FTC v. Advocate Health Care Network — Oct. 2016 (Summary)

ANTITRUST

FTC v. Advocate Health Care Network
No. 16-2492 (7th Cir. Oct. 31, 2016)

The United States Court of Appeals for the Seventh Circuit reversed and remanded a district court’s denial of a motion for preliminary injunction.  The Federal Trade Commission (“FTC”) and the State of Illinois sought to enjoin the proposed merger of two hospital networks. The court reasoned that the district court’s finding that the FTC and State of Illinois had not demonstrated a likelihood of success because they had not shown a relevant geographic market that was clearly erroneous. The district court  was wrong in treating the analysis offered by the FTC’s expert economist as circular; inappropriately concluded that evidence central to the commercial reality of hospital competition in the market was equivocal, and overlooked the market power created by what economists have come to label, “the silent majority.”

The court began its analysis reasoning that the district court erred in its criticism of the FTC’s expert’s hypothetical monopolist test, which analyzes a proposed candidate market, simulates a monopolization of that market, then adjusts the candidate market and reruns the simulation as necessary, and not mentioning the expert’s results nor explaining why an alternative test would produce correct results. The district court mistook the test’s iterations for circularity and concluded that the test assumed the answers to the market definition questions. However, the hypothetical monopolist analysis actually tests its hypothesis and adjusts the market definition if the results required, which the appeals court concluded was not circular reasoning.

The court further determined that the district court erred in its conclusion that the FTC’s expert had no economic basis to exclude hospitals that were primarily academic medical centers. After reviewing the record, the court found that the witnesses consistently used the term “academic medical center” and recognized that demand for those few hospitals differ from the demand for general acute care hospitals, which draw patients from much smaller geographic areas. The court found the testimony sufficient to distinguish between academic medical centers and other hospitals like those operated by the two health networks. Moreover, the court reasoned that evidence pertaining to the expert’s determination that patients generally choose hospitals close to their homes was not equivocal to workplace locations and outpatient relationships influencing patient choice because the testimony in which the district court cited addressed medical care broadly, not inpatient acute care specifically.

Lastly, the appeals court stated that the district court wrongly discounted the testimony of the expert’s diversion ratios, although it did not explain what it inferred from the ratios. The court stated that if patients were the relevant buyers in the market, the numbers would be more compelling since diversion rations indicate which hospitals patients consider substitutes, but the insurers rather than the patients were the most relevant buyers. Therefore, measures of patient substitution like diversion ratios do not translate into options for the insurers, and the district court wrongly assumed that they did. Additionally, the court found the district court’s reasoning and the silent majority fallacy both focus on the patients who exited the market rather than the hospitals’ market power over the patients who remained. This resulted in the hospitals having market power over the insurers who need them to offer commercially viable products to customers who are reluctant to travel farther for general acute hospital care. The relevant geographic market did not include every competitor but rather the area of effective competition, which is the place where the “effect of the merger on competition will be direct and immediate.