Seventh Circuit blocks Advocate, NorthShore merger, says new hospital system could raise prices

A federal appeals court has put a proposed merger of Advocate and NorthShore University health systems back on hold, saying a federal judge who earlier this summer had denied government regulators’ requests for an injunction had not properly considered how large and influential the proposed new health system could be on raising health care prices in the region the new system would serve.

On Monday, Oct. 31, a three-judge panel of the U.S. Seventh Circuit Court of Appeals reversed the decision of U.S. District Judge Jorge Alonso to deny the injunction, sending the case back to him with an order to reconsider, in light of the appeals’ court’s findings, the request from the Federal Trade Commission and Illinois Attorney General Lisa Madigan to block the proposed merger.

The opinion was authored by Seventh Circuit Chief Judge Diane P. Wood, with judges William J. Bauer and David F. Hamilton concurring.

The case had landed at the Seventh Circuit in June, after Alonso denied the injunction request.

The FTC and Madigan had challenged the merger in 2015, a few months after Downers Grove-based Advocate, Illinois’ largest health system company, and Evanston-based NorthShore announced a deal to merge their two organizations. The merger would have created a large group operating 17 hospitals in and around Chicago and elsewhere in Illinois.

The FTC and Madigan had argued the deal would then leave patients – and particularly those in Chicago’s north suburbs – with few competitive choices for their health care, allowing the new Advocate/NorthShore system to raise prices in the region.

Advocate and NorthShore countered with assertions the FTC had erred in its analysis of the region’s health care market, particularly in minimizing the competition Advocate and NorthShore face against the rapidly expanding Northwestern Medicine system. That group has in recent years merged with the former Cadence Health in west suburban DuPage and Kane counties, and with the former KishHealth in DeKalb County. Northwestern has also announced intent to merge with Centegra Health System in northwest suburban McHenry County.

Advocate and NorthShore also said the regulators had failed to take into account the price-fixing leverage held by large insurers, such as Blue Cross Blue Shield.

Alonso sided with the arguments presented by the hospital groups.

But on appeal, the Seventh Circuit judges said Alonso’s reasoning was flawed, discounting far too much the ability of the new proposed health system to set prices for services in the region.

While the hospital operators had emphasized the willingness of health care consumers to travel to receive care, the appeals judges said evidence presented by regulators and their expert witness, identified as economist Steven Tenn, in hearings before Alonso showed the opposite.

They noted market data showing “73 percent of patients living in plaintiffs’ proposed market receive hospital care there” and “80 percent of those patients drive less than 20 minutes or 15 miles to their chosen hospital.”

“When it came to hospital care, the evidence was not equivocal on Dr. Tenn’s central point,” the judges wrote. “As one insurance executive put it: ‘Typically [patients] seek [hospital] care in their own communities.’ The evidence on that point is strong, not equivocal.”

The Seventh Circuit judges also said Alonso had not strongly enough considered the ability of the new health system to influence health insurers.

They noted “no evidence” had been presented to show it would be possible to market a health insurance product to employers in the region without offering access to Advocate and NorthShore hospitals.

And to see what might happen to prices following the merger, the appeals judges pointed to the price increases that followed the merger of three hospitals that created the NorthShore system about 15 years ago. A group of insurers and patients continue to press a class action lawsuit over that merger and its resulting price increases.

Alonso’s decision, they said, suffered from “a critical flaw,” focusing “on the patients who leave a proposed market instead of on hospitals’ market power over the patients who remain, which means that the hospitals have 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 geographic market question asks in essence, how many hospitals can insurers convince most customers to drive past to save a few percent on their health insurance premiums?” the appeals judges wrote.  “We should not be surprised if that number is very small. Plaintiffs have made a strong case that it is.”