Merger between FTC Advocate and NorthShore Challenged by FTC

Advocate NorthShore mergerIn late December 2015, the FTC authorized an action to block a proposed merger between Advocate Health Care Network and NorthShore University HealthSystem; two of the foremost providers of general acute inpatient hospital services in the North Shore area of Chicago, Illinois.

Proposed Merger Would Create Largest Hospital System in North Shore Area

The FTC’s complaint alleges that the proposed merger would create the largest hospital system in the North Shore area, and that the combined entity would operate most of the hospitals in the area and control more than 50 percent of the general acute care inpatient hospital services.  As a result, the FTC said the merger would inflict significant harm to consumers, with rising healthcare costs and diminished incentives to upgrade services and improve quality.

Advocate and NorthShore Agree to TRO, But Vow to Fight Preliminary Injunction Request

The FTC also authorized its staff to seek a TRO and preliminary injunction to prevent the parties from consummating the merger and to maintain the status quo pending resolution of the administrative proceeding.  In a somewhat unusual twist, Advocate and NorthShore agreed to entry of a TRO.  However, while the two healthcare providers agreed to put the merger on hold temporarily, they have vowed that they will vigorously oppose the FTC’s request for an injunction.  U.S. District Court Judge Jorge Alonso is scheduled to hear the FTC’s arguments for an injunction this week.

NorthShore CEO Accuses FTC of Gerrymandering

In the wake of the FTC’s merger challenge, NorthShore’s CEO, Mark Neaman, has accused the FTC of gerrymandering boundaries of NorthShore’s competitive geographic market to challenge its proposed merger with Advocate Health Care.   In a recent article in the Chicago Tribune, Mr. Neaman told the Chicago Tribune’s editorial board that the FTC is only focusing on a at a small portion of the Chicago area’s health care market as part of its analysis of the competitive effects of the proposed merger.  Mr. Neaman said that the combined entity would compete with hospitals throughout the region, not just those in the northern Cook and southern Lake counties, as the FTC alleged in its complaint.

Mr. Neaman also told the Chicago Tribune that the FTC’s view of the merged entity’s competitors is somewhat odd.  For instance, Mr. Neaman said the FTC excluded nearby Presence St. Francis Hospital and Vista Medical Center West, but included Vista Medical Center East, which is only a few miles from Vista Medical Center West.  According to Mr. Neaman, “It seems kind of strange that you can gerrymander something like this and think for a moment that somebody can’t drive from north Evanston to south Evanston.  And yet, with all of their work to try to come up with this geography, which suits their purposes, they had to work really, really, really, really hard to get it to just over 50 percent.”  Ultimately, Mr. Neaman concluded that, when viewed properly, the merged entity would control only 22 percent of inpatient beds in the six-county Chicago-are market, which is nowhere near enough to exert market power on pricing.

The FTC Has Its Eye Keenly on Hospital Mergers

The FTC’s action against the NorthShore/Advocate merger is the third such challenge that the FTC has made to proposed hospital mergers recently.  The FTC has also taken action to halt Cabell Huntington Hospital’s acquisition of St. Mary’s Medical Center in West Virginia (which is now on hold after passage of a new law in West Virginia), and Penn State Hershey Medical Center’s  combination with PinnacleHealth System in Pennsylvania.  A major dispute with the FTC in these health system merger scenarios is the FTC’s methodology used to determine the combined market share of the merged entity.  In the case of NorthShore and Advocate, they claim their merger would only result in 22 percent of the market share, while the FTC says it would be 50 percent.

According to Debbie Feinstein, director of the FTC’s Bureau of Competition, “Advocate is one of the largest health systems in the Chicago area, and it competes directly with NorthShore in the northern suburbs of Chicago. This merger is likely to significantly increase the combined system’s bargaining power with health plans, which in turn will harm consumers by bringing about higher prices and lower quality.”  But NorthShore and Advocate disagreement about the pricing impact.

Will Merger Really Decrease Competition as FTC Claims?

“They clearly have expressed that this will substantially decrease competition,” said Advocate President and CEO Jim Skogsbergh. “Mark and I are saying, ‘Really? In Chicago, with 75 hospitals, this dramatically and substantially reduces competition?’ We don’t get it. The other concern that they’ve expressed is what’s called upward pricing pressure.  So we once again said, ‘Really? In Chicago? When Blue Cross has 75 percent market share, we are all price takers, not price setters.’”  “But even then, we went to the FTC and said, ‘If your biggest concern is upward pricing pressure, and you think consumers are going to be hurt by us coming together and jacking up our prices, which is absolutely not true, we’ll enter into a pricing agreement with you. Let’s eliminate that concern,’” he said. “They said, ‘We reject it out of hand.”

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