Federal Court Rejects FTC Challenge to Merger Between Thomas Jefferson University and the Albert Einstein Healthcare Network

MEMORANDUM

The Federal Trade Commission and Pennsylvania Office of Attorney General, collectively the Government, seek to preliminarily enjoin a proposed merger between Thomas Jefferson University and the Albert Einstein Healthcare Network pending an administrative determination of whether the combination violates Section 7 of the Clayton Act.

The parties conducted extensive discovery and the Court held six days of evidentiary hearings which included the testimony of twenty witnesses and the presentation of voluminous documentary evidence. The Court also received from the parties and reviewed additional documents, declarations, deposition transcripts and other materials. Following the hearings, the parties submitted proposed findings of fact and conclusions of law and the Court allowed the parties several hours of oral argument.

To obtain the relief it seeks, the Government must define a relevant geographic market—that area where potential buyers look for the goods or services they want—within which the likely competitive effects of the merger can be evaluated. That market’s definition is dependent on the special characteristics of the industry involved and the Court is required to take a pragmatic and factual approach in determining whether the Government has done it correctly. Of greatest importance to this case, the market’s geographic scope must “correspond to the commercial realities of the industry at issue.” The healthcare industry’s market is 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.

This means that insurers, not patients seeking and receiving medical care, are the payors—those who will most directly feel the impact of the increased price of care. This is what the Third Circuit Court of Appeals has called the “commercial reality” of the uniquely structured healthcare industry. Patients are not irrelevant to a hospital system merger analysis; their choices and behavior can affect the bargaining leverage that hospitals and insurers possess when they negotiate hospitals’ inclusion in insurers’ networks and the reimbursement rates insurers agree to pay hospitals. But as the entities bearing the immediate impact of the cost of medical care, the insurers’ perspective is extremely important in deciding whether a merger will substantially lessen the competition for healthcare in a proposed geographic market.

The propriety of a relevant geographic market in this industry must therefore be assessed “through the lens of the insurers.” To establish its prima facie case, the Government must put forth enough evidence to prove that the insurers would not avoid a price increase in any one of the Government’s proposed markets by looking to hospitals outside those markets.

The Government has not met this burden. It contends that a combination of its expert’s econometric algorithm and testimony primarily from two (of the region’s four) major commercial insurers shows that its geographic markets correspond to the commercial realities of southeastern Pennsylvania’s competitive healthcare industry. But the expert’s calculations alone do not do so, and the insurers’ testimony is neither unanimous, unequivocal nor supported by the record as a whole. Their conclusory assertions that they would have to succumb to a price increase for services in the Government’s proposed markets instead of looking to healthcare providers outside those markets are not credible.

The Court denies the Government’s request for a preliminary injunction.

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