Back in December, we wrote about a district court ruling rejecting the Federal Trade Comission’s (“FTC”) motion to enjoin the proposed combination of Thomas Jefferson University (“TJU”) and Albert Einstein Healthcare Network (“Einstein”) that would create an 18-hospital system in the Philadelphia area. The FTC and the Pennsylvania Attorney General had alleged the merger would lead to TJU/Einstein controlling at least 60% of the inpatient GAC hospital services market in a portion of Philadelphia. Following the district court decision, the FTC quickly appealed to the Third Circuit Court of Appeals and filed an emergency motion for a stay pending appeal. Days later, a three-judge panel denied the government’s motion without comment.

On March 1, the parties announced that the FTC was dropping its opposition to the transaction, thus ending its appeal. The FTC’s vote to abandon the transaction was 4-0 and came after the Pennsylvania Attorney General had reached a separate deal with the parties.

With the FTC abandoning its appeal of the district court decision, this case represents the agency’s first loss in a hospital merger challenge since the late 1990s, a period during which the government lost seven straight cases. Starting in 2004, however, after refining its approach to hospital merger analysis, the FTC has had consistent success. That success has not always been at the district court level; twice in 2016 the FTC prevailed on appeal in the Third and Seventh Circuits after district courts had rejected challenges to hospital mergers in in Chicago1 and central Pennsylvania.2 Hence, the Commission’s “surrender” here is particularly notable. The Commission has not disclosed its reasoning, although some of it will likely emerge as it attempts to distinguish the decision in future cases (for example, in the trial scheduled for May in New Jersey in another hospital merger case). For now, the antitrust bar will likely speculate as to the FTC’s rationale.

We will offer some thoughts below.

No More Support from the Pennsylvania Attorney General

One factor that probably contributed to the FTC’s abandonment of its appeal is that the Pennsylvania Attorney General dropped the state’s opposition to the deal. Instead of moving forward on the appeal, the state reached a deal with the parties that included a commitment by Jefferson to invest $200 million over seven years in Einstein’s North Philadelphia facilities. While the parties had not advanced a failing firm defense, the record was clear that Einstein had financial difficulties which were affecting its physical plant. The $200 million Jefferson commitment to Einstein provided the Attorney General a “victory” while complicating the arguments that the FTC had been making.

Unwillingness to Risk a Favorable Third Circuit Precedent

The FTC’s astonishing string of appellate court wins challenging health care provider mergers (in the Third, Sixth, Seventh, Eighth, and Ninth Circuits) appeared to be at risk, and perhaps the FTC did not want to risk turning a district court loss with no precedential value into a “bigger” appellate defeat. In 2016, the FTC appealed a district court loss in the Middle District of Pennsylvania to its challenge to the proposed combination of Penn State Hershey Medical Center and PinnacleHealth System. The FTC won a reversal on appeal and ultimately succeeded in the parties abandoning the transaction. Importantly, the Third Circuit in PennState Hershey/Pinnacle supported the government’s typical use of the hypothetical monopolist test for geographic market definition, the test it continues to rely upon in all merger challenges, including this case.

On appeal, what may have been at stake for the agency was what to make of the passage from Brown Shoe, highlighted in both PennState Hershey/Pinnacle and Jefferson/Einstein, that a market’s geographic scope must correspond to the “commercial realities of the industry.” In part, the district court’s opinion in Jefferson/Einstein was a rebuke of the FTC’s reliance on diversion ratios, a measure of patient preference, when used to support the government’s geographic market definition. Diversion ratios measure the intensity of patient preferences for one facility or location over another, or what the economics literature calls the second stage of hospital competition (the stage at which hospitals compete, on quality, to attract patients). The relevant market definition allegation, however, centers around the first stage of competition where the hospitals compete to be included in an insurer’s hospital network. The district court found that insurer testimony in the case was mixed and was insufficient to marry the FTC’s economic arguments to the real-world facts on the ground. The FTC’s analysis of hospital mergers have increasingly been grounded on its economics work, and the Commission may have decided that it was better to just let the district court decision stand rather than risk an appellate court taking a fresh look at these issues on the record established in Jefferson/Einstein.

The reasons underlying the FTC’s decision to drop the case may become clearer during the May trial of the FTC’s challenge to the proposed acquisition of Englewood Healthcare by Hackensack Meridian Health in New Jersey, a case also pending in the Third Circuit where the Hershey decision remains the law of the Circuit. The merging parties will undoubtedly seek to use the Jefferson/Einstein opinion as persuasive authority wherever they can, attempting to force the government to prove that its econometric measures match up with real-world evidence supported by commercial insurer testimony. If the parties succeed at the district court level again, one would expect that the FTC could not allow two straight losses to stand, and would seek to see an appeal through to its ultimate conclusion.

For now, however, we would expect that the FTC will not back away from its economic analysis, and will work to strengthen its testimonial story in future cases.