Federal Trade Commission v. Advocate Health Care Network
2016 U.S. App. LEXIS 19535, 2016 WL 6407247, 841 F.3d 460 (2016)
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Rule of Law:
In defining the relevant geographic market for a hospital merger under the Clayton Act, the analysis must focus on the commercial reality of insurer-hospital negotiations and the market power derived from the 'silent majority' of patients who are unwilling to travel for general acute care, rather than on the minority of patients who are willing to seek care outside the local area.
Facts:
- Advocate Health Care Network (Advocate) operated a network of hospitals in the Chicago area, including two in the northern suburbs.
- NorthShore University HealthSystem (NorthShore) operated four hospitals, all located in Chicago's northern suburbs.
- In September 2014, Advocate and NorthShore announced their intention to merge their hospital systems.
- Competition for hospital services occurs in two stages: first, insurers negotiate with hospitals to create provider networks, and second, hospitals compete to attract patients based on non-price factors like location and quality.
- A significant majority of patients demonstrate a strong preference for receiving inpatient hospital care close to their homes; data showed 80% of patients in the proposed market drove 20 minutes or less to their hospital.
- Health insurers cannot create and sell a commercially viable health plan to employers in the northern suburbs without including either Advocate's or NorthShore's local hospitals in their network.
- No health insurance product had been successfully marketed to employers in the relevant geographic area without offering access to at least one of the two merging hospital systems.
Procedural Posture:
- The Federal Trade Commission and the State of Illinois filed a complaint in the U.S. District Court for the Northern District of Illinois, seeking a preliminary injunction to block the proposed merger between Advocate and NorthShore.
- The district court conducted an evidentiary hearing on the motion for a preliminary injunction.
- The district court denied the motion, finding that the plaintiffs had not shown a likelihood of success on the merits because they had failed to prove a relevant geographic market.
- The plaintiffs (the Federal Trade Commission and the State of Illinois) appealed the district court's denial of the preliminary injunction to the U.S. Court of Appeals for the Seventh Circuit.
- The district court stayed the merger pending the outcome of the appeal.
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Issue:
Did the government plaintiffs fail to demonstrate a likelihood of success on the merits by failing to define a relevant geographic market for general acute care hospital services in Chicago's northern suburbs?
Opinions:
Majority - Hamilton, J.
No. The government plaintiffs did not fail to demonstrate a likelihood of success on the merits; the district court's conclusion that they failed to prove a relevant geographic market was based on clear factual errors and a misunderstanding of antitrust principles. The district court erred by: (1) mistaking the iterative nature of the hypothetical monopolist test for circular reasoning; (2) incorrectly rejecting the valid economic distinction between local community hospitals and 'destination' academic medical centers; (3) wrongly finding the evidence of patient preference for local hospitals 'equivocal' when it was in fact very strong; and (4) falling for the 'silent majority' fallacy by focusing on the minority of patients willing to travel for care, thereby ignoring the market power the merging hospitals hold over the large majority of immobile patients and, consequently, over the insurers who must include them in any marketable network.
Analysis:
This decision significantly strengthens the government's hand in challenging hospital mergers by endorsing a modern economic approach to market definition that moves beyond simplistic patient-flow data. It establishes that the 'commercial realities' of the health insurance market—specifically, the need for insurers to build networks attractive to employers—are paramount. By embracing the 'silent majority' fallacy concept, the court provides a powerful tool for antitrust enforcers to demonstrate market power even when some patients travel for care. The ruling makes it more difficult for merging hospitals to argue for overly broad geographic markets by pointing to distant competitors, focusing the inquiry instead on the leverage they gain from geographically-loyal patients.
