In the past 10 years, the US Federal Trade Commission (FTC) has been on a hot streak in challenging allegedly anticompetitive mergers between competing healthcare providers. However, on December 8, 2020, the US District Court for the Eastern District of Pennsylvania denied the agency’s request for a preliminary injunction in FTC v. Thomas Jefferson University[i] – the most recent preliminary injunction decision involving a healthcare provider merger. Does this district court decision herald the end of the FTC’s winning streak in the industry?
The FTC’s High Rate of Success in Challenging Healthcare Provider Mergers
Since 2010 alone, the FTC has filed injunction actions in federal court and/or administrative complaints to enjoin or unwind at least 12 tie-ups involving healthcare providers, including hospitals and surgical centers. Out of the eight such deals for which a winner has been decided through litigation,[ii] the FTC successfully blocked, unwound, or otherwise prevented seven of the deals, as shown in Table 1 below.
Table 1. FTC Wins Since 2010
Transaction | Year | Outcome |
Sanford Health / Mid Dakota | 2017 | Preliminary injunction |
Advocate / NorthShore | 2017 | Preliminary injunction (on appeal) |
Penn State Hershey Medical / Pinnacle Health | 2016 | Preliminary injunction (on appeal) |
St. Luke’s / Saltzer Medical Group (consummated) | 2014 | Permanent injunction and divestiture order |
OSF / Rockford Health | 2012 | Preliminary injunction |
Reading Health Systems / Surgical Institute | 2012 | Merging parties abandon |
ProMedica / St. Luke’s (consummated) | 2011 | Preliminary injunction and divestiture order |
The eighth case (and the only healthcare provider merger litigation in which the FTC has been unsuccessful since 2010) – Cabell / St. Mary’s Medical (2016) – involved unique circumstances. There, the FTC filed an administrative complaint in November 2015 challenging the combination of two rival general acute care (GAC) hospitals in Huntington, West Virginia. In July 2016, the FTC voted to dismiss its own complaint “in light of the passage in March 2016 of a new West Virginia law relating to certain ‘cooperative agreements’ between hospitals in that state, and the West Virginia Health Care Authority’s decision to approve a cooperative agreement between the hospitals, with which the West Virginia Attorney General concurred.”[iii] Thus, the FTC dismissed its own litigation as a result of highly specific circumstances: conflicting state action.
Finally, as of the date of this post, three cases remain pending: Jefferson / Einstein (discussed in more detail below), Methodist / St. Francis and Hackensack Meridian Health / Englewood Healthcare.
Excluding these three pending cases, the FTC’s win rate is 87.5% in this industry, with seven wins and only one loss.
FTC v. Thomas Jefferson University
Against this record of FTC successes, the December 8, 2020, decision of Judge Gerald Pappert of the US District Court for the Eastern District of Pennsylvania in FTC v. Thomas Jefferson University – in which the court denied the FTC’s and the Pennsylvania Attorney General’s (PA AG’s) (together, the Government’s) bid for a preliminary injunction – may seem to be an abrupt end to the FTC’s winning streak. In Thomas Jefferson University, the Government alleged that the proposed acquisition by Thomas Jefferson University (Jefferson) of Albert Einstein Healthcare Network (Einstein) would substantially lessen competition in three relevant markets around Philadelphia, Pennsylvania:
- Inpatient GAC hospital services sold and provided to commercial insurers and their insured members in the Northern Philadelphia Area;
- Inpatient GAC hospital services sold and provided to commercial insurers and their insured members in the Montgomery Area; and
- Inpatient acute rehabilitation services (ARS) sold and provided to commercial insurers and their insured members in the Philadelphia Area.
The district court disagreed, concluding that the Government’s proposed relevant geographic markets were not supported by the industry’s “commercial realities.”[iv] The Government’s failure began with its application of the hypothetical monopolist test (HMT)[v] to define the relevant geographic markets. Specifically, the court faulted the Government’s application of the HMT for incorporating diversion ratios for patients without providing evidence to support the assertion that insurer demand is aligned with patient demand. In other words, the Government built its proposed candidate geographic markets by relying on the alternatives to which patients – not insurers – would substitute in the event of a small but significant non-transitory increase in price (SSNIP). Yet it is insurers – not patients – who would bear a price increase as a result of the merger.
Although the merging parties and the Government agreed that the Government’s proposed geographic markets satisfied the HMT test, the district court concluded that these results were not consistent with “commercial reality.” Because insurers bear the direct cost of medical care, the Government needed to establish that if the merged firm were to raise prices, insurers would not switch to other hospitals outside the proposed geographic markets to such an extent that a price increase would be unprofitable.
Yet the insurers’ testimony on this point was mixed. In fact, the court ultimately deemed the insurers’ testimony “not credible.”[vi] Of the four major commercial insurers (i.e., customers) in the region, the Government relied on the testimony of only two.[vii]
The court found that the area’s largest insurer, Independence Blue Cross (IBC), had self-serving reasons, beyond legitimate antitrust concerns, to oppose the transaction. And IBC’s testimony that it would be forced to accept price increases from the merged firm because its network would be unmarketable without it was belied by (1) IBC’s prior threats to terminate Jefferson and Einstein from its network, and (2) IBC’s documents that showed it considered a number of alternative hospitals, excluding Einstein, to which it could redirect members if it terminated certain Jefferson hospitals from its network. The court found that the testimony of the fourth largest insurer in the area, Cigna, did not support the Government’s proposed geographic markets for GAC services.
The Government’s proposed Philadelphia Area geographic market for inpatient ARS fared no better. According to the court, “[t]he relative insignificance of inpatient rehabilitation services to members and insurers contradicts the insurers’ statements that they would accept price increases for inpatient rehabilitation services.”[viii]
Because the Government failed to define relevant markets in which the transaction would be likely to harm competition, the district court denied the Government’s request for a preliminary injunction.
Has the FTC’s streak finally ended?
The FTC’s Continued Fight
While the battle may be over, the war wages on. On December 9, 2020, the Government filed an emergency motion with the district court for an injunction pending an appeal.[ix] The Government filed a Notice of Appeal on December 10, 2020, and the following day, filed an emergency motion for an injunction pending appeal with the US Court of Appeals for the Third Circuit.
On December 14, 2020, the district court denied the Government’s emergency motion for an injunction pending appeal.[x] In a lengthy footnote setting out the court’s reasoning, Judge Pappert explained that either the Government “effectively requests a preliminary injunction where none has issued” – a request that would “require the Court to alter the status quo” – or the Government seeks “reconsideration of the legal merits of its claim,” in which case, the court no longer has jurisdiction in light of the previously filed notice of appeal.[xi]
Count the FTC Down – But Not Out
While we wait for the Third Circuit to rule on the Government’s emergency motion for an injunction, all hope is not yet lost for the Government, as the FTC’s own precedent shows. In both FTC v. Advocate Health Care[xii] and FTC v. Penn State Hershey Medical Center,[xiii] the district courts initially denied the FTC’s request for a preliminary injunction but the FTC ultimately succeeded on appeal. Importantly, however, in both cases the FTC was able to obtain a stay of the transaction or an injunction pending appeal, thereby preserving the status quo pending the decisions of the courts of appeal.
History suggests that whether the Government will continue its efforts to block Jefferson’s proposed acquisition of Einstein depends in large part on whether the Third Circuit enjoins the merging parties from consummating their transaction pending the appeals process.
Implications for Practice
It is too soon to tell whether FTC v. Thomas Jefferson University will break the FTC’s merger litigation winning streak in the healthcare provider industry. Regardless of the ultimate outcome, one thing is certain: the FTC’s aggressive enforcement against mergers of competing healthcare providers is likely to continue unabated.
For this reason, counsel advising parties to mergers of competing healthcare providers must ensure that they advise clients of the antitrust risk from these tie-ups and account for the risk of an FTC enforcement action in negotiating deal terms.
The district court’s decision in this case highlights the critical role that customer testimony and evidence plays in merger litigation. Regardless of the industry in which merging parties are involved, it is both good business practice and good antitrust practice to understand the views of the merging parties’ customers on any given substantive transaction and, to the extent possible, for the business to address any customer concerns commercially.
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[i] No. 2:20-cv-01113-GJP (E.D. Pa. Dec. 8, 2020).
[ii] In FTC v. Phoebe Putney Health System, Inc., No. 1:11-cv-00058-WLS (M.D. Ga. filed Apr. 20, 2011), the FTC litigated the merger but ultimately agreed to a settlement that contained certain behavioral commitments. For that reason, we do not include it as either a win or a loss.
[iii] Press Release, Fed. Trade Comm’n, FTC Dismisses Complaint Challenging Merger of Cabell Huntington Hospital and St. Mary’s Medical Center (July 6, 2016), https://www.ftc.gov/news-events/press-releases/2016/07/ftc-dismisses-complaint-challenging-merger-cabell-huntington.
[iv] FTC v. Thomas Jefferson Univ., No. 2:20-cv-01113-GJP (E.D. Pa. Dec. 8, 2020), at 3.
[v] With respect to geographic markets, the HMT dictates that a proposed geographic market is proper if a hypothetical profit-maximizing firm that is the only current or future supplier of the product in the region could impose at least a small but significant non-transitory increase in price (SSNIP) on at least some customers in that region. If, however, customers would substitute to alternatives outside the proposed geographic market in the event of a SSNIP to such an extent that the SSNIP would be unprofitable, then the proposed geographic market is too narrow and the analysis must continue.
[vi] FTC v. Thomas Jefferson Univ., No. 2:20-cv-01113-GJP (E.D. Pa. Dec. 8, 2020), at 33.
[vii] The Government did not rely on testimony or evidence from the second and third largest insurers in the area, Aetna (who had no concerns about the merger) and United Healthcare (United). Id. at 38. A United executive – in a declaration and during her deposition – did express “some concerns” about the transaction, which the court discredited on the grounds that “she never said what the Government needed her to say.” Id.
[viii] Id. at 59.
[ix] Pls.’ Emergency Mot. for Injunction Pending Appeal, FTC v. Thomas Jefferson Univ., No. 2:20-cv-01113-GJP, at 2 (E.D. Pa. filed Dec. 9, 2020).
[x] Order, FTC v. Thomas Jefferson Univ., No. 2-20-cv-01113-GJP (E.D. Pa. filed Dec. 14, 2020). In the same order, Judge Pappert did, however, extend the parties’ existing temporary restraining order until 11:59 p.m. on December 21, 2020, at the request of the parties.
[xi] Id. at 2 n.1.
[xii] No. 1:15-cv-11473 (N.D. Ill. June 20, 2016).
[xiii] No. 1:15-cv-02362-JEJ (M.D. Pa. May 29, 2016).
