FTC and Pennsylvania AG Sue to Block Merger of Philadelphia Healthcare Systems
On February 27th, the Federal Trade Commission (FTC) and the Attorney General of the Commonwealth of Pennsylvania (AG) filed a lawsuit in federal court to challenge a proposed merger between two Philadelphia-area healthcare systems: Thomas Jefferson University (Jefferson) and Albert Einstein Healthcare Network (Einstein). The lawsuit seeks to preliminarily enjoin the merger until the FTC can adjudicate the merger’s legality in an administrative proceeding. Jefferson and Einstein have both agreed not to close the merger until seven days after the court rules on the FTC and AG’s motion for the preliminary injunction.
On September 14, 2018, Jefferson and Einstein signed an integration agreement whereby Jefferson would assume control of Einstein. Jefferson is the largest health care system (by hospital beds) in the greater Philadelphia region, having completed four other mergers with smaller systems since 2015. The transaction would combine Jefferson’s eleven general acute-care hospitals with Einstein’s three. The parties also have inpatient rehabilitation facilities that provide post-acute rehabilitative care for patients with conditions such as strokes and traumatic brain injuries.
The FTC and AG allege that the transaction would give the combined entity at least a 60% share for general acute-care hospital services in the “Northern Philadelphia Area,” at least a 45% share for general acute-care hospital services in the neighboring “Montgomery Area,” and at least a 70% share for inpatient acute rehabilitation services in the “Philadelphia Area” (measured by commercially insured patient admissions).
The FTC and AG’s Challenge
On February 27th, the FTC and AG filed suit in the Eastern District of Pennsylvania to enjoin the merger. The same day, the FTC filed an administrative complaint against the merger. Simply put, the FTC and AG are asking the court to preliminarily enjoin the merger, so that the competitive merits of the merger can be decided through the FTC’s administrative process. In considering this request, the court will consider whether the FTC is likely to succeed in its administrative challenge. If the FTC and AG are successful in obtaining a preliminary injunction, then the merits of the challenge would ultimately be decided through the FTC’s administrative process, assuming the parties still want to pursue the transaction at that point.
Because this case is the first challenge to a hospital merger that the FTC has brought since 2015, it is a significant development in its own right. But the FTC and AG’s complaint is noteworthy for three additional reasons.
First, the transaction between Jefferson and Einstein is not the only proposed merger that Jefferson currently has underway. In late 2019, Jefferson signed definitive agreements to acquire certain healthcare assets from Temple University—including one hospital providing select inpatient general acute-care hospital services in the alleged “Northern Philadelphia Area.” Therefore, this lawsuit may have ramifications for Jefferson’s proposed transaction with Temple University.
Second, as is common in hospital merger challenges, the FTC and AG allege that the merger between Jefferson and Einstein will lessen competition in an alleged market for “inpatient GAC [general acute-care] hospital services sold and provided to commercial insurers and their insured members.” But the FTC and AG also allege a second market affected by the merger: the alleged market for “inpatient acute rehabilitation services at IRFs [inpatient rehabilitation facilities] sold and provided to commercial insurers and their insured members.” This is the first merger challenge where the FTC has alleged this latter market on a standalone basis, and it shows that enforcers will look at a healthcare merger’s effects on very specific or ancillary services in addition to its effects on core, general acute-care hospital services.
Third, with respect to geography, the FTC and AG have alleged relevant geographic markets that are defined not by reference to county lines or natural borders like rivers or roads, but rather by reference to the locations of competing facilities. For instance, the FTC and AG allege that the merger will lessen competition for hospital services in the “Northern Philadelphia Area”—defined as the area that includes nine hospitals in Philadelphia County and two hospitals in neighboring Montgomery County. Interestingly, three of these same hospitals also fall within an alleged relevant hospital market for “the Montgomery Area.” The FTC and AG’s complaint explains that, “A hospital can be in more than one relevant geographic market if it competes . . . in more than one geographic area within which a hypothetical monopolist could profitably impose a SSNIP [small but significant and non-transitory increase in price].” As in many hospital antitrust challenges, the relevant geographic market is likely to be a key point of debate, and this market definition issue is likely to be an important part of the parties’ defense.
In summary, this lawsuit is the first challenge to a hospital merger that the FTC has brought since 2015. It stands as a reminder that the FTC continues to examine hospital mergers closely, even in urban areas that have a number of sophisticated competitors.