On March 1, 2021, the Federal Trade Commission (FTC) abandoned its effort to halt the $599 million merger of two Philadelphia-area hospital systems, Jefferson Health (Jefferson) and Albert Einstein Healthcare Network (Einstein).  The FTC’s decision comes on the heels of the Pennsylvania Attorney General’s withdrawal from the case, and the U.S. Court of Appeals for the Third Circuit’s refusal to stay the deal while the FTC appealed its initial loss in the trial court.  Before this, the FTC had not lost a challenge to a hospital or provider merger in 20 years.  The case imparts significant antitrust lessons for hospitals and providers considering a future acquisition or sale.

The Merger and the FTC’s Challenge

Jefferson and Einstein entered into their merger agreement on September 14, 2018.  Following an investigation, on February 27, 2020, the FTC simultaneously filed both an administrative complaint and, joined by the Pennsylvania Attorney General, a complaint in federal district court seeking a preliminary injunction to halt the merger pending completion of the FTC’s administrative process.

The FTC claimed that, in certain geographic areas of Philadelphia, the merger would leave too few hospitals competing to provide certain medical services.  According to the FTC, the merger violated the antitrust laws because the loss of competition would allow the remaining hospitals in those areas to significantly raise the prices they charged insurers in network contracts.

The primary issue in the case was whether the FTC correctly alleged that the loss of competition in the agency’s selected areas of Philadelphia would allow hospitals in those areas to raise prices, or whether insurers would be able to find alternatives elsewhere in the region.

The District Court’s Decision

On December 8, 2020, a Pennsylvania federal district court rejected the FTC’s claim and refused to stop the merger.  The district court’s decision—now the final word in the case—contains important lessons for hospitals and providers considering a merger.

According to the court, the FTC had to prove how the merger would increase prices for insurers in the geographic areas at issue, not just how patients would be affected.  In the court’s view, insurers are the ones who typically feel any resulting price increases, so the FTC had to show how the merger would harm insurance companies.  The court found the FTC’s efforts on this issue were insufficient, and that doomed the FTC’s case.

The FTC did attempt to rely on insurer testimony to meet its burden, but the court was highly skeptical. The court noted that two of Philadelphia’s four major commercial health insurers failed to provide testimony that supported the FTC’s case.  In fact, the second-largest insurer in the area expressed no concerns about the merger.

While the other two insurers did support the FTC by testifying that the merger would force them to pay higher prices, the district court discounted this testimony.  In the court’s view, insurers generally have incentives to oppose hospital mergers, and the testimony was contradicted by other evidence in the record.  As the judge concluded, courts “should not take at face value the testimony of insurers in hospital merger cases.”  Moreover, one of the insurers had in the past made threats to terminate Jefferson and Einstein from its network, which the court cited as proof that the insurer would have alternative providers outside the FTC’s selected geographic market area if the merged hospital were to raise prices.

Finally, the court found that one of the medical services for which the FTC alleged competition would be reduced (acute rehabilitation services) was unlikely to affect prices because it had little to no effect on network negotiations—one insurance executive described it as simply a “check a box” requirement.  Thus, even if the merged hospital system had market power over these services, the court found this would be unlikely to give them leverage to obtain higher prices from insurers after the merger.

Three Takeaways for Merging Hospitals and Providers

This case highlights three important lessons for hospitals and providers considering a merger that may draw government scrutiny:

• The FTC does not always win. The FTC had been undefeated this century in challenging hospital and provider mergers.  No more.  This case is a good reminder that an FTC challenge need not sound the death knell for such a merger.     
• Insurers’ testimony and past practices may be key. The effect of a provider merger on healthcare insurers could be decisive.  However, weak or contradictory insurer testimony may fatally undermine the government’s challenge, especially if the court is predisposed to doubt the insurers’ motives for opposing the merger.
• Services should be material to network contracting. The government’s challenge may rely on certain healthcare services offered by both merging parties that have little impact on actual network contracting negotiations.  This may support an argument that, regardless of how large the combined market shares of the merging parties for that service are, the merger may have little negative effect on competition in the market.