FTC's Hospital Merger Win Streak Ends

Davis Wright Tremaine LLP

Davis Wright Tremaine LLP

On Monday morning, the Federal Trade Commission quietly added a sentence to its web page dedicated to the Commission's challenge of a proposed merger of two health systems in Philadelphia's northern suburbs, Thomas Jefferson University and the Albert Einstein Healthcare Network:

The Commission vote to voluntarily dismiss its appeal to the 3rd Circuit of the district court decision declining to preliminarily enjoin the merger of Thomas Jefferson University and Albert Einstein Healthcare Network was 4-0.

The unanimous decision etches in stone that for the first time in the 21st Century the FTC has abandoned litigation to enjoin a hospital merger after failing to obtain a preliminary injunction from the district court.1 While the outcome showcases that healthcare provider transactions can overcome opposition from the state and federal antitrust enforcers, healthcare providers should expect aggressive enforcement to continue.

Just yesterday the FTC announced the end of its investigation of the proposed merger between Atrium Health Navicent, Inc., and Houston Healthcare System, Inc., because the parties abandoned the deal. That announcement comes not long after two hospital systems in Memphis, Tenn., abandoned a planned merger when the FTC sued to block their $350 million transaction.

Market Definition Central in Hospital Merger Litigation

The Jefferson-Einstein case should be somewhat heartening to hospitals and health systems in competitive urban areas. The key battleground—as in most hospital merger cases—was market definition.

The FTC defines geographic markets using the Hypothetical Monopolist Test (HMT), which assesses whether a hypothetical monopolist of inpatient hospital services could profitably raise prices if it controlled the hospitals in a defined geographic area. If so, that area is a relevant geographic market to assess the competitive effects of the merger based on market shares and concentration levels or actual effects.

The Commission's application of the HMT has produced some strange geographic markets in urban areas. For instance, the below map shows the market that passed the HMT in FTC's case challenging the proposed merger of Advocate Health Care Network and NorthShore University Health System in the Chicago area:

FTC Geographic Market chart

In Jefferson-Einstein, the district court found that the FTC's alleged markets in the northern Philadelphia area passed the HMT. The judge nonetheless held that the FTC failed to meet its burden because the alleged geographic markets did not "correspond to the commercial realities of southeastern Pennsylvania's competitive healthcare industry."2 In particular, the district judge was not persuaded that the testimony from commercial insurers supported the markets the FTC had proposed.

It will be important to watch how the FTC reacts to the decision. The Commission argued on appeal that the results of the HMT should be sufficient to carry the FTC's burden: "Courts must consider 'commercial realities' when formulating and applying the hypothetical monopolist test… A court may not, however, jettison undisputed results of a test that already incorporates the 'commercial realities' of the healthcare market."3

While the FTC appears committed to its current approach to market definition, expect there to be extra focus on the substance and credibility of payer testimony in hospital merger litigation ahead. Next up is the FTC's challenge to the proposed merger of New Jersey hospital systems Hackensack Meridian Health, Inc., and Englewood Healthcare merger, which is slated for trial in June 2021.

FTC Remains Committed to Enforcement in Healthcare

The Commission's decision to abandon the Jefferson-Einstein appeal was not terribly surprising, given the 3rd Circuit denial of the FTC's request to enjoin the merger while the appeal was pending.4 The parties were free to close the deal and begin integrating while the appeal was underway, and reached an agreement with the Pennsylvania attorney general in January 2021 to drop its challenge to the transaction in exchange for a commitment to invest at least $200 million in Einstein's facilities. Even if the FTC had won the appeal, it could have ended up in protracted litigation about whether (and how) to "unscramble the eggs."5

The FTC's first loss in two decades comes as the FTC has committed to aggressive antitrust enforcement in healthcare. Acting Chair Rebecca Slaughter and Commissioner Christine Wilson have both been outspoken about the Commission closely scrutinizing every hospital merger.

The FTC also recently authorized a retrospective on the consolidation of physician groups into the health systems.6 It is worth noting that after the FTC conducted a retrospective of hospital mergers in the early 2000s it emerged with a new approach to analyzing and challenging hospital mergers, which fueled the long winning streak that has now come to an end.

With that history in mind, it would be a mistake to read the FTC folding its hand in Philadelphia as a sign of less aggressive enforcement ahead. Just the opposite—expect redoubled enforcement efforts in healthcare, including increased focus on physician transactions.


1  A few years ago when the FTC initially lost two preliminary injunction proceedings in hospital merger cases at the district court level, the 7th Circuit and the 3rd Circuit both enjoined the mergers pending appeals. The FTC ultimately won both of those appeals and prevented hospital mergers in the Northern suburbs of Chicago and in the greater Harrisburg, Pennsylvania area. See Federal Trade Commission v. Penn State Hershey Medical Center, 838 F.3d 327 (3d Cir. 2016); Federal Trade Commission v. Advocate Health Care Network, 841 F.3d 460, 476 (7th Cir. 2016).
2  Memorandum Opinion, Federal Trade Commission and Commonwealth of Pennsylvania v. Thomas Jefferson University and Albert Einstein Healthcare Network, Civil Action No. 20-01113, Dkt. No. 277, at p. 3 (E.D. Pa. December 8, 2020).
3  Emergency Motion of Federal Trade Commission for an Injunction Pending Appeal, FTC v. Thomas Jefferson University, No. 20-3499 (3d Cir. Dec. 11, 2020).
4  Order Denying Emergency Motion of Federal Trade Commission for an Injunction Pending Appeal, FTC v. Thomas Jefferson University, No. 20-3499 (3d Cir. Dec. 22, 2020).
5  For instance, the FTC spent years challenging Phoebe Putney Health System's acquisition of Palmyra Park Hospital in Albany, Georgia, and resolved the case without a divestiture because of concern that Georgia's Certificate of Need laws would effectively preclude the FTC from achieving that remedy. https://www.ftc.gov/enforcement/cases-proceedings/111-0067/phoebe-putney-health-system-inc-phoebe-putney-memorial.
6  https://www.ftc.gov/news-events/press-releases/2021/01/ftc-study-impact-physician-group-healthcare-facility-mergers.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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