case that boils down to a simple question can insurance companies who are the relevant buyers here successfully market a plan that includes advocate north shore and other local hospitals in the north shore area or would they be willing to pay a small but significant price increase to keep those hospitals in their market the evidence i stop you right there because i think one of the central issues in this case is who are the buyers and you said as certainly your breed has taken the position that the buyers are the insurance companies and so i'd like you to elaborate a little bit on that because there's evidence about patient diversion and so forth and you can talk a little bit about how that fits in with your theory sure what the buyers of the insurance companies are the direct purchasers of hospital services and in doing the economic analysis of the markets  focusing on are you that's been the key question here is really whether an outside competitor competitor outside the market can constrain prices inside the market and you have to look to the insurance companies for that question because the patien s are not price sensitive because they paid the same amount for any in in network hospital so if that hospital is a raise it's prices that won't directly marketing products to probably employers in the primarily slayer's primarily employers i know their health changes and so on but primarily employers and so employers in turn at least once a year have to have an open season and they want to see if their employees are going to elect a particular product whether it's blue choice or whether it's an h m o or whether it's else's you know united health product and it's not enough people like the product then the employer doesn't want to buy the product from the insurance company and the insurance company will somehow filter through those preferences is that how it works yeah i think that's i think that's basically correct the insurance company wants to market plans that will be attractive to employers the employers want plans that will that well meet the needs of their employees and so your position is if there's a plan that excludes all of the hospitals in this area that you've just signed the north shore area call it that employers would tell the insurance companies we don't want that plan and the insurance companies would say you know gee we can't sell this product that's well i think the insurance companies would say would say is you would rather be willing to we rather pay a price increase would rather pay a small price increase and then try to sell a plan that doesn't include any of those hospitals because it's because people because people living in the in the employers won't want that plan because it doesn't meet the needs of their employees and that's because the employees be the patients in this area as in many areas have a strong preference for local care and again there's  overwhelming evidence of that and i let me start with the under about an expert testimony of dr ten which showed that seventy three percent of patients live in the north shore every receive care they are three quarters of them travel less than twenty minutes to get to a hospital and of course if you look at his diversion or a sheet of the diversion ratios he calculated which up which are not dispute roughly half the patients in the north shore area if they their first choice hospital wasn't available they would go to a second to another hospital a hospital with a so if you look at it so you do i mean the district judge was worried that there were other hospitals quite nearby to which consumers could also turn so explain how that gets factored into the hypothetical monopolist small but in the sniff test right well the district court i think really focused on the wrong question and the the wrong by years and the district court i mean its analysis really started and stopped by saying that  look there are some nearby hospitals and and the diversion ratios seem to show that you know some people are willing to go to these downtown hospitals northwestern  another hospital will somehow constrain the prices for insurers and again if it's that payer problem it focuses on on the is quite focused on patients preferences rather than on the key question which is what is and what is a reasonable substitute from an insurer standpoint and if you look at the evidence on that point the evidence overwhelmingly shows and this comes from both insurers who support the merger and from assurance who oppose the merger that they don't view downtown hospitals downtown hospitals like northwestern memorial as as substitutes for local hospitals they couldn't market a plan that only included down town hospitals you know that that has to be the key point here and now says if if an insurance company put together a package that had none of the hospitals in the north shore area but that had northwestern memorial in u i university of chicago and russian's mother very fine institutions but people wouldn't want that because they would say your your your expert i guess testified that people would not accept that our expert and also i think the insurers themselves that's why the people wouldn't people wouldn't want that but that's exactly right a plan like that would mean that people living in highland park and lake forest and waukegan if they need to go to the hospital they'd be forced to drive an hour down perspective when you look at if you had a group of of hospitals that were under common control if you had that if you had that group there the insurance question is what i rather try and market a network that exclude all of these local hospitals or am i willing to pay a small but significant price increase to keep those hospital in network now your turn on and so excuse me for just going say your opponent's argument shows him to have a question that you did not show that this small but significant increase in price would stick for the right length of time that two years or four more that that would say that's a durable price increases not just an attempt to raise prices that just falls back right away which we wouldn't care i'm not sure that they actually make that argument i think they argue that the last point in their brief was that you didn't prove profitability didn't prove profitability and i think the i mean that's that's the argument that i thought they were making and the answer is that dr tens model certainly took profitability into account one of the key inputs that he used was the cost margins showed that in fact at the levels of interim market diversion that you see in the north shore area a price increase would be profitable and it would be profitable you can expect the hospitals to take it is analysis i mean this is skipping ahead to competitive but that's a bit but if you if he's analysis showed that across the six party hospitals you would expect to see an eight percent price increase roughly going to about forty five forty five million dollars per year and he testified that's not that's not forty five million dollars that's forty five million dollars a year going forward indefinitely and this is not all hypothetical i think it's very helpful to a court to look at the beat evanston case decided by the f t c which involves these very same hospitals evanston is what's now known as north shore and that case involved the merger of three hospitals to create the core of what is now north shore and in that case the commission didn't bring that didn't bring its case in the actual seven years after the merger was the merger consummated and so we know what happened there and that the fact the matter is that prices did go up significantly not just in the fact that all these same hospitals all the same downtown hospitals that the defendants say constrained prices were there ten years ago just not just in the fact that other hospitals and the other local hospitals were there so it's not at all theoretical or conjectural that a merger of these two large hospital systems which really dominate the north shore area would have would significantly increase their bargaining leverage and lead to higher prices like to ask you several questions if i could mister often first about some practicalities and i'd like to hear from the defense about this as well which is about the time pressures   our decision via sleep mergers or are fragile things and what's your sense of the time there's no time pressure from from our perspective i'm not aware of so i'm not aware that any sort of drop dead date for this merger or any reason why if it makes economic sense now it would make economic sense a month from now six months from now obviously i know the defendants will face want to move ahead it will be six months but through their throughout the transcripts there are a number of references to slides where do we find those in the record i'm not sure the slides are all in the record because the slides the slides i'm not  i think you're thinking of that there probably were demonstrative exhibits used at trial which were not admitted as exhibits and therefore they're not part of the record they are so unlike which they are likely think that it's unfortunate because testimony becomes incoherent  without them and i hope well i'll ask court staff to follow up and try to make sure that we have everything that was at least actually admitted in wheels or to us and we can certainly make that available to the court if the court want to see it i'm sure both both sides can do that but i don't believe it's in the record now i would have to tell you when you got cooperation from both sides on that i'd like to follow up on a couple of just the specific issues that have been debated in the by the parties first of all present st francis why is excluded and why does it nobody seems to think it actually matters but it looks good winds of making dr ten's marketed look like it's gerrymandered well it doesn't matter and i don't think although it's close to north shore hospitals and competes with them it doesn't really compete significantly with advocate right so you're here for their particular point which prodded the district judge right deal but i it's the only one that's in question question right here and that's really the only one the answer is that if you if you were to relax the third criterion dr ten testified that that would add four additional local hospitals to the market one of which is present st francis giving you a fifteen hospital market but as he said even if he even if that's viewed as the proper market the market shares hit levels would at at least one location of the merging parties and in this case presence in france it doesn't constrain doesn't wish to fully compete with advocate and doesn't significantly constrain advocate uniform price increase across the system for people who want to make sure they get the out of hospitals for insurers who want to make sure they have it the out of hospitals in the network so that's why dr ten did it it's certainly a reasonable assumption consistent with that with the merger guidelines but again it doesn't really matter again it's important to recognize there's not necessarily one relevant market here you know there could be any nuclear look yes we've we've said there's always room to quibble around the edges but i'll just tell you that just the optics of excluding presidents are extraordinarily bad for that particular map on it like to ask you about the diversion ratios in just see if i understand how they fit into this you know the the implicit assumption seems to be that it is a commercial reality that an insurer is not going to be able to convince people to drive past their first choice and their second choice to their third choice hospital is that about right i think i think that's about right i mean there's no there isn't data on third choices but the assumption is that insurers you know diversion ratio tell you followers are are actually a little less than half right before your eight percent and ten has responded if i understand correctly well as long as it's a so quote substantial fraction then you've got potential for market power here and he obviously has done the analysis and concluded that there would be market power within the celeb and hospital market but i ask my question is how substantial is how big is substantial in that approach  what else does he need to know how do we quantify that that sounds like a very fuzzy concept to me it's not fuzzy but i think it's it's mathematically somewhat complicated i mean dr ten used a model which which you get in puts both the diversion ratios focusing on the interim market diversion ratios and the price cost margins of the hospitals so you know holding if you hold all the variables constant except for the diversion ratios you could determine what the threshold is for you know for that thing but of course you change those very few change some of those variables the number could change i don't think dr ten he didn't give a range of of of version ratios and cost margins by that monopolist could impose a snip one other question that i wanted to to get to if i could is to do with the this concept that well your case is built upon the the bargaining model right that the prices here are going to be set by insurers bargaining with hospital systems right and so  there's an argument that systems are going to negotiate system wide this is right or is there evidence in chicago of price discrimination by hospitals within the same system  land area or at least good chunks of it how would they be able to extract and awfully profits from the north shore area hospitals alone right well i think that you know this is goes to the way that brown shoe  compete you know that they do business elsewhere but what philadelphia national bank says is that the you know the question for geographic market determination is not where the parties do business or even where they compete but where within the area of competitive overlander stamp that my point though is that you look we're dealing in the hospital merger area we're dealing with extra layers of complexity because of the so called two stage models two stages of competition position but i don't quite understand how any how advocate extracts monopoly profits through bargaining if it has to set prices throughout its hospital system because even though it h prices throughout its hospital system one factor that goes into those prices is how much insurers need that are going to need to merge system or you know and i construct i put a coming up of the system and you're you're really i think maybe getting into competitive effects rather than the market definition question but they're not that different are they there there's close similarity between them but i think where or focus on them that the fact th is though that emerged entity would have more leverage over insurers because of its ability because insurers need it for this area and the fact that insurers may not need may not have the s you know the seem need for advocate in other areas of the state doesn't affect the fact they do have the need for here that they know there might be a monopoly in other parts of the state or not or in the wrong work doesn't mean that that that the you good morning and may it please the court the argument if you just heard turns very much i think on this idea that insurers require access to the advocate in north shore hospital in order to market a plan but that's a premise that the district court in this case specifically held that the f t c did not approve as a matter of fact i don't sure the district court was consistent in its reasoning i mean at one point it accepts the product to market that the parties are talking about but then it slips away from that since the district court says hospitals compete to be included in insurers network that's fine but then it's segues over to patient movements about halfway through the opinion and i'm concerned that it it doesn't follow either model through actually actually page five of the relevant product market in patient general acute care services sold to commercial payers and their insured members so how do you get that the district court wasn't looking at the insurance dimension here you know the district court did also look at the insurance to mention it and there there is a there is not this is a kind of a false premise that the f t c is argument rests on that there's this huge difference between what insurers care about what patients care about their their piece in terms of who's buyer i mean i was concerned that the district court actually didn't understand the hypothetical monopolists test well what they let me start with the point a moment ago which is the district court understood and said in his opinion that customer preferences patient preferences drive ensure prussian preferences and that's what led the f t c zone expert as well as our expert to rely heavily on diversion ration not as the only input but as a very significant input to the analysis that was dr tends cit primary input was diversion ratios which do depend on patient market and i was going to say you guys are kind of the glass is half full and there the glass is half empty because  to view is that it's an insurer is trying to market a product that half of customers will flee from the insurer would rather pay a little bit more for the hospital system then lose half of the customers whereas you say oh half of the people can go down to receive chicago or northwestern or whatever so doesn't that show that there's competition and i think you're mixing apples and oranges there well actually it's not half it's less than half for the f t c and more than simply forty eight percent interest but but it should be clear that it's the diversion ratios that undercut the very testimony that they're relying on i think the argument you just heard rests almost completely on this idea that insurers can't market a plan that doesn't include these hospitals so why do you suppose well go ahead so what evidence is there over the commercially successful group policy in the north sure that doesn't  well i would use choice is marketed to individuals is there anything else well blue choice is also marketed to employers and how many have bought not it is primarily an individual product and it's not tens or it's not much so but what commercial is there without those hospitals well that's that's not the test this has been a very commercially successful product please answer judge temperance question is there any evidence in the record there is commercial success with the product for blue cross overall is it commercially successful in the it doesn't all the way it by the way doesn't include northwestern memorial either so it's not a perfect comparison this is a product that doesn't include either north shore or north the north western hospitals which would include hospitals in this region is sold in to employees in groups in that narrow swath of the market now what i can tell you though is that that does not make it unsticks suspect from blue cross this perspective and again the f t c is point here is that this narrow employer market is so critical to blue cross over all that blue cross would pay a snip in order to keep these hospitals in the market and there is no evidence of that in the record there is no evidence that blue cross has product is not successful front for blue cross which competes far beyond that narrow margin in the market and what we care about according the f t c what we care about is blue cross bargaining power but across to that logic is long as blue cross you know make money in illinois a whole we could just have one hospital in chicago because blue cross be making a lot of money and they could go down you know somebody who down to springfield or carbondale or whatever i mean blue cross  find that there would be too many constraints on competition within that market from out of market things you say that's not a product market that's not a good geographic market jever one you're testing and so you expand out and that's what the commission expert did here they started with a small market added some hospitals to get up to the eleven hospital mark and i suppose that the other for the judge hamilton was talking about and the  suggests that insurers do want to serve the north shore of chicago well first of all that the f t c has own version of the hypothetical monopolist test doesn't hold that once you calculate a snap you're done you need to find out who is the second best what is really the closest substitute for product a they're an example six product c is a closer substitute for product and and so you would include products c in the relevant market  and i don't see that you have any evidence that there is a product c here what we do have evidence that north north western northwestern memorial is the closest substitute for north shore it is the first or second best substitute for five out of the six hospitals in this market and under example six in fact the f t c concedes here that once it concluded there was a lot of interim market diversion it didn't even look at whether there were close service substitutes outside the market also didn't need to i mean no they said when applying this you've got to see if there's a second product and i don't see i mean you're kind of assuming that if if you offered an insurance product that did not have any hospitals in the north shore area but that said you can go to northwestern every day of the week that insurers and really through filtering down employers employees would find  just as an attractive product they would they would accept that as a substitute for a product that let them to go to the north shore hospitals and the i don't see where the evidence exists that that's the case yet you want them to go to both and that's a fallacy no idea at the evidence exists and that and it was presented in this case and that's why ultimately this is a case about and about a district court reviewing the assumptions of an expert if you look at the death if you look at the evidence including evidence cited attach the reply brief supplemental appendix fifteen at night considered northwestern memorial and north shore to be both candidates to include to fill this geographic we do not the question was is an advocate only product this is a reply supplemental appendix fifteen is an advocate only product marketable beyond the individual consumer segment that witness said  no we do not believe it's markable beyond the individual segment the geographic brett this not is not great enough so in order to build a geographic gap this it's this next passage that i'm relying on so in order to fill that geographic wrap to make the product about marketability and it might be helpful could i enter if i don't you know in the room sure it might be helpful for me to illustrate why it is exactly that the judge held that diversion ratios undermined this very tired of testimony we're talking about if i could direct your attention to page eighty five of the opening brief this is testimony from cigna which is one of the cigna had a witness who to justified that north shore and advocate were essential to a marketable product for you i'm on page eighty five of the norton actually believe that this is so critical here's one explanation on a five she says the primary alternative to north shore highland park would be advocate condo but if you look at the diversion ratios which are presented in table nine they're attached to our opposition brief and these are the f t c zone next actually the primary substitute the primary alternative for north shore highland park is north western lake forest and the and its closely followed by northwestern memorial northwestern lake forest has a diversion ratio of eighteen point five from north to highland park and northwestern memorial has a diversion ratio seventeen point seven from north shore highland park conn dell which ms norton believed was the primary alternative to north for highland park has only eleven point four percent diversion ratio so and similarly if you look further up in that page she talks about present st francis and says present st francis is in evanston but typically what we've heard from our customers is that lutheran general is the preferred alternative to north shore evanston hospital if you look at table design of that matters under the merger guidelines at least i think you're making it a don't use the merger guidelines approach oh no not at all you're on a they do say groups of products may satisfy the hypothetical monopol host without including the full range of substitutes from which consumers choose you just got his make sure glutes enough they're going to be some substitutes that are not in there but the reason i was relying on that evidence for a really specific reason i judge which is the f t c is argument in this case depends almost completely on a factual premise about how insurers need advocate in north shore not everyone not anyone i have actually interesting evidence to back that up such as what's happened to prices in the past when mergers in this area occurred well first of all the this is a standard of review issued this is a clearly erroneous standard and what the do what i just tell if the district judge asks the wrong question correct mixes up its analytical structures then that's a prior mistake so to speak that's not subject to review indeed but what the district court did in this case is it started with the premise and you can see page nine of it's opinion it started with the observation that we pointed out which is that northwestern memorial hospital is the second or third choice for patients who use five of the six party hospitals in the north shore area that just facially raises a serious question given what a geographic market is supposed to be which is as we agree the hospitals to which consumers could practically turn so faced with that strange result the district court went back and looked at the in assumptions that were presented by its experts assumptions that my opponent continues to rely upon today and  assumptions and it found those assumptions to be lacking in terms of economic basis they were circular they were ignoring commercial reality  general meant hospital inflation rates after the merger occurred which certainly seems to imply that these markets are quite small and local and that a lot of the other  that the f t c is pointing to a merger that was sixteen years ago that's for ever in the health care world things have changed dramatically the hospital visit people's buying habits apparently have not though people's travel habits i know that you have an element of your argument that essentially inpatient hospital care your product market you argue is a declining market i don't know whether it's going to level off at some point but you say there's been a great deal of substitution of outpatient services which i know the least i take to be outside the product market for information services so that brings to my mind the idea of a declining market and so it's declining market what do you do about mergers well the the law has always been that you don't have any special unless it's actually a failing firm and nobody says these are friendly firms you apply the any trust laws just as you do in any others situation even if it's a declining market and i'd like you to talk about how you think we ought to take into account your argument about substitution of non product market to say outpatient services for this case absolutely well one of the things that tells that and that explains this significant difference in the markets over the last sixteen years since that last merger is the very thing your honour's point i don't see why that means there isn't a product market for inpatient services you seem to concede that we did i don't see why that doesn't give room for potential anti competitive pricing in the product market for inpatient services even if it's covering only you know fifty percent of what hospitals do now instead of seventy five percent of what hospitals once upon a time well what the district court did with that evidence and i thought it was quite well supported by both the record and our experts testimony was to explain that because it's a declining market in patient services clearly our product market are no longer routine and a great deal of these absurd i mean you know nobody goes for certain procedures on an outpatient basis you know if you're having heart surgery correct you're not going to go in on an outpatient basis if you're having any number of procedures it's a smaller number now correct totally agree but it's different in kind and that's the reason for my comment it's because the plaintiffs say it's different because it roots in one of the arguments for this idea that local means where you live and by the way that's inconsistent with what was pleaded in the complaint the complaints that suggested people use services where they live and work which would suggest downtown chicago but if i could the nature of the this concept of the local services is based in part on the idea that people want to pursue routine care close to home just isn't there solid imperial evidence to that effect that you know this is my first choice my second choice is still inside this north shore area but there was solid empirical evidence evidence contradicting it mean your kid breaks his leg at the baseball game you don't want to drive all the way into downtown chicago to northwestern you want to go get the leg set but the diversion ratios to be clear take all that into account the diversion ratios include sorting patien why they went to the hospital they include sorting patients based on how old they are and they compare where would people like that go if their first choice wasn't available and for five of the six hospitals here northwestern memorial was the first or second best alternative so there are clear you may not take your son to the two to northwestern memorial for breaks his leg but you very well may dr pat passed dozens of hospitals to deliver a baby at northwestern memorial and the kinds and many people do and the kinds of services that people use to see invite though what the economists keep calling the silent majority of us are right we know that a lot of there's a significant fraction of people who are willing to  significant troops but the economists are telling us not to assume that the other seventy or seventy five or eighty percent asians are like those folks and willing to drive  diametrically opposed ways we'll just have to decide what the right like you is because the f t c keeps saying if you're going to lose half your market you're going to stay in lieu of losing half your market you're going to say ok you know will cough up a little more money to keep you in the tent and you don't seem to think that's what their reaction will be but brown shoe asks the court to examine what is the market in which consumers can practicably turn and the consumer here rather sliding over into the patient no no and they are looking at the insurance company no i was not i did not mean to say that fight over the patients and i also don't think again that there's a significant difference between the two i mean the district court in this case looked at diversion ratios because that's what the f t c is a expert pointed as the most important input to his analysis so diversion ratios that they do were analyze what the alternatives are for patients it's that kind of analysis that drives insure and the way we know that is think about that at a testimony i pointed to a moment ago when the aetna representative says we must have advocate in north shore to market a plan and the reason she said that was because she believes that the best substitute the preferred substitute for hospitals like north shore highland park would be advocate condo that was the basis for her view was about patient preferences but we but the judge here examined that testimony and found it non credible because in part it was undermined by the diversion ratios as i just showed the diversion ratios show that she was mistaken about what question as i mentioned the only question before the court today is was there an adequate geographic market defined by the f t c the f t c had the burden to do that the district court found that the f t c had not identified an appropriate geographic market and this court reviews that for clear error if if the court two were to remain and the district court i assume would follow whatever instructions this court set out for the another twenty what instructions should we give them if we were just told us we ought to declare the geographic market settled that would be that would be fairly unprecedented in modern terms having a western yes i think at the at most you would send it back and ask him to look at a different question but to be honest i'm not aware of a single court anywhere that has held that once the f t c has experts says that a snap has been calculated the district court may not reject that testimony by examining its assumptions and that's really what's not the point of my question that's maybe you can tell me that i'm wrong that your position would have been that's not everything that needs to happen it is or there is a preliminary injunction once you have the product and geographic markets settled then you have to go on and ask the rest of the questions that the more your side lines make relevant including you know competitive effects and all the rest of it so there is there are some steps that need to be taken before you actually have the preliminary injunction that the commission  clearly so now it's you are of course correct and but i guess what i would say is if the court found that what the district court did here was was inappropriate there is more work to be done even on the geographic market because the the  geographic market or the hypothetical monopolist to us which by the way we don't quibble with this case is not a referendum on the hypothetical novelist us but there is no single methodology identified by any case or even by the merger guidelines for calculating whether a hospital can impose a snap dr ten chose a method for calculating a snippet that no court has ever approved and that is seriously flawed for all the reasons our expert not really deal cases actually make it  courts i might observe it's correct but he did he conceded that the no court has ever accepted this this particular method and our experts offered various serious critique of that method so we would have to minimum have to go back to have that analysis tested i still don't see by the way how even a correct snip test could solve the problem that the candidate market was ill defined and that's essentially what the f t c is arguing here now even if we got back there in the district court said yes there's a geographic market we would then go on to competitive affects and it would raise a presumption and that presumption respectfully has already been rebutted we have presented substantial evidence that forth that would justify the merger which are not for the court we do think that on this record the court can find that the f t c showed a likelihood of success at the geographic market question again it's important to recognise that we're not a analysis it's probably said well he was the model has never been accepted by any court i think if you look at the evidence in that you'll see that dr ten says his model is well grounded in the economic literature it uses standard econometric techniques model the effects of the of the of the transaction often in many cases as you but you pointed out there aren't that many of these cases that are reported and the economist doesn't even know what's been used in a particular case courts don't usually produce a long you know appendix setting for the economic model so you know the notion that you know dr ten the model should be rejected because i can't point to a particular case in which that model is used it is just absurd i mean the question is whether the model is well grounded in and in of that's exactly where i want to go because the evidence from the diversion ratios does seem to indicate that northwestern memorial is the most popular second choice for these parties hospitals and it looks like a pretty darn good alternative for an awful lot of people  so i'd like you to address specifically exclusion from the market share well if you look at example six explains what it means to be a closer substitute and it says product c is a closer substitute if in response to a snip on product a more revenue will be diverted will be diverted to seed and to be i'm paraphrasing but i think that's what it's that's that's what it says and so if you're looking at this from an insurance perspective which is the right to do it i think the question is if north shore raises its prices are insurers going going to switch to switch to advocate for northwestern memorial and the diversion ratios may be informative of that question but they don't answer it i think as you see from the from the insurer testimony which is very clear and overwhelming the insurers view advocate and northwestern  under defendants example sixty three is northwestern memorial and they concede they conceded in closing argument it doesn't matter if you took doctor tens if you took doctor tends to eleven hospital market and you did northwest memorial and present st francis which is really the focus of their brief should be included it's really all a distraction because because at the end of the day everyone agrees that it doesn't matter and again i think that's for a further indication further reason why on this record the court can be very confident that the government made its burden of showing the likelihood success of a few other points i would briefly like to make you i think i might have one extra minute