On February 27, 2020, the Federal Trade Commission (FTC) announced an action to block a proposed transaction between Thomas Jefferson University d/b/a Jefferson Health (Jefferson) and Albert Einstein Healthcare Network (Einstein). Jefferson and Einstein entered into a “System Integration Agreement” in late 2018 under which Jefferson would become the sole member (i.e., owner) of Einstein and oversee a 14-hospital system (11 of which would be located in Pennsylvania). According to the FTC, Jefferson and Einstein are leading providers of inpatient general acute care (GAC) hospital services and inpatient acute rehabilitation services in Philadelphia County and Montgomery County, Pennsylvania, and therefore the FTC now challenges the proposed integration on the basis that it will substantially harm competition for those services in both Philadelphia and Montgomery counties.

In its administrative complaint, the FTC notes that Jefferson’s and Einstein’s GAC hospitals “compete directly and significantly” with each other, and alleges that if the transaction proceeds the merged system would control at least 60 percent of the commercial inpatient GAC hospital services market in Northern Philadelphia, and 45 percent of the commercial inpatient GAC hospital services market in Montgomery County. The FTC further alleges the transaction would be presumptively unlawful under the DOJ’s 2010 Horizontal Merger Guidelines due to a substantial increase in market concentration.

Furthermore, the FTC alleges that Jefferson and Einstein operate competing inpatient rehabilitation facilities (IRFs) in the Philadelphia area. According to the FTC, post-transaction the two would operate six of the eight IRFs in the area, leading to at least 70 percent control of the inpatient acute rehabilitation services market among commercially insured patients. As with GAC hospital services, the FTC alleged the significant resulting increase in concentration would be presumptively unlawful under the DOJ’s Horizontal Merger Guidelines.

In its Complaint, FTC took note of the fact that the relevant services in the markets at issue are already highly concentrated, allegedly exacerbating anti-competitive effects of the proposed transaction. The FTC claims that commercial insurers would find it difficult to market health plans to employers in the Northern Philadelphia area and Montgomery County that excluded all of the GAC hospitals that would be owned by the combined entity, and similarly commercial insurers would have difficulty marketing a health plan to employers in Philadelphia that excluded all of the inpatient acute rehabilitation facilities owned by the combined entity. Finally, the FTC notes that the hospital systems have not yet “substantiated” any merger-specific efficiencies that could potentially offset anti-competitive concerns, and the FTC takes the position that any savings that could be passed on to patients as a result of the transaction would be “far outweighed” by its potential harm.

The FTC has accordingly authorized the filing of an administrative complaint to block the transaction due to violations of the FTC Act and (if consummated) Section 7 of the Clayton Act. The administrative proceeding is scheduled for September 1, 2020. The FTC will file a corresponding federal court complaint and request for preliminary relief to enjoin the consummation of the transaction during the pendency of the administrative process in the U.S. District Court for the Eastern District of Pennsylvania.

This intervention by the FTC is an important reminder of the government’s continued scrutiny of concentration in the hospital market. The government’s strong recent track record in opposing hospital mergers is likely to be of concern for systems contemplating merger. It remains to be seen whether and how Jefferson and Einstein will counter this filing, which is still a preliminary action based upon the FTC having a “reason to believe” the transaction will violate federal law.

This post was co-authored by Michael Lisitano, legal intern at Robinson+Cole. Michael is not yet admitted to practice law.