Federal Trade Commission v. Advocate Health Care Network
2016 U.S. App. LEXIS 19535
| 7th Cir. | 2016Background
- Advocate Health Care Network and NorthShore University HealthSystem proposed a horizontal merger of hospitals serving Chicago’s northern suburbs; FTC and Illinois sued to enjoin the merger under Section 7 of the Clayton Act.
- Plaintiffs relied on the hypothetical monopolist (SSNIP) test; FTC economist Dr. Steven Tenn identified an eleven-hospital "North Shore Area" (party hospitals + five nearby non-academic hospitals) that would pass the test and a larger fifteen-hospital area that also passed. He excluded academic medical centers as "destination hospitals."
- Dr. Tenn used diversion ratios and HHI calculations and concluded the merger would produce a presumptively unlawful increase in market concentration. Insurer witnesses testified insurers could not market employer plans in the area without including either Advocate or NorthShore hospitals. No employer networks had been successfully sold excluding both systems.
- The district court denied a preliminary injunction, criticizing Dr. Tenn’s candidate market selection (calling it circular), rejecting the distinction between academic medical centers and community hospitals, and finding evidence of patient preference for local hospitals "equivocal." The court relied in part on patient diversion measures.
- The Seventh Circuit reversed, holding the district court committed clear factual errors and legal error in its application of the hypothetical monopolist test, misstated the evidence on patient preferences and insurers’ role, accepted a "silent majority" style fallacy, and remanded with the injunction to remain in place pending reconsideration.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper geographic market definition for inpatient general acute-care hospital services | The North Shore Area (11 hospitals) passes the hypothetical monopolist (SSNIP) test; academic medical centers are distinct and should be excluded; merger would raise HHI to presumptively unlawful levels | Candidate market is too narrow; academic medical centers are substitutes; market should include hospitals that compete with either party; diversion ratios show many patients would go outside the proposed market | Reversed district court: hypothetical monopolist test is iterative (not circular); plaintiffs’ 11‑hospital market is supported by evidence; district court erred by downplaying insurer role and patient preference for local hospitals |
| Role of academic medical centers in market definition | Academic medical centers are "destination" hospitals with different demand; they can be excluded from a local market candidate | Academic medical centers are substitutes and should be included in the market | Court found record supports distinguishing academic medical centers from community hospitals; district court erred in rejecting that distinction |
| Relevance of patient diversion ratios and travel patterns | Diversion ratios and travel data support a market where many patients prefer nearby hospitals; insurers, not individual patients, are the critical buyers when assessing network marketability | Diversion ratios show a sizable share of patients would go outside the candidate market, undermining the market definition; patient flow data show broader market | Court held diversion ratios focus on patient substitution and cannot alone defeat plaintiffs’ showing because insurers’ bargaining and need to offer marketable employer networks matter; district court overstated diversion ratios’ weight |
| Application of Elzinga‑Hogarty / “silent majority” concerns | Relying solely on patient flow (Elzinga‑Hogarty) can overbroadly define markets; a silent majority of patients prefer local care and limit competitive constraints | Patient flows show many patients travel, so the proposed market is too narrow and not consistent with commercial realities | Court rejected district court’s embrace of patient-flow over SSNIP: silent‑majority issue can permit profitable price increases; iterative SSNIP approach is controlling |
Key Cases Cited
- Hawaii v. Standard Oil Co. of California, 405 U.S. 251 (U.S. 1972) (discussing preliminary relief while agency pursues administrative process)
- United States v. Philadelphia National Bank, 374 U.S. 321 (U.S. 1963) (defining geographic market as area where merger’s competitive effect is direct and immediate)
- Brown Shoe Co. v. United States, 370 U.S. 294 (U.S. 1962) (market definition requires product and geographic market analysis and must reflect commercial realities)
- E.I. du Pont de Nemours & Co. v. [opposite party], 353 U.S. 586 (U.S. 1957) (pragmatic approach to market definition; area of effective competition)
- Saint Alphonsus Medical Center-Nampa Inc. v. Saint Luke’s Health System, Ltd., 778 F.3d 775 (9th Cir. 2015) (geographic market analysis focuses on likely insurer response and SSNIP testing)
- Rockford Memorial Corp. v. [opposite party], 898 F.2d 1278 (7th Cir. 1990) (recognizing local nature of hospital markets)
- AD/SAT, a Division of Skylight, Inc. v. Associated Press, 181 F.3d 216 (2d Cir. 1999) (market includes sellers with ability to deprive each other of significant business)
- West Allis Memorial Hospital, Inc. v. Bowen, 852 F.2d 251 (7th Cir. 1988) (standard for likelihood of success on the merits for preliminary injunction in Section 7 suits)