In the Matter of Evanston Northwestern Healthcare Corp.

Brief Fact Summary. An administrative law judge (ALJ) found that Evanston Northwestern Healthcare Corp (ENH) (Defendant) violated federal antitrust law when it acquired Highland Park Hospitals, as the transaction lessened competition considerably in the Northern Illinois market for acute-care inpatient services.  The ALJ ordered Defendant to divest itself of Highland Park Hospital.  Defendant appealed.

Synopsis of Rule of Law. Where a health care corporation's acquisition of a hospital lessens competition considerably in the Northern Illinois market for acute-care inpatient services, divestiture is not warranted seven years after the merger.

Facts. Before the merger, Evanston Northwestern Healthcare Corp. (ENH) (Defendant) owned Evanston Hospital and Glenbrook Hospital, both in Cook County, Ill.  In January 2000, Defendant acquired Highland Park, the nearest hospital to the north.  There are other hospitals in the area, including nine facilities that are closer to Evanston, Glenbrook, or Highland Park than they are to each other, but there are no other hospitals within the triangle formed by the three ENH (Defendant) hospitals.  The Federal Trade Commission (FTC) (Plaintiff) filed a complaint in February 2004, claiming that Defendant's merger with Highland Park caused less competition and higher prices for insurers and health care consumers for general acute-care inpatient services sold to managed care organizations in the relevant geographic market.  In October 2005, an administrative law judge found that Defendant exercised its enhanced power to obtain price increases considerably above its premerger prices and considerably larger than price increases obtained by other comparison hospitals.  Defendant was ordered to divest of Highland Park.

Issue. Where a health care corporation's acquisition of a hospital lessens competition considerably in the Northern Illinois market for acute-care inpatient services, is divestiture warranted seven years after the merger?

Held. [Commissioner not stated in casebook excerpt.]  No.  Where a health care corporation's acquisition of a hospital lessens competition considerably in the Northern Illinois market for acute-care inpatient services, divestiture is not warranted seven years after the merger.  The evidence shows that the transaction enabled the merged firm to exercise market power that was not offset by merger-specific efficiencies, that senior Evanston and Highland Park senior officials anticipated the merger would give them greater leverage for raising prices, that the merged firm did raise its prices immediately and considerably after completion of the transaction, and that the same senior officials attributed the price increases in part to increased bargaining leverage the merger had produced.  Clearly Defendant violated § 7 of the Clayton Act, and an administrative law judge reasonably ordered the divestiture of Highland Park from ENH (Defendant), because divestiture is the preferred remedy for challenges to unlawful mergers.  It is, however, impractical seven years after the merger, as substantial costs would be incurred to achieve divestiture, and it would upset the efficiencies now in place in the combined facility.  A better, if inferior, remedy at this point is to require Defendant to establish independent negotiating teams—one for Defendant's Evanston and Glenbrook hospitals, and another for Highland Park—to allow managed care organizations to negotiate separate contracts for the hospitals.  The injunction remedy is not ideal, but it will allow managed care organizations to negotiate separately again for these competing hospitals, thereby reintroducing competition between them for the business of managed care organizations.

Discussion. The traditional remedy in a merger case is divestiture, and the proposed remedy in this case—independent contract negotiating teams—could be impractical as there are difficulties associated with protecting against sharing of information, deliberately or not, about the separate managed care contracting efforts.  Nevertheless, Plaintiff arguably had no choice but to reject divestiture.  It would have been a real challenge to undo the merger after seven years.