Judge orders breakup of hospital merger

In a possible bellwether case for the hospital industry, a federal judge has ruled that the 2000 merger of Evanston Northwestern Healthcare Corp. and Highland Park Hospital in suburban Chicago substantially decreased local health care competition and should be broken apart.

Chief Administrative Law Judge Stephen J. McGuire ruled in favor of the Federal Trade Commission in his Oct. 17 decision, saying the merger gave Evanston Northwestern unfair market clout that it used to its advantage. He ordered the health system to sell the hospital within 180 days.

But Evanston Northwestern officials vowed to appeal the ruling and said they wouldn't take any steps to divest the hospital or discontinue services in the interim. Appeals are expected to last up to two years.

Still, experts say the case, brought in February 2004, is a major victory for the FTC, which had not successfully challenged a hospital merger in nearly a decade. Legal experts said it should serve as a warning to other merged hospital systems that the FTC is scrutinizing the industry, which has undergone significant consolidation in recent years.

"The FTC has given the signal that just because the deal has closed doesn't mean they won't review it or challenge it," said J. Robert Robertson, an antitrust attorney in Chicago with Kirkland & Ellis LLP, who worked at the federal agency for about two years.

Evanston Northwestern bought the hospital for about $200 million in January 2000. It owned two other hospitals in north suburban Chicago.

The FTC alleged that the merger made Evanston Northwestern the dominant hospital system in the market, enabling it to exercise "market power" and substantially lessen competition. It said that shortly after the merger, Evanston Northwestern negotiated uniform prices for the hospitals as a single system, leading to price increases at each location.

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.

But McGuire ruled that "ENH exercised its enhanced postmerger market power to obtain price increases significantly above its premerger prices and substantially larger than price increases obtained by other comparison hospitals." The judge also determined that Evanston Northwestern's improvements to Highland Park didn't outweigh "the competitive harm resulting from the merger."

In a written statement, Evanston Northwestern President and Chief Executive Mark R. Neaman said the ruling "discounts the importance of our investments in excess of $100 million at the HPH campus which have dramatically improved the breadth, depth and quality of health care services in the region."

He said that despite the "enormous" costs, Evanston Northwestern would continue to challenge the FTC, first by appealing to the agency's full commission. Evanston Northwestern spokeswoman Gail Polzin said the health system had already spent more than $20 million on the legal battle.

The American Hospital Assn. has been monitoring the case, said its chief Washington counsel, Melinda Hatton. "[The FTC is] trying to vindicate their losing record in court and build a new model for future mergers, and that is of concern to us," she said.

But Hatton said she didn't think the ruling would ultimately impact the industry "because it is not a sound and well-reasoned antitrust opinion."

Robert W. Doyle Jr., an antitrust attorney who spent 20 years at the FTC, said most of the past hospital merger cases were brought before the mergers were consummated, making it hard for the government to prove that the deal would be anticompetitive. "What's interesting about this case is ... they have a real live test case to look at," he said,

But Doyle, now a partner with Sheppard, Mullin, Richter & Hampton in Washington, D.C., said that the longer the two entities remain merged, the harder it will be to break them apart, if necessary.

"Once the eggs are scrambled it's hard to unscramble them," he said.