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Legal Insights and Perspectives for the Healthcare Industry

On December 8, 2020, Judge Gerald Pappert in the US District Court for the Eastern District of Pennsylvania denied a request from the Federal Trade Commission (FTC) and Pennsylvania attorney general (AG) to preliminarily enjoin a proposed merger between Thomas Jefferson University (TJU) and Albert Einstein Healthcare Network (Einstein). The case was widely watched as the FTC sought to show that the combination of these two urban hospital systems would harm consumers.

Background

TJU and Einstein are two hospitals largely based in Philadelphia and neighboring counties that provide general acute care (GAC) and rehabilitative services, among other offerings. The FTC and Pennsylvania AG challenged the merger on the basis that the consolidated entity would harm competition. A central question at the hearing was whether the government could establish the geographic boundaries of the relevant markets it claimed would be harmed. The government proposed three relevant markets, each with different geographic boundaries:

  1. Inpatient GAC sold to commercial insurers and their members in the “Northern Philadelphia Area”
  2. Inpatient GAC sold to commercial insurers and their members in the “Montgomery Area,” an area consisting of parts of Philadelphia and neighboring Montgomery County
  3. Inpatient acute rehabilitation sold to commercial insurers and their members in the “Philadelphia Area”

The court observed that the government did something the FTC “has never attempted” before by alleging multiple geographic markets for the same GAC services.

The Decision

The court began by recognizing that the market’s geographic scope must “correspond to the commercial realities of the industry at issue.” The healthcare provider industry—including hospitals—has a “two-stage model of competition.” The first stage is where hospitals compete to be included in an insurer’s hospital network. The second stage is where hospitals compete to attract individual members of the insurers’ plans. This means that insurers are primary payors that will directly feel the impact of any increased costs that could flow from the proposed merger. Thus, the antitrust analysis primarily focused on potential harm to insurers, and looked to see if TJU/Einstein (and others) could profitably increase prices without insurers turning to alternatives outside the alleged markets.

Framed through this standard, the court turned to the market analysis by the government’s economist, who focused on how patients view healthcare provider options as substitutes. The government’s thesis was that insurers will look to the switching patterns of their members in determining substitutes among healthcare providers. The court rejected this analysis because the government had failed to show that the choices of patients were correlated to the behavior of insurers and that the analysis failed to capture the commercial realities of the market. The court also considered testimony from the insurers on this topic and ultimately found it unpersuasive. In particular, some insurers testified that they had no concerns about the combined TJU/Einstein entity or did not say that they would have to accept a price increase post-merger. In the court’s view, this type of testimony fell short of satisfying the government’s burden.

After its loss, the government has sought an emergency injunction of the TJU-Einstein merger as the government pursues an appeal in US Court of Appeals for the Third Circuit.

Takeaways

There are three key takeaways from this decision:

  1. This case demonstrates the difficulty that government agencies can face when seeking to block hospital mergers in densely populated areas. If the agency alleges a geographic market that covers the entire city, it can result in low market shares for the merging parties. If, however, the agency alleges a narrower geographic market, it is susceptible to arguments that it has “gerrymandered” the market, and the alleged market, as in this court’s words, does not “correspond[] with commercial realities.”
  2. The court was highly focused on how the economic analysis corresponded with the real-world evidence, including the parties’ internal documents and the witness testimony. In a key passage—one that is likely to be a focus on appeal—the court stated that it does not dispute that the FTC’s geographic markets satisfy the key antitrust market definition test. However, the court concluded that the FTC did not satisfy its burden, in significant part, because the parties’ strategy documents and the witness testimony did not support the alleged markets. Internal strategy documents, as well as witness testimony, consistently play critical roles at trial.
  3.  The FTC has been active in challenging hospital mergers recently. In addition to the TJU/Einstein litigation, the FTC has two pending challenges to hospital mergers, FTC v. Hackensack Meridian Health, Inc. & Englewood Healthcare Foundation, and FTC & State of Tennessee v. Methodist Le Bonheur Healthcare & Tenet Healthcare Corp.