Evanston–A Departure from Structural Remedies
Evanston Northwestern Healthcare Corporation, which owned Evanston Hospital and Glenbrook Hospital, merged with Highland Park Hospital in 2000. All three hospitals were located in Cook County, Illinois. The parties to this merger filed a pre-merger notification pursuant to the Hart-Scott-Rodino Act pre-merger review process. The merger was completed without challenge by any governmental agency or private party.
In 2002, the Federal Trade Commission (FTC) embarked on a review of consummated hospital mergers, presumably sparked by a long line of failed attempts by the FTC and Department of Justice (DOJ) to challenge hospital mergers before completion. Clearly, evidence of actual anticompetitive effects would be easier to demonstrate post-merger. The Evanston merger was among those studied. Four years after the transaction, the FTC filed a complaint based primarily on the allegation that the merger had substantially lessened competition for acute care, in-patient hospital services sold to private payors in the area surrounding the hospitals’ locations in violation of Section 7 of the Clayton Act. Evanston’s primary defense was that the significant efficiencies and patient care quality improvements that had been made possible by the merger out-weighed any alleged anticompetitive effects.
After a lengthy trial, the Administrative Law Judge (ALJ) found that the merger had indeed substantially lessened competition, resulting in higher prices in the product and geographic markets defined by the FTC. The ALJ further found that the efficiencies and quality improvements claimed by Evanston did not justify the cost increases post-merger. The remedy ordered was full divestiture of Highland Park Hospital from the Evanston system, a structural remedy typically favored in Section 7 cases. United States v E. I. duPont deNemours and Company, 366 U.S. 316, 329 (1961). Divestiture, a “structural” remedy, is preferred in these cases because it is “the most appropriate means for restoring competition lost as a consequence of a merger or acquisition.” In Re: Chicago Bridge and Iron Company, No. 9300, 2005 W.L. 120878, at 93 (FTC Jan. 6, 2005). Divestiture, however, is not the only remedy available to the FTC, DOJ and courts. The trier of fact can invoke conduct remedies, award monetary damages or in cases prosecuted by the DOJ, pronounce criminal remedies.
On review, the FTC affirmed the ALJ’s finding that Evantson’s acquisition of Highland Park Hospital violated Section 7 of the Clayton Act but took the opportunity to fashion a different remedy in light of the unusual nature of the case. The Commission chose a “conduct” remedy instead of divestiture, primarily because of the length of time that had elapsed between the merger and the conclusion of the litigation (7 years) and the improvements made to Highland Park Hospital that probably would not survive divestiture (a cardiac program and state-of-the-art medical records system). The remedy, in part, ordered that all payors negotiate a separate contract for Evanston and Glenbrook Hospitals and a separate contract for Highland Park Hospital. Separate negotiating teams had to be formed to deal with payors competitively and a “firewall” mechanism had to be implemented to prohibit the negotiating teams from sharing information. On April 28, 2008, the Commission basically adopted Evanston’s proposed final order incorporating separate payor negotiating teams for the hospitals, restrictions on requiring the same terms or prices for the hospital’s separate contracts and the maintenance of a firewall mechanism to prevent the sharing of contracting information.
Does the Commission’s decision in Evanston signal the willingness to apply more creative remedies than divestiture to merger cases in the future? Maybe or maybe not. At the conclusion of the Evanston opinion, the FTC warns:
Nor will our reasoning here necessarily apply to consideration of the appropriate remedy in a future challenge to a consummated merger, including a consummated hospital merger. Divestiture is the preferred remedy for challenges to unlawful mergers, regardless of whether the challenge occurs before or after consummation. Thus, where it is relatively clear that the unwinding of a hospital merger would be unlikely to involve substantial costs, all else being equal, the Commission likely would select divestiture as the remedy.
Only time will tell if the Evanston remedy achieved the desired effect and whether, given the right set of circumstances, similar conduct remedies will again take the place of divestiture.
Jeanne C. Comeaux is a partner in the Baton Rouge office of Breazeale, Sachse, Wilson, L.L.P. where she practices commercial litigation and antitrust law.