Big Stakes Merger: Federal Trade Commission, Et Al. v. Thomas Jefferson University, Et Al.

• Jurisdiction: United States,Federal,Pennsylvania
• Author: Edited by Shira Liu
• Publication year: 2022
• Citation: Vol. 32 No. 1

BIG STAKES MERGER: FEDERAL TRADE COMMISSION, ET AL. V. THOMAS JEFFERSON UNIVERSITY, ET AL.

Edited by Shira Liu¹

PANELISTS:

• James A. Donahue, III, Office of the Attorney General, Commonwealth of Pennsylvania
• Jamie E. France, Gibson, Dunn & Crutcher LLP
• Paul H. Saint-Antoine, Faegre Drinker Biddle & Reath LLP
• Moderator: Shira Liu, Crowell & Moring LLP

I. INTRODUCTION & OVERVIEW

In September 2018, Thomas Jefferson University and Albert Einstein Healthcare Network signed a merger agreement. In February 2020, the FTC initiated an administrative proceeding seeking to permanently enjoin the proposed merger.² Fact discovery closed in July 2020, and a six-day permanent injunction hearing was held in September 2020. After the hearing, Judge Gerald Pappert of the Eastern District of Pennsylvania denied the motion, and the Third Circuit subsequently denied an emergency stay.³ The FTC withdrew the matter from adjudication, and then dismissed the complaint in March 2021.

Trial counsel for the FTC, the Commonwealth of Pennsylvania, and Thomas Jefferson University shared their experiences trying this case in the midst of the COVID-19 pandemic with the Golden State Institute in November 2021 in a panel discussion moderated by Shira Liu.

Jim Donahue is the Executive Deputy Attorney General for the Public Protection Division of the Pennsylvania Office of Attorney General. The Division includes the antitrust charities, civil rights, consumer protection, fair labor, health care, special litigation, and tobacco sections. From 2009 to 2012, Jim served as the Chair of the National Association of Attorneys General Multistate Antitrust Task Force.

Jamie France is Of Counsel in Gibson Dunn & Crutcher LLP's Washington, D.C. office. She represents clients in merger and nonmerger investigations before the FTC and DOJ, as well as in complex private and government antitrust litigation. Jamie was previously an attorney in the Mergers IV Division of the FTC's Bureau of Competition. While at the FTC, she was a key member of the FTC's trial

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teams and several hospital health care provider merger challenges.

Paul Saint-Antoine is a graduate of Columbia Law School and a partner at Faegre Drinker Biddle & Reath LLP, where he co-chairs its national antitrust practice. In 2020, he was a lead trial counsel for Thomas Jefferson University in the FTC's action to block its merger with Einstein Healthcare Network. This year the Philadelphia Business Journal named Paul one of its Best of the Bar in the category of business relations.

II. THE FTC'S CHALLENGE TO THE MERGER

MS. LIU: Thanks to everyone for joining us today. I will turn it over to Jamie to get us started on our topic today.

MS. FRANCE: It's a pleasure to be here today. Before I start, I'll just note that the views expressed today are my own and do not represent the views of the FTC or of Gibson Dunn. I'll start by going over some of the allegations in the complaint in this case. Jefferson and Einstein, who were two of the largest hospital systems in the five-county Philadelphia area, signed an agreement to merge in September 2018, and their proposed merger would create the largest hospital system in the greater Philadelphia area.

After an investigation that spanned into 2020, the FTC filed a complaint in administrative court seeking to permanently enjoin the merger, and the FTC and the Pennsylvania Attorney General's Office simultaneously sought a preliminary injunction in federal district court in the Eastern District of Pennsylvania to temporarily enjoin the merger during the pendency of the merits proceeding. After discovery, there was a six-day preliminary injunction hearing held in September and October 2020 before Judge Gerald Pappert, and Judge Pappert ultimately denied the FTC and Pennsylvania's preliminary injunction motion. Subsequently, after the Third Circuit denied the FTC's request for an emergency stay of the merger pending appeal, the Commission voted to dismiss its appeal to the Third Circuit, and the matter was withdrawn from adjudication before the FTC's administrative law judge.

We'll now talk about some of the allegations in the FTC and Pennsylvania's complaint. Pre-merger, Jefferson operated 11 general acute care hospitals in Pennsylvania and New Jersey, and three inpatient rehabilitation facilities ("IRFs") in Pennsylvania, and Einstein operated three general acute care hospitals and five IRFs in the Philadelphia area. The first step when analyzing a merger's likely effect on competition is to identify a relevant market, and there are two components to the relevant market. The first is the line of commerce, meaning the overlapping products or services that are provided by the merging parties, and the second is the geographic area, which can relate to the locations of the merging parties or the locations of their customers. At issue in the Jefferson/Einstein case were two lines of commerce or product markets. The first was inpatient general acute care ("GAC") hospital services, which is a cluster of medical and surgical diagnostic and treatment services that require an overnight hospital stay. The second product market alleged in the complaint is inpatient acute rehabilitation services, which is a cluster of acute rehab services that are provided to post-acute patients, i.e., patients who were previously treated at a GAC hospital. This includes intensive multidisciplinary rehab therapies at least three hours a day for five days a week, and there are some other details about that product market in the complaint. Now, both product markets were limited through services provided to a particular set of customers, and that's commercial health insurers and their members.

Taking a step back for a minute to talk about that customer set, the FTC's and the state's hospital merger enforcement efforts have generally been in the context of what's called the two-stage model of competition, and this framework recognizes that hospitals compete in two separate but interrelated stages. In the first stage, hospitals compete for inclusion in insurers' provider networks, which is

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largely competition on the basis of price. And in the second stage, hospitals compete to attract insurers and enrollees who require hospital care largely on the basis of nonprice factors. The two stages of competition are interrelated, but hospitals desire to be included in insurers' networks, and insurers desire to have hospitals in their networks to serve their enrollees. Both affect the relative bargaining leverage of insurers and hospitals, and thus the prices that they negotiate in that first stage of competition. And importantly, this analysis focuses on the insurer as the customer, but it recognizes that patient preferences may influence insurer demands.

Turning back to market definition and the geographic market allegations in the complaint, the FTC alleged that the merger would eliminate competition between Jefferson's and Einstein's general acute care hospitals in two geographic markets in and around Philadelphia and the nearby Montgomery County, as well as eliminate the competition between Jefferson's and Einstein's IRFs or their rehab hospitals in one geographic market that covered parts of Philadelphia and parts of Montgomery County. The antitrust agencies employed a hypothetical monopolist test to evaluate whether groups of products in geographic areas are sufficiently broad to constitute relevant antitrust markets. In the context of a hospital merger such as this one, the hypothetical monopolist test asks whether a hypothetical owner of all of the hospitals or all of the IRFs here in a candidate market could profitably impose at least a five percent price increase in negotiations with commercial insurers.

Now, importantly in this case, all three of the markets alleged in the FTC and Pennsylvania's complaint satisfied the hypothetical monopolist test. First, the northern Philadelphia area geographic market consisted of 11 GAC hospitals in Philadelphia and Montgomery County, and it focused on an area of overlap between two of Einstein's hospitals and two of Jefferson's hospitals. According to the complaint, the merged hospital system would control at least 60 percent of this market post-merger. Second, the Montgomery area geographic market consisted of ten GAC hospitals in or near Montgomery County, Pennsylvania, and it focused on the area of overlap between one of Einstein's hospitals and two of Jefferson's hospitals, and as alleged in the complaint, the merged hospital system would control at least 45 percent of this market post-merger. Third, the Philadelphia area geographic market for inpatient acute rehab services consisted of seven IRFs in Philadelphia and Montgomery County, and it focused on the area of overlap between Jefferson and Einstein's largest IRFs, Magee Rehab Hospital and MossRehab at Elkins Park. And as alleged in the complaint, the merged system would control at least 70 percent of this market post-merger. Under the merger guidelines, the post-merger concentration level and increase in market concentration in all three of the markets that we just went through created a presumption that the transaction was unlawful.

Beyond the structural presumption of illegality, the complaint also alleged that the merger would eliminate the close competition between the parties for inclusion in commercial health insurers' hospital networks and that this would enhance the merged system's ability to negotiate more favorable reimbursement rates with insurers in that stage one of competition as well as diminish their incentive to compete on the basis of quality and service offerings in stage two of competition.

The complaint also contained allegations related to entry or expansion, that entry or expansion by other GAC hospitals or other IRFs would not be timely, likely, or sufficient to counteract the...