A federal court on Tuesday denied the FTC’s request to enjoin the merger of Thomas Jefferson University and the Albert Einstein Healthcare Network, two hospital systems in the Philadelphia area. After a six-day hearing that included twenty witnesses and what the court called “voluminous documentary evidence,” the court found that the FTC had not carried its burden of proof and denied the requested injunction. The court’s decision seemingly places a priority on evidence of actual commercial realities over data and econometric models.
The court’s analysis, in its 62-page opinion, turned almost entirely on the question of geographic market definition. The FTC argued that the combination would be anticompetitive because, if completed, payors allegedly would have no choice but to keep the merged entity in their plans and accept a price increase from it, because payors allegedly could not look to hospitals outside the FTC’s proposed markets to create price competition. To support its proposed markets, the FTC presented an econometric analysis using the hypothetical monopolist test (“HMT”), but the court stressed that, in hospital merger cases, market definition must focus on the perspective of payors, not patients, given the commercial reality that payors negotiate for the inclusion of hospitals in their networks and bear most of the burden of hospital costs.
The court found several flaws with the FTC’s arguments. For one, the court refused to treat the FTC’s HMT results – which it referred to as the expert’s “econometric algorithm” – as dispositive, even assuming they “could be correct” “[a]s a matter of academic econometric analysis,” because the analysis still would “have to be supported by credible evidence that the insurers would have to agree to price increases instead of looking outside [the FTC’s] proposed geographic markets.” The court stressed that “geographic market definition is not merely a ‘statistical exercise’” that the HMT can always answer. The court also faulted the HMT conducted by the FTC’s expert for relying on patient diversion ratios, which it viewed as not fully capturing the market realities at the payor level.
For another, the court found that payors did not provide credible and consistent evidence to support the FTC’s theory of harm. Two of the four area payors expressed no concern with the proposed merger. As to a third, the court found that it had significant non-antitrust business reasons to oppose the merger, which seemed to undermine the credibility of its testimony in the court’s view. While the FTC also presented testimony from a fourth payor, the court found that the testimony on balance did not support the FTC’s position (in part because this payor did not believe the merging parties would have a substantial share in the broader region). As a result, the court concluded, the FTC had not put forward the required “extensive evidence” that payors would have to accept a price increase from the combined entity in the FTC’s proposed markets. And while the FTC also presented argument around an additional proposed market based on rehabilitation services, the court readily dismissed that theory, because, among other things, such services play a minor role in the health systems’ operations and “are just not a focus in insurer-member contracting,” so payors could contract to provide such services from out-of-market suppliers, and that such services are “‘less important than most other services’ in insurer-provider negotiations.”Perhaps the most interesting aspect of the decision is the court’s unwillingness to allow the results of an econometric HMT analysis to dictate the market-definition outcome, and its reliance on testimony from market participants to determine the commercial realities of the situation. The court cited a previous case in which an injunction was supported by evidence from insurers that they could not market a product without the inclusion of the merging parties, including an actual instance where an insurer lost half of its members when it stopped covering the merging hospitals. While data and econometric models will continue to be important in merger challenges going forward, this case highlights the need for parties facing potential government challenges to carefully assess payor views and behaviors, in order to build an effective evidentiary record to respond to the inevitable HTM analyses that the government would offer in any challenge.
Paul S. JinPartner
Christopher T. HoldingPartner