By: Mark Taylor

January 2, 2006, Modern Healthcare

The Federal Trade Commission wasn't shooting in the dark when it alleged in its 2004 antitrust lawsuit against three-hospital Evanston (Ill.) Northwestern Healthcare that the Chicago North Shore system exploited its newly merged market power to extract price increases from managed-care payers.

In fact, a number of health insurance companies served as laser-guided scopes for the FTC as it took aim at one of the payers' biggest network service providers. Sources told Modern Healthcare that at least five local health plans and their trade association, the now-defunct Illinois Association of Health Plans, informally filed complaints with the FTC shortly after the 2000 merger between what was then two-hospital Evanston Northwestern Healthcare and Highland Park (Ill.) Hospital.

The health plans protested the large price increase demands from Evanston Northwestern and its alleged requirement that the system negotiate contracts collectively for its hospitals and physicians. Aetna, Cigna Corp., Health Care Service Corp. (Illinois' Blues plan), Humana and UnitedHealthcare of Illinois were among those grumbling to the FTC, alleging that Evanston Northwestern's promises to lower prices through merger efficiencies never materialized.

After hearing the complaints, the FTC began its own inquiry, out of which grew the agency's ``look-back review'' of previously consummated hospital mergers; the review was announced in May 2002. Though some managed-care plans offered evidence willingly, the FTC subpoenaed records from at least 10 payers to verify what it heard anecdotally.

In October 2005, FTC Administrative Law Judge Stephen McGuire ruled that the merger violated Section 7 of the Clayton Act, which prohibits mergers that might lessen competition (Oct. 24, 2005, p. 6). The decision, if upheld, would require ENH to divest Highland Park Hospital. ENH last month formally appealed McGuire's ruling to the full Federal Trade Commission, and the hospital system has said it will take the matter to federal court if necessary.

In a friend-of-the-court brief filed by the American Hospital Association with the FTC last month, the AHA supported ENH's appeal. In doing so, the nation's largest hospital trade group fingered payers as the antagonists in this healthcare antitrust drama. The AHA said the federal judge in the case ``abandoned the established framework for defining geographic markets in hospital merger cases'' and ``relied exclusively on unsupported and selective testimony from health insurance companies and an admittedly unscientific patient survey.''

``The FTC is not going to suddenly look at a map and decide to go after Evanston Northwestern,'' said David Dranove, a professor of healthcare management at Northwestern University, who was hired by local payers to investigate the Evanston Northwestern pricing allegations. ``The FTC has heard from a number of interested parties in a number of markets about alleged abuse of market power. However, that agency conducts its own independent investigation and does not rely on the claims of third parties.'' Dranove declined to comment further about the role of managed-care payers in the FTC case, citing confidentiality agreements.

Michael Cowie, former assistant director of the FTC's Bureau of Competition until 2004, said the agency places great importance on the views of payers. Cowie, now in private practice with the law firm Howrey, said when analyzing the conduct of healthcare providers, health insurers, not consumers, are the principal customers. ``So those views carry significant weight,'' said Cowie, who recalled that many large regional and national payers publicly complained about hospital rate increases after mergers in the early 2000s.

``Merger investigations are often precipitated by customer complaints,'' he said.

The role of local payers in first alerting the FTC and later in providing evidence for the agency's case against the system was no secret; after subpoenaing records from payers, the FTC also compelled managed-care executives to testify in the case, sometimes behind closed doors to avoid publicly releasing proprietary information.

The Illinois Blues plan challenged the legality of the Evanston Northwestern price hikes and eventually negotiated a new contract for far less than the system and its physicians originally demanded. The Blues plan did not testify at the trial.

But trial documents indicated that other health plans inked less-favorable contracts with much higher increases and willingly negotiated with Evanston Northwestern both on behalf of physicians and the three hospitals collectively.

The FTC alleged in its complaint that in 2000, Evanston Northwestern raised prices to UnitedHealthcare's HMO by 52% at its Evanston facility and Glenbrook (Ill.) Hospital and 38% at Highland Park and raised its rates to UnitedHealthcare's PPO by 190% for Evanston and Glenbrook and 20% for Highland Park. The agency alleged that the system raised prices to Humana in 2000 by nearly 60%; Aetna by 15%; and Cigna's HMO by 15% to 20%, and 30% to its PPO. Private Healthcare Systems saw a 40% increase by the Evanston and Glenbrook hospitals.

``We were cognizant during this process of the need not to burn any bridges and maintain professional ties,'' Aetna spokeswoman Wendy Morphew said.

UnitedHealthcare of Illinois spokesman Greg Thompson said his company responded to an inquiry by the FTC, ``received subpoenas and cooperated with the government to fulfill our legal obligations.'' Thompson said he did not know of any damage done to the plan's relationship to ENH.

Humana spokesman Mark Mathis said the FTC's interest in healthcare competition benefits the system and the patients who use it.

``Humana believes that an active FTC helps ensure that all the players in the healthcare marketplace operate in a fair and competitive manner,'' Mathis said in a statement.

At deadline, officials at the Illinois Blues plan and Cigna could not be reached for comment.

Susan Pisano, a spokeswoman for America's Health Insurance Plans, a trade and lobbying association for health insurers, said the antitrust laws are in effect not to protect health plans or hospitals but to protect consumers.

``Our members at various times have testified to the antitrust agencies to encourage them to look at prospective and consummated mergers and whether they meet the test of benefiting consumers by promoting efficiency and affordability in healthcare markets,'' she said. ``You have to look at how what you do affects your customers and work with others in healthcare system, even when you do not agree with their approaches.''

For many years courts used patient choice and patient flow to define geographic markets in hospital merger analysis. However, after the FTC and Justice Department's Antitrust Division suffered a string of court losses in every hospital merger case since 1991, then-FTC Chairman Timothy Muris sought to determine how healthcare markets had changed and whether previous merger analyses still applied. The FTC found that because healthcare insurance coverage had changed since the 1970s from indemnity to managed care, few patients actually chose their hospitals directly. Unlike indemnity insurers, managed-care plans engage in selective contracting to leverage lower hospital rates. FTC attorney Thomas Brock said when hospitals merge now, it's necessary to see whether the merger affects the managed-care plan's ability to contract with hospitals, rather than analyzing whether the merger affects patient choice in hospitals.

Brock said healthcare purchases differ from transactions for products and services in other industries. ``When a consumer purchases a loaf of bread, the individual picks it out, pays for it and consumes it,'' said Brock, an FTC co-counsel in the Evanston Northwestern trial. ``However, with healthcare, the doctor picks the services, the patient consumes the services, and the insurer contracts to pay for the services. The old cases looked at hospitals as competing for individual patients. The Evanston decision simply recognizes that with managed care and selective contracting, hospitals compete for the insurer's business.''

Ogan Gurel, a Chicago physician and president of Aesis Research Group, a healthcare consulting firm, said there's an ebb and flow to the power relationship between hospitals and payers that saw payers dominating in the late '90s and hospitals rising in ascendancy in the early part of this decade.

``There's a kind of gentlemen's agreement that both parties recognize, knowing that the pendulum will swing back. Like a husband and wife who jointly operate a business, they know they have to live together and that their interests interlock. I don't think this lawsuit will have a long-term adversarial effect on their relationship,'' Gurel said. ``Ultimately, they need to work it out and get along.''

The federal judge in the case "abandoned the established framework for defining geographic markets in hospital merger cases" and "relied exclusively on unsupported and selective testimony from health insurance companies and an admittedly unscientific patient survey."

--The American Hospital Association

"Humana believes that an active FTC helps ensure that all the players in the healthcare marketplace operate in a fair and competitive manner."

--Humana