurance purchasers and hospital services consumers. The complaint alleged that the merger violated Section 7 of the Clayton Act, based on an analysis conducted under the Horizontal Merger Guidelines and on the actual competitive effects, in the form of higher prices actually charged by ENH after the merger. The complaint contemplated a remedy to restore competition to the benefit of consumers seeking competitively priced health care.

In October 2005, Chief ALJ McGuire issued an initial decision and order, ruling in favor of Commission staff, and ordering ENH to sell Highland Park within 180 days. According to Judge McGuire’s decision, which upheld Count I of the administrative complaint issued by the FTC, ENH’s acquisition of Highland Park resulted in “substantially lessened competition” and higher prices for insurers and healthcare consumers for general acute care inpatient services sold to managed care organizations in the geographic market defined by the ALJ. ENH subsequently appealed the ALJ’s decision to the Commission. Complaint counsel cross-appealed the ALJ’s decision not to make a ruling against the respondent under Count II and also requested that the Commission supplement and revise the ALJ’s divestiture order.

The ALJ dismissed Count II of the complaint as moot. Count III, which alleged anticompetitive conduct by ENH Medical Group, Inc., acting on behalf of its member doctors, was resolved by a consent order barring such conduct that was announced on May 17, 2005.

The Commission Vote: The Commission vote approving issuance of the opinion and order was 5-0, with Commissioners J. Thomas Rosch and Jon Leibowitz issuing separate concurring opinions.

Commissioner Rosch’s opinion described a different theoretical basis for a Section 7 violation. He embraced a two-tiered theory of anticompetitive effects that was “based on the unique competitive dynamics of hospital markets, stemming from the bargaining between hospitals and managed care organizations (MCOs) over inclusion in MCO networks that is described by the Commission opinion.” Commissioner Rosch explained that the elimination of competition between Evanston and Highland Park “enabled ENH to include Highland Park in its system and engage in system (all-or-nothing) supra-competitive pricing.” In Section II of his concurrence, Commissioner Rosch also embraced the proposition that in some cases, including this case, evidence of actual anticompetitive effects can sufficiently identify the contours of the relevant market for purposes of establishing a Section 7 violation.

In his opinion, Commissioner Leibowitz wrote, “I join the opinion of the Commission with respect to its findings of fact, its conclusion that the merger violated the Clayton Act as identified in Count One of the Complaint, and the remedy identified in that opinion. However, I believe that the weight of the evidence clearly supports a finding that the merger violated the Clayton Act in the manner identified in Count II of the Complaint as well. Consequently, I join in Section II of Commissioner Rosch’s concurrence.”

Copies of the Commission’s opinion and order, and the Commissioners’ concurring opinions, are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/competitioncounts.