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From Antitrust Law Daily, March 8, 2017

Illinois hospital operators drop merger plans after FTC wins injunction

By Jeffrey May, J.D.

Advocate Health Care Network and NorthShore University HealthSystem—two of the leading providers of general acute care inpatient hospital services in Chicago’s northern suburbs—have called off their planned merger. Their decision to abandon the proposed transaction comes after the federal district court in Chicago granted the FTC’s request for a preliminary injunction on March 7. The district court was revisiting the injunction issue because the U.S. Court of Appeals in Chicago had overturned an October 2016 ruling, denying the agency's request for temporary relief pending an administrative challenge to the transaction, which was valued at approximately $2.2 billion (FTC v. Advocate Health Care Network, Case No.: 1:15-cv-11473).

The district court issued its opinion under seal in light of certain competitively sensitive information contained in the parties’ submissions. The parties will now have an opportunity to meet and confer with one another about proposed redactions. The decision will likely be released after that time. In a publicly-available notice, the court said that, upon reconsideration of the agency's motion in light of guidance from the Seventh Circuit, it granted the requested relief.

In December 2015, the FTC filed an administrative complaint and a court action seeking a preliminary injunction, following a 15-month investigation of the combination of Advocate and NorthShore. Last June, the federal district court in Chicago denied the request for a preliminary injunction blocking the deal, after finding that the FTC and the State of Illinois did not meet their burden of showing that there was a likelihood that they will succeed on the merits of their antitrust claims.

Relevant market. In an announcement to NorthShore University HealthSystem employees yesterday, company president and chief executive officer Mark R. Neaman said that the "latest ruling is in response to requirements by the Court of Appeals that the Federal Court re-examine the merger from the perspective of the FTC’s view of the market, namely, that insurance companies’ needs take precedent over direct benefits to consumers."

The Seventh Circuit had taken issue with the lower court’s earlier analysis of the relevant geographic market, which the government asserted was limited to Chicago’s "North Shore Area." The district court had suggested that the FTC's expert used flawed criteria to identify the relevant geographic market. The district court questioned the exclusion of "destination hospitals"—such as Northwestern Memorial Hospital, Rush University Hospital, and University of Chicago Hospital—from the market. The appellate court had rejected the lower court’s conclusion that there was no "economic basis" for the exclusion of the academic medical centers from the market.

Jim Skogsbergh, president and chief executive officer of Advocate, also issued a statement to Advocate employees regarding the ruling and the decision to abandon the merger. Skogsbergh reiterated the company’s long-held view that the merger would have been "a big win for consumers and for health care."

FTC reaction. In response to the decisions of both the court and the parties, FTC Bureau of Competition Director Tad Lipsky said: "The FTC is delighted with today’s district court ruling, which enjoined this merger, and the parties’ subsequent decision to abandon the transaction." He added that "Advocate and NorthShore’s merger would likely have reduced the quality, and increased the cost, of health care for residents of the North Shore area of Chicago."

While Lipsky’s reaction might be a standard response to an agency victory, it could be read as an indication that the current Bureau of Competition director is on board with the merger enforcement efforts of the prior administration.

This is the second recent victory for the FTC in a hospital merger case. In September 2016, the U.S. Court of Appeals in Philadelphia reversed a lower court’s finding that the FTC too narrowly defined the geographic market in its challenge to the proposed merger between Penn State Hershey Medical Center and Pinnacle Health System in central Pennsylvania. In that case, the lower court was directed to enter the preliminary injunction. The parties have since dropped the deal.

Attorneys: Kevin Hahm for the FTC. John Robert Robertson (Hogan Lovells US LLP) and Robert Walter McCann (Drinker Biddle & Reath LLP) for Advocate Health Care Network and Advocate Health and Hospitals Corp.

Companies: Advocate Health Care Network; Advocate Health and Hospitals Corp.

MainStory: TopStory AcquisitionsMergers Antitrust FederalTradeCommissionNews IllinoisNews

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