Evanston Northwestern Healthcare Corporation (ENH), located in Evanston, Illinois, must sell Highland Park Hospital (Highland Park) within 180 days, under the terms of an initial decision and order issued by Chief Administrative Law Judge Stephen J. McGuire on October 17, 2005, and announced by the Federal Trade Commission today. ENH was formed in January 2000, as a result of Evanston Hospital (Evanston) and Glenbrook Hospital’s (Glenbrook) acquisition of Highland Park, which is located on Chicago’s North Shore.
According to Judge McGuire’s decision, which upheld Count I of an administrative complaint issued by the FTC in February 2004, ENH’s acquisition of Highland Park has resulted in “substantially lessened competition” and higher prices for insurers and healthcare consumers for general acute care inpatient services sold to managed care organizations in the geographic market defined by the ALJ.
The Administrative Complaint
In January 2000, ENH acquired Highland Park in a transaction valued at more than $200 million. The acquisition combined ENH’s Evanston and Glenbrook Hospitals – located in Cook County, Ill. – with Highland Park, the nearest hospital to the north. With Highland Park added to its existing hospitals, ENH became a more significant provider of health care services to payers who needed hospital access in northeast Cook County and southeast Lake County, Ill. The administrative complaint alleged that following the acquisition, ENH was able to raise its prices far above price increases of other comparable hospitals as a result of the transaction.
According to the complaint, ENH’s acquisition of Highland Park resulted in significantly higher prices charged to health insurers, and therefore higher costs to insurance purchasers and hospital services consumers. The complaint alleged that the merger violated the Clayton Act, based on an analysis conducted under the Horizontal Merger Guidelines and on the actual competitive effects, in the form of higher prices actually charged by ENH after the merger. The complaint contemplated a remedy to restore competition to the benefit of consumers seeking competitively priced health care.
The Initial Decision
In upholding Count I of the administrative complaint, ALJ McGuire stated that “[c]ontemporaneous and post-acquisition evidence establishes that ENH exercised its enhanced post-merger market power to obtain price increases significantly above its premerger prices and substantially larger than price increases obtained by other comparison hospitals.” He wrote that as a result of the elimination of Highland Park as a competitor, ENH was able to “convert existing price methodologies to managed care organizations to much more favorable post-merger terms” than either Evanston or Highland Park could have achieved on their own. Further, he wrote that in 2002 and 2003, ENH continued to unilaterally raise rates, which “significantly increased the prices paid by managed care organizations for ENH services.” ALJ McGuire concluded that the evidence presented by complaint counsel effectively ruled out explanations for these price increases, other than the exercise of market power.
Based on these basic findings, the ALJ sustained Count I of the complaint, which alleged that the merger of ENH and Highland Part substantially lessened competition in the relevant market, in violation of Section 7 of the Clayton Act. He also stated that “[C]omplaint Counsel has . . . demonstrated a reasonable probability that the structure of the merger will create an appreciable danger of anticompetitive consequences and will substantially lessen competition and harm consumer welfare in the future.” The ALJ dismissed Count II as moot. Count III of the Commission’s complaint, which alleged anticompetitive conduct by ENH Medical Group, Inc., acting on behalf of its member doctors, was resolved by a consent order barring such conduct that was announced on May 17, 2005.
The ALJ’s Order
In the order accompanying his initial decision, ALJ McGuire wrote that “divestiture is the most effective and appropriate remedy” to address the anticompetitive effects of ENH’s acquisition of Highland Park. Accordingly, he ruled that no later than 180 days from the date the divestiture requirements of the order become final, ENH must divest and convey the “Highland Park Hospital Assets” to a Commission-approved buyer and in a Commission-approved manner. In addition, he ordered ENH to comply with all terms of the divestiture agreement approved by the Commission and to cooperate with the acquirer to ensure the hospital assets are maintained as competitive pending their divestiture. The order also provides that for up to a year after the divestiture, ENH must provide transitional services to the acquirer to ensure the hospital remains competitive in the marketplace. It also contains terms concerning the transfer and recruitment of employees between ENH and Highland Park during the divestiture process.
Finally, the order requires that ENH distribute the order to selected officers and employees, states that the Commission may appoint a monitor to ensure the divestiture is completed successfully, and provides that if ENH has not divested the Highland Park Hospital Assets within the time required, the FTC may appoint a divestiture trustee to accomplish the sale to a Commission-approved buyer.
The Appeals Process
The judge’s initial decision in this matter is subject to review by the full Commission on its own motion, or at the request of any party. If an appeal from the initial decision is not received within 30 days after it is served, or 30 days after a timely notice of appeal is filed, whichever is later, and the Commission does not take certain other actions detailed in its Rules, the initial decision will become the decision of the Commission.
Copies of the initial decision by the administrative law judge are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
Mitchell J. Katz
Office of Public Affairs
(FTC Docket No. 9315)