The U.S. Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”), in the span of about 48 hours in the first days of March, wrapped up two challenges to hospital deals – one dropped, the other settled (pending court approval). Both outcomes should be viewed as important indicators of both the issues the enforcement agencies are likely to focus on in health care industry deals and why market definition is particularly critical in health care market transactions.
The Philadelphia Case
On Monday, March 1, the FTC announced that it was walking away from its year-old challenge to the pending merger of the Philadelphia-area Jefferson Health (“Jefferson”) and Albert Einstein Healthcare Network (“Einstein”). The case was filed in February 2020, and the FTC was joined by the Pennsylvania Office of Attorney General (“PA-AG”). The FTC and PA-AG, unsuccessfully, sought a preliminary injunction in their federal court challenge, so as to permit the FTC to pursue its own administrative proceeding in an effort to permanently stop the transaction. On December 8, 2020, Eastern District of Pennsylvania U.S. District Court Judge Gerald J. Pappert, denied the injunction request and found that the government had incorrectly alleged patient-focused markets and not, as he held was more appropriate, insurer-focused markets. Judge Pappert believed that the demonstration of an adverse effect on insurers from the merger was necessary, i.e., that they would be harmed by a potential price increase due to an inability to turn to other health care providers as an alternative to the combined Jefferson-Einstein enterprise. The failure to address that issue, and the patient-focused approach taken, were fatal to the FTC’s case.
The FTC disagreed, and, heavily influenced by its belief that the combination would result in significant and anticompetitive market shares for the combined businesses[1], filed an appeal and immediately asked the U.S. Court of Appeals for the Third Circuit to stay the parties ability to close the merger pending appeal. The Third Circuit denied that request almost as quickly as it was filed, rejecting the FTC’s argument that Judge Pappert’s decision was based on his own “faulty economic reasoning” and a misapprehension of the Philadelphia region’s health care markets. Soon thereafter, the PA-AG withdrew from the appellate effort, but the FTC, in early 2021, appeared willing to continue without the protection of a stay. Ultimately, however, on March 1, the FTC’s website indicated a 4-0 vote to drop the appeal.
Judge Pappert’s decision appears to be the FTC’s first true hospital merger loss in a federal district court since 2016[2] – but that loss was reversed on appeal by the U.S. Court of Appeals for the Seventh Circuit. Thus, it appears that the Jefferson-Einstein loss, though without appellate confirmation, is the first litigation defeat suffered by the FTC in slightly over two decades. The ultimate precedential impact of Judge Pappert’s conclusions and the lack of appellate review remains to be seen: will it be an outlier, or will it carry weight in future cases? As noted below, the root cause ofthe FTC’s district court loss here, embedded in its deemed-faulty market definition and focus, may be an indicator of why any other outcome short of stopping the deal entirely (e.g., divestiture or some other structural remedy) did not come to fruition as the FTC carried out its investigation and tried the case. In other words, the merging parties were apparently confident to try the case successfully against the FTC’s approach to market definition. While it is a win for Jefferson and Einstein, and a rare one at that, will it deter the FTC in future cases or cause a strategic shift in its approach to market definition? The hypothetical monopolist test obviously remains central, but, its application to the correct initial market participant focus (patients? insurers? other providers?) needs to be thoroughly thought through, as does the proper geographic market definition. Where future cases land, only time will
tell.[3]
The Central PA Case
Just two days later, on Wednesday, March 3, the DOJ filed papers in its challenge to the “Collaboration Agreement” between Geisinger Health and Evangelical Community Hospital, which included a partial acquisition of Evangelical, located in Lewisburg, Pennsylvania. That challenge, which followed a DOJ investigation[4] that commenced in October 2018, was filed in the U.S. District Court for the Middle District of Pennsylvania in August 2020. At the time of the March 3, 2021 announcement there had been no actual litigation activity in the case, but, apparently, a resolution was being discussed between the parties who had a “hold separate agreement” in place. The proposed resolution significantly reduces the collaborative relationship proposed by the parties, and will, if approved, on a going-forward basis for as long as ten years, impose significant behavioral remedies on both parties.
Geisinger, which is both a health care provider and operates health insurance plans, had initially sought to tie-up Evangelical because it feared Evangelical would find another hospital or insurance company to merge with and compete with Geisinger. The parties, realizing that such a transaction would very likely raise antitrust concerns, decided on a structure which it documented in a “Collaboration Agreement” which memorialized, among other things, a partial acquisition by Geisinger in conjunction with its promise to invest upwards of $100 million. Evangelical also agreed to give Geisinger a right of first refusal on any joint ventures Evangelical would consider in the future and other deals that resulted in Evangelical selling assets or undergoing a change in control. Overall, the Collaboration Agreement as originally executed would have given Geisinger a 30 percent stake in Evangelical, along with a number of Board seats and other mechanisms to facilitate Geisinger’s direct involvement in Evangelical’s operations.
The proposed settlement, which must be published in the Federal Register, and will allow for a 60-day comment period thereafter, will significantly limit Geisinger’s involvement. Its ownership stake will be limited to 7.5 percent and its involvement will be passive. Geisinger’s intended $100 million investment will not be permitted, and the $20.3 million already invested will be kept by Evangelical, with $17 million of that amount being used to help complete a patient room improvement project, and the other $3.3 million to be used as a part of the Lewisburg YMCA sponsorship of the Miller Center. Other, non-financial aspects of the original Collaboration Agreement, e.g. Geisinger’s support of Evangelical’s electronic medical records technology upgrades, which DOJ acknowledged as a procompetitive activity, can continue. An Amended and Restated Collaboration Agreement was agreed to by the parties, and is a part of the consent decree process as an exhibit to the Competitive Impact Statement, along with the original Collaboration Agreement. DOJ’s March 3 press release notes the significant competitive harm that is being avoided by the proposed resolution, by removing Geisinger’s influence and control and restoring “incentives to compete with each other on both quality and price.”
The proposed resolution also requires the appointment of an Antitrust Compliance Officer by each party, with duties specifically set forth in the proposed Final Judgment. Those duties include, among other things, antitrust compliance education of various personnel, including the CEO and Board members of both Evangelical and Geisinger, the filing of written reports with DOJ, and the immediate reporting of any actual or potential violation of the Final Judgment. In addition, the CEO or CFO and the General Counsel of each organization must, 90 days after the Final Judgment is entered, and annually thereafter, certify in writing to the DOJ that the Final Judgment has been complied with. The DOJ retains the right to do Compliance Inspections, and the Final Judgment has a ten-year term, which can be shortened if, after five years, the DOJ and the parties notify the Court that its continuation is “no longer necessary or in the public interest.”
Saul Ewing will monitor the Geisinger-Evangelical case as the comment period proceeds, along with the Court action taken in connection with the proposed Final Judgment.
Conclusion
Obviously a busy week, indeed, for legal issues in Pennsylvania health care markets. And a good take-away from the two cases might well be this: keep in mind the continuing significance of appropriate market definition, and, when the well- and correctly-stated definition is clear cut, problematic and anticompetitive, the relative ease with which the DOJ as an antitrust enforcer and regulator can dictate the terms and manner in which parties may entangle themselves without harming competition. The Geisinger-Evangelical outcome may by a harbinger of the remedial focus of both agencies going forward, on a behavioral/conduct focused approach. If the FTC’s market definition and focus been more appropriately set out in the Jefferson-Einstein case, might it have followed the route of Penn State-Pinnacle, or led to a negotiated resolution like Geisinger-Evangelical? Again, looking ahead to other cases, only time will tell.
1. Evidence in the case indicated that the combined entities would hold 60 percent of in-patient general acute care in North Philadelphia and 45 percent in Montgomery County, along with 70 percent of the market for in-patient rehab services for acute conditions (stroke, spinal cord injuries, for example).
2. In the Chicago area Advocate Health Care/NorthShore University Health System transaction.
3. The foregoing comments echo back to the FTC’s loss in the Penn State-Pinnacle merger litigation. That case was tried before Hon. John E. Jones III of the U.S. District Court for the Middle District of Pennsylvania, and the FTC, as in the Eastern District Jefferson-Einstein case, lost in the district court. In the Penn State case, the district court denied and injunction and found the merger permissible, and criticized the FTC’s approach to the hypothetical monopolist geographic market issue from a where-do-patients-travel perspective. The Third Circuit reversed and held that Judge Jones had the wrong perceptions of the Central PA health care markets geographically, and that he improperly decided that issue. On appeal the Third Circuit enjoined the merger and the parties soon abandoned it. For an excellent review of that case, see this article in the Harvard Law Review. Penn State-Pinnacle and Jefferson-Einstein, laid against each other, present a very clear picture of the market definition nuances requiring thorough analysis in health care system/hospital mergers.
4. That investigation included the pre-complaint issuance, and responses to, two Civil Investigative Demands, the production of 585,800 documents (containing 2,463,900 pages) from 18 document custodians, and 12 total depositions.
