Home > Alerts > Lost the Battle, Still Looking to Fight the War — the FTC Presses Forward on All Fronts to Stop Jefferson-Einstein Merger

Lost the Battle, Still Looking to Fight the War — the FTC Presses Forward on All Fronts to Stop Jefferson-Einstein Merger

Posted: 12/14/2020
Services: Antitrust
Industries: Health Care

Faced with a December 8, 2020, Memorandum and Order by Eastern District Judge Pappert (link) denying the Federal Trade Commission’s (FTC’s) request to enjoin the proposed Jefferson-Einstein merger, and the resulting right of the parties to complete the merger after 11:59pm on December 15, 2020 pursuant to the terms of a February 2020 temporary restraining order, the following procedural steps were taken:

  1. On December 9, 2020, the FTC filed an Emergency Motion for Injunction Pending Appeal (link) in the District Court.
  2. On December 11, 2020, the FTC made a similar filing in the Third Circuit.
  3. On December 11, 2020, Jefferson filed its opposition to the District Court Emergency Motion (see below).
  4. On December 12, 2020, the parties agreed (link) to extend the February 2020 temporary restraining order through 11:59pm, December 21, 2020.
  5. On December 14, 2020, as a result of the agreement, Judge Pappert entered an order that denied the Emergency Motion (link) and accepted the change to the previously entered temporary restraining order.

The FTC is taking its effort to appeal and stop this merger on full bore. As a substantive matter, and broadly stated, the Emergency Motion argues what would be expected: Judge Pappert’s decision incorrectly applied the “amorphous ‘commercial realities’ standard” in analyzing the “hypothetical monopolist test” by improperly (a) focusing more on insurers’ reactions to the merger than patients, as the FTC had argued was more appropriate and (b) completely rejecting the FTC’s economic expert and insurance industry executive witnesses testimony on the basis that it was “neither unanimous, unequivocal nor supported by the record as a whole.” In addition, the FTC argues that if not stayed pending appeal, the completed merger would result in the need to “unscramble the eggs” if, on review, the Third Circuit were to reverse Judge Pappert’s order.

More specifically, the FTC contends that it is clear that relevant precedent was not properly applied by Judge Pappert in that the decision focused more on “whether Jefferson or Einstein compete with hospitals located outside the relevant antitrust markets” instead of where the focus belonged, which is on “whether commercial insurers would pay a small but significant non-transitory increase in price (a SSNIP) in order to maintain access to a hypothetical monopolist of all hospitals in any one of the markets.” The FTC argued that its expert precisely answered the relevant question and established that the merged entities, as the hypothetical monopolist, could indeed profitably increase its prices by at least five percent “in negotiations with insurers” — meaning that the FTC proved the efficacy of its stated geographic markets. Judge Pappert’s mistake, according to the FTC, was to essentially require that the expert go to the next step and demonstrate that the SSNIP could be successfully imposed without the insurers “turning to providers outside the geographic markets” — which the Court says the FTC’s expert did not do, and the FTC says it did, as specifically set out in the expert report. In addition, the FTC argues that Judge Pappert then took another step too far and dismissed as not credible insurance industry executives’ testimony by referencing “commercial realities,” which suggested that insurers could, in fact, defeat a price increase because of the extensive and available competitive alternatives in southeastern Pennsylvania. In sum, based on the evidence presented, the FTC believes that “the merger in this case is manifestly anticompetitive” and that Judge Pappert’s application of the hypothetical monopolist test was an error of law that the Third Circuit ought to correct, and that the ability to avoid that “manifestly anticompetitive” outcome will be, essentially, lost if the merger proceeds at the time it is permitted and is not stayed pending the Third Circuit appeal.

Jefferson and Einstein were given until noon Friday, December 11, 2020 to oppose the FTC motion, and they did (link). A key statement in their response: “The merger is the only avenue for shoring up Einstein’s financial condition.” That statement dovetails with the basis of opposing the motion to stay, which as one might expect, is quite clearly that Judge Pappert “faithfully followed” the relevant Third Circuit precedent – Federal Trade Commission v. Penn State Hershey Medical Center, 838 F.2d 327 (3d Cir. 2016) and that the FTC was ignoring the fact that it had, in fact, in the past been able to “unscramble the eggs” in similar situations. Echoing one of the foundations of Judge Pappert’s reasoning, Jefferson and Einstein point out that the record was clear as a result of “insurers’ ordinary course documents and business decisions, which showed that insurers had plenty of choices besides accepting a price increase” by the hypothetical Jefferson/Einstein monopolist. In sum, the opposition is premised on the straightforward approach that the FTC’s burden in seeking to hold up the planned merger via an injunction pending appeal is quite high, and not only has it not been met, but the FTC has offered no valid argument for lowering that burden.

As of this writing, the parties await the Third Circuit’s decision on the FTC’s request for a stay pending appeal, which the Third Circuit would have to grant by 11:59pm on December 21, 2020, to prohibit a closing.

Given the importance of this decision to the Philadelphia area health care markets and as a matter of antitrust law generally in an area where the FTC and state attorneys general have been particularly active, we will be following this case as it proceeds and updating this alert as necessary.