On December 8, 2020, a federal court in Pennsylvania rejected a challenge by the Federal Trade Commission (FTC) and the State of Pennsylvania to block a $599 million merger of two hospital and healthcare systems in Philadelphia: the fourteen-hospital Thomas Jefferson University (Jefferson) and the three-hospital Albert Einstein Healthcare Network (Einstein). The court found that the FTC had failed to meet its burden to prove that the merger would result in an increase in prices to insurers and less competition in the relevant geographic market. The FTC has requested the federal district court and the U.S. Court of Appeals for the Third Circuit grant a temporary injunction while it appeals the decision. If the emergency motions are denied, the merger could complete as soon as December 21, 2020.

Einstein’s flagship hospital, Einstein Medical Center Elkins Park, is a safety net hospital, as it has one of the highest percentages of government-insured inpatients—87% or more—among large hospitals in the United States. Because of its poor payer mix, Einstein sought a strategic partner to improve its financial situation. On September 14, 2018, Jefferson and Einstein entered into a System Integration Agreement, pursuant to which Jefferson would become Einstein’s sole member and ultimate parent.

Earlier this year, the FTC and the Pennsylvania Office of Attorney General (together, the Government) sought a preliminary injunction in federal court to block the merger between the two systems pending an administrative investigation by the FTC to determine whether the merger would violate Section 7 of the Clayton Act. The Government contended that if the merger were permitted to go forward, the transaction would substantially lessen competition in the Philadelphia area.

After a six-day evidentiary hearing, the district court denied the Government’s request for a preliminary injunction, holding that the Government did not properly define the relevant geographic market for healthcare services in Philadelphia and therefore did not meet its burden to block the merger. The court defined the healthcare industry market as represented by a “two-stage model of competition.”

In the first stage, hospitals compete to be included in an insurer’s hospital network. In the second, hospitals compete to attract individual members of the insurers’ plans. The court held that the first stage of competition—focusing on insurers as the payers in the market—is more important because insurers will most directly feel the impact of any increased price of care. This is referred to as the “commercial reality” of the uniquely structured healthcare industry. As a result of this “commercial reality,” the insurers’ perspective is “extremely important” in deciding whether a proposed merger will affect competition for healthcare in a proposed geographic market.

The second stage of the competition model—where patients choose to receive healthcare—is relevant to the extent patient choices and behavior affect the bargaining leverage that hospitals and insurers possess when negotiating network agreements and reimbursement rates. But this is less important than the insurers’ perspective as the payer, and thus the relevant geographic market must be assessed “through the lens of the insurers.”

Through this framework, the Government had the burden to prove that the insurers would face a price increase in the Government’s proposed markets should the merger occur. The district court held that the Government failed to meet its burden. The court reasoned that the FTC was far too focused on the second stage—where patients go to attend care—rather than whether the insurers would be forced to pay increased prices as a result of the merger. The court noted that the geographic region has only four major commercial health insurance providers, and one of them Independence Blue Cross, has more than 50% market share. Although the Government put forth expert calculations and testimony from two of the larger payers in the market in support of its contention that the insurers would face increased prices, the court found the testimony “neither unanimous, unequivocal nor supported by the record as a whole.” Moreover, the consolidation of the insurance payers in the market led the court to conclude that the testimony from the Government’s experts’ and insurers’ that insurers would have to succumb to a price increase was “not credible.” The court therefore denied the request for a preliminary injunction.

The FTC has appealed the decision to the U.S. Court of Appeals for the Third Circuit and has requested a temporary injunction of the merger pending the resolution of its appeal. Pursuant to agreement of the parties, the district court entered an order (available here) extending a previous temporary injunction of the merger from December 15 to December 21, 2020 pending resolution of the FTC’s requests for a further injunction pending appeal. If the requests are denied, the merger could be complete as soon as December 21, 2020.

The district court’s December 8, 2020 opinion is here. The FTC’s emergency motion with the district court is here, and its emergency motion with the Third Circuit is here.