Federal Trade Commission and State of Illinois, Plaintiffs-Appellants,
Advocate Health Care Network, et al., Defendants-Appellees.
August 19, 2016
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 15 C11473 - Jorge
L. Alonso, Judge.
Wood, Chief Judge, and Bauer and Hamilton, Circuit Judges.
Hamilton, Circuit Judge.
horizontal merger case under the Clayton Act depends on
proper definition of geographic markets for hospitals.
Defendants Advocate Health Care Network and NorthShore
University HealthSystem both operate hospital networks in
Chicago's northern suburbs. They propose to merge.
Section 7 of the Clayton Act forbids asset acquisitions that
may lessen competition in any "section of the
country." 15 U.S.C. § 18. The Federal Trade
Commission and the State of Illinois sued in district court
to enjoin the proposed Advocate-NorthShore merger while the
Commission considers the issue through its ordinary but
slower administrative process. See 15 U.S.C. § 53(b); 15
U.S.C. § 26; Hawaii v. Standard Oil Co. of
California, 405 U.S. 251, 260-61 (1972).
obtain an injunction, plaintiffs had to demonstrate a
likelihood of success on the merits. 15 U.S.C. § 53(b);
15 U.S.C. § 26; West Allis Memorial Hospital, Inc.
v. Bowen, 852 F.2d 251, 253 (7th Cir. 1988). To show
that the merger may lessen competition, the Commission and
Illinois had to identify a relevant geographic market where
anticompetitive effects of the merger would be felt. See
United States v. Philadelphia National Bank, 374
U.S. 321, 357 (1963); Brown Shoe Co. v. United
States, 370 U.S. 294, 323 (1962). Plaintiffs relied on a
method called the hypothetical monopolist test. That test
asks what would happen if a single firm became the sole
seller in a proposed region. If such a firm could profitably
raise prices above competitive levels, that region is a
relevant geographic market. In re Southeastern Milk
Antitrust Litig., 739 F.3d 262, 277-78 (6th Cir. 2014).
The Commission's expert economist, Dr. Steven Tenn, chose
an eleven-hospital candidate region and determined that it
passed the hypothetical monopolist test.
district court denied the motion for preliminary injunction.
Federal Trade Comm'n v. Advocate Health Care,
No. 15 C 11473, 2016 WL 3387163 (N.D. Ill. June 20, 2016). It
found that the plaintiffs had not demonstrated a likelihood
of success because they had not shown a relevant geographic
market. Id. at ""5. The plaintiffs
appealed, and the district court stayed the merger pending
appeal. That stay remains in place.
with the deference we give a district court's findings of
fact, the district court's geographic market finding here
was clearly erroneous. The court treated Dr. Tenn's
analysis as if its logic were circular, but the hypothetical
monopolist test instead uses an iterative process, first
proposing a region and then using available data to test the
likely results of a price increase in that region. Also, the
evidence was not equivocal on two points central to the
commercial reality of hospital competition in this market:
most patients prefer to receive hospital care close to home,
and insurers cannot market healthcare plans to employers with
employees in Chicago's northern suburbs without including
at least some of the merging hospitals in their networks. The
district court rejected that evidence because of some
patients' willingness to travel for hospital care. The
court's analysis erred by overlooking the market power
created by the remaining patients' preferences, something
economists have called the "silent majority"
lays out the facts of the proposed merger, the relevant
economics, and the district court proceedings. Part II-A
discusses briefly the relevant product market, which is not
disputed. Part II-B addresses the disputed issue of the
relevant geographic market, looking at the issue first
generally and then with respect to hospitals. Part III
explains what we see as the errors in the district
court's analysis of the geographic market: in Part III-A,
mistaking the nature of the hypothetical monopolist test; in
Part III-B, the role that academic medical centers play in
markets for general acute care; in Part III-C, patients'
preferences for convenient local hospitals; and in Part
III-D, the "silent majority" fallacy.
The Proposed Merger and the District Court
United States today, most hospital care is bought in two
stages. In the first, which is highly price-sensitive,
insurers and hospitals negotiate to determine whether the
hospitals will be in the insurers' networks and how much
the insurers will pay them. Gregory Vistnes, Hospitals,
Mergers, and Two-Stage Competition, 67 Antitrust L.J.
671, 674-75 (2000). In the second stage, hospitals compete to
attract patients, based primarily on non-price factors like
convenience and reputation for quality. Id. at 677,
682. Concerns about potential misuse of market power
resulting from a merger must take into account this two-stage
area providers of hospital care include defendant NorthShore
University HealthSystem, which has four hospitals in
Chicago's north suburbs. The area surrounding
NorthShore's hospitals has roughly eight other hospitals.
Two of those hospitals belong to defendant Advocate Health
Care Network, which has a total of nine hospitals in the
Chicago area. A map of Chicago area hospitals included in the
record is an appendix to this opinion.
September 2014, Advocate and NorthShore announced that they
intended to merge. The Federal Trade Commission and the State
of Illinois took action in December 2015 by filing a
complaint in the Northern District of Illinois seeking a
preliminary injunction against the merger. The court heard
six days of evidence on that motion. Executives from several
major insurers testified. Some of the details of their
testimony are under seal, but they testified unequivocally
that it would be difficult or impossible to market a network
to employers in metropolitan Chicago that excludes both
NorthShore and Advocate. Additional evidence shows that no
health insurance product has been successfully marketed to
employers in Chicago without offering access to either
NorthShore hospitals or Advocate hospitals.
court also heard testimony from several economic experts,
including Dr. Tenn. He used the "hypothetical monopolist
test" to identify the geographic market relevant to the
case. That test asks whether a single firm controlling all
output of a product within a given region would be able to
raise prices profitably a bit above competitive levels.
Economists and antitrust cognoscenti refer to such a price
increase as a "SSNIP, " a "small but
significant [usually five percent] and non-transitory
increase in price." U.S. Dep't of Justice &
Federal Trade Comm'n, Horizontal Merger Guidelines
9 (2010). Dr. Tenn simulated the market's response
to a price increase imposed by a monopolist controlling
NorthShore's hospitals and the two nearby Advocate
hospitals. He found that the monopolist could profitably
impose the increase. He therefore concluded that the
contiguous area including just those six party hospitals is a
relevant geographic market.
Tenn also chose a larger candidate market to test, using
three criteria. First, he distinguished between local
hospitals and academic medical centers, which he rather
inauspiciously called "destination
hospitals." Academic medical centers draw patients
from across the Chicago area, including the northern suburbs,
even though they are not in the northern suburbs. Dr. Tenn
excluded those hospitals from his candidate market, reasoning
that patients require insurers to provide them more local and
convenient hospital options. Second, Dr. Tenn identified
hospitals that had at least a two percent share of the
admissions from the same areas the parties' hospitals
drew from. Finally, he included only hospitals that drew from
both Advocate's and NorthShore's service areas.
criteria produced an eleven-hospital candidate market: the
six party hospitals and five other nearby hospitals, without
any academic medical centers. Dr. Tenn simulated the response
to a price increase by a hypothetical firm controlling those
eleven hospitals. He again found that the price increase
would be profitable. He therefore concluded that the area
around the eleven hospitals is a relevant geographic market.
The plaintiffs focused their arguments on the larger,
eleven-hospital market both in the district court and on
appeal; they and we refer to it as the North Shore Area.
how robust his results were, Dr. Tenn also tested another,
larger market, selected using less restrictive criteria. He
added hospitals that drew only one percent of admissions from
either NorthShore or Advocate's service areas,
indicating a fifteen-hospital market. That area included
Presence St. Francis, a hospital close to NorthShore's
Evanston hospital. Dr. Tenn concluded that the larger area
also passed the hypothetical monopolist test.
of his simulations, Dr. Tenn calculated the percentage of
patients at each of the North Shore Area hospitals who would
turn to each of the other available hospitals if their first
choice hospital were closed. For example, he determined that
if Advocate's Lutheran General Hospital closed, 9.3
percent of its patients would likely go to NorthShore's
Evanston Hospital instead. These measures are called
diversion ratios. Dr. Tenn calculated that for 48 percent of
patients in the North Shore Area, both their first and second
choice hospitals were inside the Commission's proposed
identified the relevant geographic market, Dr. Tenn used the
Herfindahl-Hirschman Index, a common method for assessing a
transaction's competitive effects, to evaluate the
merger's effects on the market's concentration. He
found that for both the eleven-hospital proposed market and
the fifteen-hospital market, the proposed Advocate-NorthShore
merger would result in a presumptively unlawful increase in
defendants called their own experts, including economist Dr.
Thomas McCarthy, who criticized the criteria Dr. Tenn used to
select his candidate market. Dr. McCarthy argued that
academic medical centers are substitutes for local hospitals
because patients seek the same treatments at both hospital
types. He also contended that the candidate market should
include competitors to either Advocate or NorthShore, not
just competitors to both. A competitor to either system, he
reasoned, would also compete with and constrain the merged
district court rejected Dr. Tenn's analysis, found that
plaintiffs had not shown a likelihood of success on the
merits, and denied an injunction. Advocate Health
Care, 2016 WL 3387163, at ""5. Its analysis
focused on Dr. Tenn's candidate-market criteria and
echoed Dr. McCarthy's criticisms of those criteria.
Id. at ""4-5. There was, the court said,
no economic basis for distinguishing between academic medical
centers and local hospitals and no reason to think a
competitor had to constrain both Advocate and NorthShore to
be in the geographic market. Id. The court also
criticized Dr. Tenn's assumption that patients generally
insist on access to local hospitals, calling the evidence on
that point "equivocal" and pointing to the 52
percent of patients whose second-choice hospitals were
outside the proposed market. Id. at *4 n.4. At
several points in the opinion, the court implied that Dr.
Tenn's analysis was circular, saying that he
"assume[d] the answer" to the geographic market
question. Id. at ""4-5.
review the district court's legal determinations de
novo, its factual findings for clear error, and its
ultimate decision for abuse of discretion. Federal Trade
Comm'n v. Venn State Hershey Medical Center, ___
F.3d ___, No. 16-2365, 2016 WL 5389289, at ""1-2
(3d Cir. Sept. 27, 2016) (reversing denial of injunction to
stop hospital merger); Abbott Laboratories v. Mead
Johnson & Co.,971 F.2d 6, 12-13 (7th Cir. 1992)
(describing standard of review for preliminary injunction