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In October federal regulators ordered a corporation in northern Illinois to sell off a hospital purchased in 2000 � even though it had previously won approval for the acquisition from antitrust agencies. The order was issued by an administrative law judge of the Federal Trade Commission. The FTC brought the case against Evanston Northwestern Healthcare Corporation after determining that the purchase of Highland Park Hospital resulted in increased costs to consumers and “substantially lessened competition” in the local market ["Unscrambling the Eggs," March 2005]. While the divestiture of a single hospital � purchased by Evanston for $200 million � isn’t likely to send shock waves through the health care industry, a government-ordered sale is significant. It shows antitrust regulators’ willingness to unwind previously approved deals if harm to consumers is demonstrated later. “Although attacking consummated mergers should not be the norm, given the status of the hospital industry and the clear evidence of anticompetitive price increases, I thought the challenge was necessary,” says former FTC chairman Timothy Muris, who was heading the agency when the complaint was filed. FTC economists argued that as a result of eliminating Highland Park as a competitor, Evanston was able to increase its prices 11 � 18 percent above what the market otherwise would have permitted. Administrative law judge Stephen McGuire also noted that even Evanston’s own experts calculated that its postmerger price increases were 9 � 10 percent higher than what it would have been able to demand without the merger. Prices charged by a merged entity do not have to exceed those of its competitors to violate the nation’s antitrust laws. In this case, a 5 percent increase in prices is sufficient to show market power and increased costs to consumers, according to McGuire. Furthermore, the FTC proved that the parties sought to merge in order to reduce competition. “The evidence further establishes that Evanston wanted to merge with Highland Park in no small part to eliminate a competitor,” the opinion states. “The merger was seen by Evanston as an opportunity to join forces and grow together rather than compete with each other.” Muris says the decision proved the government is still in the business of ensuring hospital competition. “When we issued the complaint, I thought the evidence would support finding that the merger was anticompetitive and divestiture was appropriate,” says Muris, now a professor at George Mason University School of Law. Over the past decade, the FTC and its sister antitrust agency, the U.S. Department of Justice’s antitrust division, have brought and lost seven cases against hospital mergers. While he was still chairman, Muris said it was important to bring a strong case in the industry to clarify and correct some of the shortcomings � largely economic analysis � that were the Achilles’ heel of these cases. The previous unsuccessful hospital cases were brought in federal courts. It remains an open question whether the FTC has addressed the legal problems sufficiently to win an eventual appeal at the federal level. At the moment, the matter remains with the FTC. If Evanston Northwestern Healthcare appeals, the case will be reviewed by the agency commissioners themselves. If they affirm McGuire’s ruling, only then would the case be appealed to a federal appeals court. An order to unwind a merger that went through antitrust regulators’ Hart-Scott-Rodino Act review is sure to set off alarm bells across American industry. But Muris suggests that not all consummated mergers are susceptible to subsequent divestiture requirements. This case, he says, was a matter that clearly demonstrated consumer harm in the health care industry, one of the largest sectors of the economy. McGuire’s order states that Highland Park Hospital must be sold within six months, though that will be delayed if the case is appealed. The divestiture is required to restore competition, the order states, because the FTC’s evidence “establishes that ENH exercised its enhanced postmerger market power and obtained postmerger price increases substantially above its premerger prices and significantly larger than price increases obtained by other comparison hospitals.” Evanston Northwestern Healthcare argued that the price increases that occurred after the merger were “a result of its learning about demand for its services and that its premerger prices at Evanston were, on average, below market.” McGuire, however, wrote that “the court finds these arguments without merit.” A version of this story originally appeared in The Deal, a sibling publication of Corporate Counsel.

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