Eight years after Evanston Northwestern Healthcare Corp. (ENH) and Highland Park Hospital (Highland Park) consummated their merger, and more than six years from when the Federal Trade Commission (FTC) launched its Merger Litigation Task Force to retrospectively investigate hospital mergers, including that of ENH/Highland Park, the Commission has issued a Final Order and Opinion of the Commission on Remedy.
The ENH/Highland Park merger received clearance under the Hart-Scott-Rodino Act in 2000. In 2002, then-FTC Chairman Muris created a Merger Litigation Task Force to review a number of consummated hospital mergers that had been previously cleared by the Commission. The Task Force brought an Administrative Complaint to unwind the ENH/Highland Park merger in 2004. The case proceeded before an Administrative Law Judge (ALJ) who found that the merger violated Section 7 of the Clayton Act and ordered the divestiture of Highland Park. The Commission heard the case on appeal and upheld the ALJ’s finding of a Section 7 violation, but overturned the divestiture order. In an unusual decision, the Commission ruled that ordering a divestiture rather than enforcing a conduct remedy would be “much more difficult, with a greater risk of unforeseen costs and failure.” Opinion at 89. On April 28, 2008, the Commission announced the Final Order with respect to a conduct remedy.
The Commission ordered the following remedy, which has a sunset date 20 years from the date the Order became final:
- ENH and Highland Park must establish separate negotiating teams for the negotiation of contracts for all hospital services with managed care organizations (MCOs), including inpatient and outpatient. Government Medicare and Medicaid insurance programs are not included within the definition of payors for purposes of the Order.
- In cases in which the payor wishes to jointly contract with ENH and Highland Park, a payor can affirmatively opt out of separate negotiations and inform ENH of its desire to contract jointly for the services of the combined entity.
- ENH must maintain a separate contracting team to negotiate with payors who opt out of separate negotiations, and there must be firewalls between the joint negotiating team, the ENH negotiating team, and the Highland Park negotiating team.
- All contracting disputes with MCOs should go to mediation and then, if necessary, to binding arbitration before the American Arbitration Association (AAA). This dispute resolution provision protects against a reduction in competition in the context of a payor’s separate negotiations with ENH and Highland Park, which now exist under the same corporate entity.
- ENH is required to give prior notice to the Commission of any future hospital acquisitions in the Chicago area for the next 10 years.
The remedy imposed in this case diverges from the Commission’s usual and preferred approach to remedying Section 7 violations, which is typically to require divestiture of the assets acquired. The Commission stated that its rationale for imposing a conduct remedy in this case was its recognition of the fact that the merger had led to some important improvements at Highland Park in the form of a cardiac surgery program. The Commission expressed concern that a divestiture remedy would, for example, jeopardize the cardiac care at Highland Park, which would be a significant loss for the community.
The more typical approach to fixing a Section 7 violation was followed by the Commission in Chicago Bridge & Iron Co. N.V. v. FTC – another case in which the FTC challenged a merger after closing, but there the FTC ordered a divestiture of the acquired assets. To further distinguish the rationale for these different approaches to restoring competition post-closing, the Commission noted that in ENH/Highland Park the parties closed the transaction without notice that the Commission might take a second look, whereas in Chicago Bridge & Iron, the parties were aware of an ongoing FTC investigation and, in effect, closed the transaction knowing that there was a reasonable risk the merger could be challenged.
Going forward, merging parties should be aware that these cases illustrate how the Commission is willing to challenge consummated transactions in certain circumstances. Moreover, resorting to only a conduct remedy, the FTC emphasized the “unique circumstances” in the Evanston cases – that is, (1) the transaction led to significant improvements at the merged entity and (2) the parties were not on notice of a potential challenge upon closing the transaction. Absent such facts, the Commission is likely to rely on its preferred approach, which is to order a divestiture to provide a structural remedy to the competitive concerns raised by the acquisition.