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FTC seeking to break apart hospital merger

The commission's look at an Illinois deal could signal more moves against hospitals that merged, then raised their prices.

By — Posted Feb. 14, 2005

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Five years after Evanston Northwestern Healthcare Corp. took over Highland Park Hospital in suburban Chicago, the Federal Trade Commission is seeking to break apart the merger, perhaps signaling that the agency is ready to take a fresh look at hospital consolidation.

At a hearing before an administrative law judge, scheduled to begin Feb. 10, the FTC was to get its chance to prove that the merger gave Evanston Northwestern unfair market dominance that it used to boost prices at its three hospitals well beyond those at comparable facilities at the same time. The health system has denied the allegations. There has been no indication when a ruling would be given.

Though consolidation has been seen in other health care sectors, most observers caution against believing that the case could signal an impending FTC crackdown on mergers in managed care or among physician groups. But observers say the case is significant, because it could show that the government has begun looking at hospital mergers already consummated, after losing roughly eight to 10 cases in the 1990s that sought to stop mergers as they were happening.

"What the government can now do is go back and look at the post-acquisition behavior of the merged firm and determine whether the acquisition was in fact anticompetitive or pro-competitive," said Robert W. Doyle Jr., who spent 20 years at the FTC and is now an antitrust attorney with Sheppard, Mullin, Richter & Hampton in Washington. "And if prices were up post-acquisition, the FTC can look at that evidence and decide whether to challenge that acquisition."

He said the latest case could have a better chance of prevailing than previous actions because there might be more tangible proof that there were antitrust violations. "You have a real live test case where you have available to you the post-acquisition behavior of the firms. You no longer have to speculate. ... You can make a determination empirically whether the merger is anticompetitive," he said.

Doyle thinks the FTC is scrutinizing other consummated hospital mergers as well. But an agency spokesman said he could not comment if there were any investigations.

The complaint alleges that the merger made Evanston Northwestern the dominant hospital system in the market, enabling it to exercise "market power" and substantially lessening competition.

The FTC alleged that shortly after the merger, Evanston Northwestern negotiated uniform prices for the hospitals as a single system, leading to price increases at each location. The complaint said several health insurers accepted the increases even though they saw prices rise by roughly 20% to 60% and in one case by nearly 190%.

Evanston Northwestern has said that the merger saved a failing hospital, created pro-competitive efficiencies and resulted in significant improvements in the quality of patient care that far outweigh any alleged anticompetitive effects.

A company spokesman declined to comment on the upcoming hearing. But in a statement issued last February, Mark Neaman, Evanston Northwestern's president and chief executive, said the FTC's allegations were false and not supported by evidence.

"The FTC's attempt to undo the merger ignores the enormous benefits of the merger and demonstrates disregard for the health and welfare of the families and communities we are privileged to serve," he said.

Bruce Ryan, an antitrust attorney with Paul, Hastings, Janofsky & Walker in Washington, said the FTC lost some of its previous efforts to stop mergers because it had difficulty proving what the hospitals' geographic markets were.

"It was difficult sometimes to prove exactly where patients would travel from to go to a hospital for services," he said. "In a number of those cases they found that they failed to prove what the relevant geographic market was ... and if you can't prove that, you can't show that the merged parties would be able to exercise market power."

But Ryan said there were drawbacks to bringing such a case. "The equities are a little against ... undoing mergers where there's a lot of disruption and expense involved, so it gives them a little higher burden because divestiture is a severe remedy."

The complaint also claimed that price-fixing occurred because the merger folded an independent physician association into the larger ENH Medical Group, which then allegedly negotiated with payers for uniform prices on behalf of both salaried and independent physicians.

The FTC agreed to remove this count from the hearing, and Evanston Northwestern said both parties had reached a tentative agreement in which the medical group's independent physician association had agreed to not negotiate fee-for-service contracts on behalf of independent physicians.

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ADDITIONAL INFORMATION

Consolidation may not boost care -- study

A new study found that hospital consolidation may lead to higher prices but not necessarily to an upturn in the quality of care.

The study in the January/February issue of the policy journal Health Affairs looked at the impacts of growing hospital systems and found that after consolidation, hospital market power increased and hospitals gained higher prices. But mergers did not necessarily mean better efficiencies or improvements to care.

"This study, along with others, has found that consolidation may no longer in this era be a good thing for a consumers," said Alison Evans Cuellar, lead author of the study and an assistant professor in public health at Columbia University, in New York City. "Paying higher prices for the same service or the same quality service is not good for consumers."

The American Hospital Assn. disputed the findings, saying the study was too narrow. "The real benefits of hospital mergers come down the road," said Caroline Steinberg, AHA's vice president for trends analysis. She said there are many tangible benefits to consolidation, including the fact that hospitals will be better able to plan their growth and expansion. Also, she said, they can avoid duplicating resources, and they can figure out how to best allocate their staff.

She said it's also important to note the context for many mergers. "Oftentimes it's a last-chance survival strategy," she said. "It's a real benefit to the community if these hospitals can stay open."

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