- A Conversation With California Supreme Court Justice Martin J. Jenkins
- Aam V. Robert Bonta: An End To California Pharmaceutical Legislative Reform?
- Big Stakes Antitrust Trial: In re National Collegiate Athletic Association Athletic Grant-in-aid Cap Antitrust Litigation
- Combatting Covid Through . . . Consumer Protection? a Multi-jurisdictional Approach To Protecting Public Health Through Enforcement of Consumer Fraud Laws
- Executive Committee
- Message From the Chair
- Message From the Editor
- No-poach Agreements: Increasingly Risky
- Recent Developments In Antitrust and Unfair Competition Law
- Table of Contents
- Views From the Top: Managing Antitrust Practice In Changing Times
- Big Stakes Merger: Federal Trade Commission, Et Al. V. Thomas Jefferson University, Et Al.
BIG STAKES MERGER: FEDERAL TRADE COMMISSION, ET AL. V. THOMAS JEFFERSON UNIVERSITY, ET AL.
Edited by Shira Liu1
- James A. Donahue, III, Office of the Attorney General, Commonwealth of Pennsylvania
- Jamie E. France, Gibson, Dunn & Crutcher LLP
- Paul H. Saint-Antoine, Faegre Drinker Biddle & Reath LLP
- Moderator: Shira Liu, Crowell & Moring LLP
I. INTRODUCTION & OVERVIEW
In September 2018, Thomas Jefferson University and Albert Einstein Healthcare Network signed a merger agreement. In February 2020, the FTC initiated an administrative proceeding seeking to permanently enjoin the proposed merger.2 Fact discovery closed in July 2020, and a six-day permanent injunction hearing was held in September 2020. After the hearing, Judge Gerald Pappert of the Eastern District of Pennsylvania denied the motion, and the Third Circuit subsequently denied an emergency stay.3 The FTC withdrew the matter from adjudication, and then dismissed the complaint in March 2021.
Trial counsel for the FTC, the Commonwealth of Pennsylvania, and Thomas Jefferson University shared their experiences trying this case in the midst of the COVID-19 pandemic with the Golden State Institute in November 2021 in a panel discussion moderated by Shira Liu.
Jim Donahue is the Executive Deputy Attorney General for the Public Protection Division of the Pennsylvania Office of Attorney General. The Division includes the antitrust charities, civil rights, consumer protection, fair labor, health care, special litigation, and tobacco sections. From 2009 to 2012, Jim served as the Chair of the National Association of Attorneys General Multistate Antitrust Task Force.
Jamie France is Of Counsel in Gibson Dunn & Crutcher LLP’s Washington, D.C. office. She represents clients in merger and nonmerger investigations before the FTC and DOJ, as well as in complex private and government antitrust litigation. Jamie was previously an attorney in the Mergers IV Division of the FTC’s Bureau of Competition. While at the FTC, she was a key member of the FTC’s trial
teams and several hospital health care provider merger challenges.
Paul Saint-Antoine is a graduate of Columbia Law School and a partner at Faegre Drinker Biddle & Reath LLP, where he co-chairs its national antitrust practice. In 2020, he was a lead trial counsel for Thomas Jefferson University in the FTC’s action to block its merger with Einstein Healthcare Network. This year the Philadelphia Business Journal named Paul one of its Best of the Bar in the category of business relations.
II. THE FTC’S CHALLENGE TO THE MERGER
MS. LIU: Thanks to everyone for joining us today. I will turn it over to Jamie to get us started on our topic today.
MS. FRANCE: It’s a pleasure to be here today. Before I start, I’ll just note that the views expressed today are my own and do not represent the views of the FTC or of Gibson Dunn. I’ll start by going over some of the allegations in the complaint in this case. Jefferson and Einstein, who were two of the largest hospital systems in the five-county Philadelphia area, signed an agreement to merge in September 2018, and their proposed merger would create the largest hospital system in the greater Philadelphia area.
After an investigation that spanned into 2020, the FTC filed a complaint in administrative court seeking to permanently enjoin the merger, and the FTC and the Pennsylvania Attorney General’s Office simultaneously sought a preliminary injunction in federal district court in the Eastern District of Pennsylvania to temporarily enjoin the merger during the pendency of the merits proceeding. After discovery, there was a six-day preliminary injunction hearing held in September and October 2020 before Judge Gerald Pappert, and Judge Pappert ultimately denied the FTC and Pennsylvania’s preliminary injunction motion. Subsequently, after the Third Circuit denied the FTC’s request for an emergency stay of the merger pending appeal, the Commission voted to dismiss its appeal to the Third Circuit, and the matter was withdrawn from adjudication before the FTC’s administrative law judge.
We’ll now talk about some of the allegations in the FTC and Pennsylvania’s complaint. Pre-merger, Jefferson operated 11 general acute care hospitals in Pennsylvania and New Jersey, and three inpatient rehabilitation facilities ("IRFs") in Pennsylvania, and Einstein operated three general acute care hospitals and five IRFs in the Philadelphia area. The first step when analyzing a merger’s likely effect on competition is to identify a relevant market, and there are two components to the relevant market. The first is the line of commerce, meaning the overlapping products or services that are provided by the merging parties, and the second is the geographic area, which can relate to the locations of the merging parties or the locations of their customers. At issue in the Jefferson/Einstein case were two lines of commerce or product markets. The first was inpatient general acute care ("GAC") hospital services, which is a cluster of medical and surgical diagnostic and treatment services that require an overnight hospital stay. The second product market alleged in the complaint is inpatient acute rehabilitation services, which is a cluster of acute rehab services that are provided to post-acute patients, i.e., patients who were previously treated at a GAC hospital. This includes intensive multidisciplinary rehab therapies at least three hours a day for five days a week, and there are some other details about that product market in the complaint. Now, both product markets were limited through services provided to a particular set of customers, and that’s commercial health insurers and their members.
Taking a step back for a minute to talk about that customer set, the FTC’s and the state’s hospital merger enforcement efforts have generally been in the context of what’s called the two-stage model of competition, and this framework recognizes that hospitals compete in two separate but interrelated stages. In the first stage, hospitals compete for inclusion in insurers’ provider networks, which is
largely competition on the basis of price. And in the second stage, hospitals compete to attract insurers and enrollees who require hospital care largely on the basis of nonprice factors. The two stages of competition are interrelated, but hospitals desire to be included in insurers’ networks, and insurers desire to have hospitals in their networks to serve their enrollees. Both affect the relative bargaining leverage of insurers and hospitals, and thus the prices that they negotiate in that first stage of competition. And importantly, this analysis focuses on the insurer as the customer, but it recognizes that patient preferences may influence insurer demands.
Turning back to market definition and the geographic market allegations in the complaint, the FTC alleged that the merger would eliminate competition between Jefferson’s and Einstein’s general acute care hospitals in two geographic markets in and around Philadelphia and the nearby Montgomery County, as well as eliminate the competition between Jefferson’s and Einstein’s IRFs or their rehab hospitals in one geographic market that covered parts of Philadelphia and parts of Montgomery County. The antitrust agencies employed a hypothetical monopolist test to evaluate whether groups of products in geographic areas are sufficiently broad to constitute relevant antitrust markets. In the context of a hospital merger such as this one, the hypothetical monopolist test asks whether a hypothetical owner of all of the hospitals or all of the IRFs here in a candidate market could profitably impose at least a five percent price increase in negotiations with commercial insurers.
Now, importantly in this case, all three of the markets alleged in the FTC and Pennsylvania’s complaint satisfied the hypothetical monopolist test. First, the northern Philadelphia area geographic market consisted of 11 GAC hospitals in Philadelphia and Montgomery County, and it focused on an area of overlap between two of Einstein’s hospitals and two of Jefferson’s hospitals. According to the complaint, the merged hospital system would control at least 60 percent of this market post-merger. Second, the Montgomery area geographic market consisted of ten GAC hospitals in or near Montgomery County, Pennsylvania, and it focused on the area of overlap between one of Einstein’s hospitals and two of Jefferson’s hospitals, and as alleged in the complaint, the merged hospital system would control at least 45 percent of this market post-merger. Third, the Philadelphia area geographic market for inpatient acute rehab services consisted of seven IRFs in Philadelphia and Montgomery County, and it focused on the area of overlap between Jefferson and Einstein’s largest IRFs, Magee Rehab Hospital and MossRehab at Elkins Park. And as alleged in the complaint, the merged system would control at least 70 percent of this market post-merger. Under the merger guidelines, the post-merger concentration level and increase in market concentration in all three of the markets that we just went through created a presumption that the transaction was unlawful.
Beyond the structural presumption of illegality, the complaint also alleged that the merger would eliminate the close competition between the parties for inclusion in commercial health insurers’ hospital networks and that this would enhance the merged system’s ability to negotiate more favorable reimbursement rates with insurers in that stage one of competition as well as diminish their incentive to compete on the basis of quality and service offerings in stage two of competition.
The complaint also contained allegations related to entry or expansion, that entry or expansion by other GAC hospitals or other IRFs would not be timely, likely, or sufficient to counteract the transaction’s adverse competitive effects.
And finally, the complaint alleged that the defendants had not asserted cognizable merger efficiencies and that even if the defendants could identify some cognizable efficiencies resulting from the merger, any savings likely to be passed on to patients would be far outweighed by the transaction’s potential harm and would not be sufficient to justify the transaction.
MR. SAINT-ANTOINE: Thank you to GSI for giving us the opportunity to talk about the Jefferson case—a case that is very important to those of us that live in the Philadelphia area, but also a significant one for those of us that practice in this particular area of antitrust jurisprudence. Like Jamie, I should begin with the admonition that these are my views and don’t necessarily reflect the views of my firm, Faegre Drinker, or any of its particular clients.
Those that have reviewed Judge Pappert’s decision denying the government’s request for a preliminary injunction know that the court ultimately grounded its decision on the plaintiffs’ failure to prove a relevant geographic market for both the types of health care services that Jamie talked about in her presentation. But the defendants, in presenting their case to the court, did not want to limit their presentation to the market definition issues. They very much wanted to explain to the court why this transaction was so important to the parties, and there were two principal reasons.
First, the north Philadelphia flagship hospital is a safety net hospital, serving one of the poorer communities in Philadelphia with a very high percentage of government payor mix. For those that are familiar with health care markets, you know that the health care systems often rely on commercial insurance to stabilize their finances, and in this case the Einstein system was losing upwards of $30 million annually. The financial struggles of Einstein were well recognized in the community, and the large insurer Independence Blue Cross even provided favorable rates, higher rates, to avoid what it described in testimony as a financial tragedy. Einstein looked for a solution to its financial predicament and ultimately settled upon Jefferson, which remained the only strategic partner with a strong balance sheet that was willing to merge with Einstein.
Second, the other benefits of the merger that we wanted to convey to the court were the efficiencies to be gained, and this began with due diligence by the parties before the transaction and then ultimately was complemented in court with expert testimony from our expert Lisa Ahern, who identified as much as $58 million in annual merger-specific efficiencies. Now, again, we thought it was important to explain to the court why we wanted to do the transaction, but we recognized the high hurdles of pursuing defenses either based upon the financial situation or merger efficiencies, which is an affirmative defense. So, much of our focus was on the market definition issues where the government had the burden of proof, and if you could encapsulate the defendants’ theme in its presentation on market definition issues, it was commercial realities.
The Third Circuit in the Hershey decision made clear that no matter what methodology experts pursued, whatever economic evidence was entered into court in support of one position or another, they’ve all had to comport with commercial realities in the particular proposed market, and this was where we took issue with the government’s expert case.4We pointed Judge Pappert to a number of aspects we thought were incompatible with his opinions on market definition.
For example, in the Montgomery area market for inpatient hospital services that Jamie described in her presentation, part of that depended upon establishing that the parties’ hospitals in that geographic area were close competitors, but if you’re familiar with this geography of the Philadelphia area, you know that that part of Montgomery County is divided by a major interstate highway, the I-476, referred to as the Blue Route by us locals, and when we looked at the economic statistics, we found that 70 percent of Einstein’s patients were on one side of the highway and 96 percent of Jefferson’s patients were on the opposite side of the highway—incompatible, in our view, with the notion that these hospitals were close competitors.
Another commercial reality that we focused on in critiquing the plaintiffs’ expert case was how they went about measuring closeness. The primary measure relied upon by the government’s expert
was the distance between the parties’ hospitals, but if you think about why you’re measuring closeness, it’s all about patient convenience, and we thought and advocated to the court that drive times were a much more reliable measure of closeness between the hospitals than distances; and in fact when you looked at drive times as opposed to drive distances, it changed the number of competing hospitals in either of the Montgomery or the Philadelphia markets. It expanded the number and therefore diluted the shares of the two-party hospitals.
And then also another aspect of commercial realities is we looked at the past as a predictor of the future, and for example, we looked at what happened when Einstein opened its Montgomery hospital in terms of the impact on Jefferson, again to assess whether or not they were particularly close competitors.
And what our expert, Cory Capps, was able to demonstrate was that the opening of Einstein’s Montgomery facility in 2012 had little impact on Jefferson’s own market shares in that proposed market. Another aspect of the market that we wanted to focus on in terms of commercial realities picks up on a point that Jamie mentioned, and this is the two-stage method of competition in hospital merger cases. Actually, this is one area where the parties agreed that you have to look at both the insurer level and the patient level to have a complete picture of the market dynamics, and in this case we thought it was important, when you looked at the competition at the insurer level, on the predominant influence of Independent Blue Cross ("IBC") in this market. In terms of negotiating leverage, we showed that statistically they accounted for about half of the market share for commercial insurance in the proposed market. IBC had enormous leverage over all of the health care systems. And in fact IBC, we discovered, had done some analysis to show that if Jefferson went out of network, they were going to lose far more than IBC was in terms of financial losses—upwards of tens of millions of dollars, by IBC’s own calculations. And in terms of who IBC would turn to if Jefferson went out of network, our own analysis—and I think this was consistent with IBC’s analysis—was that it was not Einstein, the hospital in north Philadelphia; it was Penn Medicine that IBC viewed as Jefferson’s closest competitor. For us, this was a very important commercial reality, and anybody who lives and works in the Philadelphia area is very aware of the strong presence of Penn Medicine.
MR. DONAHUE: Thank you, Shira, thank you Paul and Jamie, and thank you GSI for inviting us to speak. You know, we’re often asked from the Attorney General perspective, why do the Attorneys General get involved in these cases and what is your experience? And our experience is a little bit different from that of the Federal Trade Commission or the Department of Justice in these cases, in that the Attorneys General have a wide range of responsibilities in the health care arena—not only from the antitrust perspective, but oftentimes from the charitable trust perspective. California, Massachusetts, and Pennsylvania are the three states that are most actively involved in hospital transactions and the most actively involved in the health care area generally, so we have a lot of experience. That experience involves quite a bunch of different types of cases. And I want to talk a little bit about two that we thought had some relevance here in this matter.
First, the Allegheny Health, Education and Research Foundation (AHERF) case became the largest nonprofit bankruptcy in the history of the United States. It involved a health system that developed in the Pittsburgh area, expanded to the Philadelphia area and included about ten hospitals, a number of doctors’ practices and a nascent attempt at establishing some type of health plan provider. All of these hospitals were acquired in quick succession, and their collapse led to the loss of endowments, the closing of most of the Philadelphia hospitals, and the loss of Allegheny General as one of the key tertiary care hospitals in the greater Pittsburgh area. We brought a number of adversary proceedings to try to reclaim the various endowments that were sort of shifted from the solvent parts of AHERF to the insolvent parts.
We ultimately filed the bankruptcy claim of about $78 million and recovered about $34 million, which went back into similar endowments for health care, but there was a significant loss of assets for the charitable mission here in the AHERF case.5
Second, UPMC/Highmark was a little bit of a different story. UPMC, which is the University of Pittsburgh Medical Center, was the largest health system in the greater Pittsburgh area, especially after the AHERF failure. Highmark was the largest health plan in the Pittsburgh area, with a market share of around 60 percent. That ten percent difference between IBC in Philadelphia and high 60 percent in Pittsburgh is actually a very big difference in terms of how hospitals deal with them. And Pittsburgh has some unique characteristics. One of those characteristics is that the public is very loyal to its insurance company, Highmark, and they’re very loyal to UPMC. So, people would have been customers of Highmark and its predecessors through generations, and they would have been patients of UPMC and its predecessors through generations. So, Highmark announced that it was going to acquire the West Penn Allegheny system, which was the successor to AHERF. UPMC turned around and said, we’re going to terminate your contract with us then, and that created a tremendous amount of turmoil about where people would get their care, especially in certain areas like cancer and transplants, where UPMC was pretty significant. We ultimately got consent decrees from both of them, basically dealing with their charitable missions, not so much from a competitive standpoint, but we got consent decrees.6 Just as sort of an aside and to give some color to this, the two groups, the UPMC and Highmark, would not communicate directly with each other during those negotiations, nor would they sign the same documents. So, we negotiated two identical, parallel consent decrees. Under the consent decrees, individual consumers could make, you know, complaints or ask for mediation. Twenty-five thousand of them did. We had three hearings involving potential contempt or violation of the consent decrees, and at various times there were 25 attorneys working full-time in this across our office, the Insurance Department, and the Pennsylvania Department of Health. So, the bottom line is we didn’t want to go through this again.
So, we see some similarities between the Jefferson and Einstein situation and the AHERF and UPMC situations. As has been mentioned, Einstein had some financial issues. Now, I want to note that Einstein’s management and Jefferson’s management were leagues above, in terms of quality, the management at AHERF, but you have a health system merging with another health system and some pretty significant financial issues and what sort of risks are involved there. Jefferson had done a series of other transactions in pretty short succession, but it merged with three other hospital systems and it merged with another college. Jefferson is actually known as Thomas Jefferson University, but prior to the merger with Philadelphia University, it was really only a medical school and a nursing school. The merger with Philadelphia University basically made it into a full-service university, covering many different majors and programs. And Jefferson also had an interest in expanding into the health plan area. So, all of these factors weighed heavily in our decision to join the Federal Trade Commission to challenge this transaction.
III. MARKET DEFINITION IN HOSPITAL MERGER CASES
MS. LIU: Thanks to everyone for introducing those issues. I’d like to ask you a few questions, starting with the court’s holding. Jamie and Paul, you talked a bit about the court’s holding and focus on insurance companies as the most relevant buyer, and the court also rejected testimony from one of the insurer witnesses, noting that that witness opposes all hospital mergers. So, where does that leave the government in future hospital merger cases and what kind of evidence can it put forward from insurers to meet its burden?
MS. FRANCE: Thanks, Shira. I can take this first, and then I’m sure Paul has plenty to say about it as well. I think that it’s important to remember
Judge Pappert’s opinion in Jefferson was a very fact-specific holding, and it was based a lot on the judge’s credibility determinations about insurer witness testimony, and that’s discussed at length in Judge Pappert’s opinion.
At trial the government put up evidence through its economic expert that showed that each of the geographic markets passed the hypothetical monopolist test and that in each of those three markets, the central Einstein hospital’s closest competitor was a Jefferson hospital, and this analysis was focused on competition at the hospital level. As Paul highlighted earlier, the defense emphasized insurer witness testimony that related more to system-level competition. So, there’s a bit of a disconnect there. But since the Jefferson holding, we’ve seen that insurer testimony is still important evidence in hospital merger cases. For example, there was a hospital merger case litigated by the FTC after Jefferson/Einstein in the district of New Jersey, so also the Third Circuit. This was the FTC’s challenge to the Hackensack-Englewood merger, and in that opinion the court relied on insurer testimony as well as other evidence in holding that the FTC met its burden of proving that the merger was likely to substantially lessen competition.7 So, I think juxtaposing those two opinions highlights the very fact-specific nature of this opinion, but I do think that the Jefferson opinion really underscores the importance of ordinary-course, documentary evidence from insurers that supports their testimony.
MR. SAINT-ANTOINE: So, I think that’s my cue. There is actually a fair amount in what Jamie just said that I think the defendants agreed with in terms of first the importance of evaluating insurer evidence. As I think we both talked about earlier in our presentations, this is a two-stage model of competition, and you’ve got to be aware of that. As the courts recognized, patients are largely insensitive to these hospital prices, and the real bargaining takes place between the providers and the insurers.
And to give you an example of the significance of the distinction between the negotiations between insurers and providers and patients, are the statistics that economists—often on both sides—rely on but sometimes over-rely on, and these are the diversion ratios. And essentially, with diversion ratios, you’re looking at where would a patient’s next best option be if its best option wasn’t available? This is an important statistic, but as Judge Pappert recognized and as the Third Circuit recognized, its focus is on patient preferences, but insurer preferences are really focused on price. So, one lesson, I think, is if you’re going to rely diversion ratios, you’ve got to be aware of limitations.
And then another point to pick up on that Jamie mentioned are the ordinary-course documents and the specific testimony of the insurers. Again, this isn’t a very important source of information, but it is very fact-specific, and in this case, we were able to show that IBC had some conflicting interest. It was not purely a disinterested bystander commenting on the market. Among other things, it was looking to see whether Jefferson was going to improve its position as a potential competitor for certain forms of insurance. So there were reasons why Judge Pappert ultimately concluded that not everything they said could be taken at face value.
IV. THIRD-PARTY EVIDENCE AND WITNESSES
MS. LIU: That actually leads me into my next question, which is more generally, do you have thoughts on how to use third-party evidence and third-party witnesses effectively in antitrust cases, where most witnesses from third parties are still likely to have a preferred outcome in the case?
MR. SAINT-ANTOINE: I guess the point I would make on this topic is you can’t forget that this is a trial. By the time the case gets to a preliminary injunction proceeding, the party and their counsel have spent a lot of time together at the investigative stage in meetings with the Commission and the Attorney General’s Office,
and you’ve also spent a lot of time with your experts, and there could be a potential that you get too narrow of a focus on certain aspects of the case, including the expert testimony. In this particular case the government put together, with a very qualified economic testifying expert, a case that laid out, in a very specific methodology, the hypothetical monopolist test, and applying that test and some other criteria, drew lines in Montgomery County and Philadelphia and then computed market shares.
And if you just listen to it in the abstract, it gave you one view of the merits, but ultimately Judge Pappert, sitting in the court in Philadelphia, aware of the bigger picture as well as aware of the ordinary-course documents and the evidence of lay testimony, had to balance all of that against conflicting expert testimony. So, I think one lesson to be drawn from this is get a great expert, develop a great expert case, but make sure that you can buttress that with fact testimony.
And secondly and briefly, again because this is a trial and there’s going to be conflicting testimony, make sure you have accounted for any issues with credibility. And as I mentioned before with IBC, a very important fact witness, Judge Pappert found some reasons to discount the testimony because of their own self-interest.
MR. DONAHUE: I’ll just say, look, as a general rule, the fact testimony and the expert testimony have to coincide, and some of the concepts and the terminology that we use on the antitrust side, like the hypothetical monopolist test and diversion ratios, are sort of foreign to sort of the way businesses talk about stuff. Although they actually do use those concepts, they just call them different things. And I think it’s certainly important to draw the connection between the two.
In this particular case, as Jamie mentioned, there’s a two-stage level of competition, and the insurers kind of wear two hats. One hat is they’re negotiating for themselves and for their insured product, but they are also a proxy for the people who are buying insurance, the consumer and the employer, who also have slightly different interests, and it’s important to make sure that those interests, and what the insurer is doing in that area to get across its representation of its interests, are revealed in the testimony.
MS. FRANCE: I just have one thing to add, which is to echo what I said before, I think the interests or the potential interests of third parties are always going to be an issue in antitrust cases because so often we’re looking to those who are potentially going to feel the effects of a merger, the customers, and customers have various interests at play. We’re also often looking to competitors when we’re defining a market or potential competitors to get other evidence, aside from just evidence from the merging parties or just evidence from an economic expert about the competitive dynamics at play.
So, I think there is the potential for there to be competing interests from third-party witnesses at a variety of levels, and I think this underscores the importance of having ordinary-course documents from third parties to support their testimony.
V. LITIGATING NEW PRODUCT MARKET DEFINITIONS
MS. LIU: You mentioned the GAC product market definition has been used quite a lot in similar cases, but I believe that IRF market is new, and the court rejected this product market. Do you have thoughts on this outcome and any recommendations for litigants who are bringing antitrust cases with new product market definitions or defending against allegations, including new product market definitions?
MS. FRANCE: Ultimately, as antitrust practitioners know, market definition is a very fact-specific inquiry. I think courts in the antitrust agencies will continue to evaluate both documentary and testimonial evidence from the parties, from third parties, and economic evidence, when they’re evaluating new product market definitions. So, I think there is a lot of room to read Judge
Pappert’s opinion as very fact-specific on this particular market.
I will note in Jefferson there was a dispute between the parties, and this played out a lot at the hearing, about whether skilled nursing facilities should be included in the IRF product market. Those services are provided, as the government alleged, at IRFs rehab hospitals. Ultimately Judge Pappert’s opinion did not rule on whether the IRF market was a properly defined product market, but earlier this year the State of California, in a different action, ordered a divestiture to resolve competitive concerns in a merger between two skilled nursing facility companies.8 I think it’s possible that if that matter had gone to trial, one of the questions likely to have been disputed would have been a similar product market question about whether the California Attorney General could support its allegation that skilled nursing facility services was the relevant market.
So, I think we’ll continue to see this play out in a variety of different health care spaces. But I think more broadly, the court’s holding on market definition in Jefferson just highlights the need, as we were talking about before, for antitrust plaintiffs to build multiple types of evidence that supports whatever market definition that they’re alleging. And it was clear from Judge Pappert’s opinion that he thought the fact testimony and the economic expert analysis should have lined up even more closely than they did.
MR. SAINT-ANTOINE: So just a pickup on that. Because this was the rehab services market and was something new—there are a lot of merger cases dealing with inpatient acute care services—I think it was fair to say that this was really taking both sides a bit outside their normal comfort zone, and we were throwing out words about IRFs and SNFs like we have been dealing with this product market for years and decades, but really, no, this was really new stuff, I think, in terms of the analysis.
For defendants, we really went back to our theme, in terms of commercial realities, and emphasized to the court when there was bargaining going on between the providers and the insurers for the full range of services, how little attention was paid to rehab services, no matter how you defined it, and I think our effort was really focused on putting this aspect of the overall market in perspective.
MR. DONAHUE: If I can just add something about these two IRFs, Moss and Magee, were nationally renowned rehab facilities and oftentimes were responsible for developing some of the most effective treatments of various types of rehabilitation needs. So, there was that other little aspect of this where not only do you have sort of a new market, but you also had two very significant players in the research and clinical area that were merging, and you would be losing some competition as a result of that as well.
VI. REMOTE HEARINGS-LESSONS LEARNED
MS. LIU: Let’s go back to this timeline, and you can see that, as you mentioned, discovery took place March through July of 2020 and the hearing took place September of 2020. I think we all remember what was going on in the world at those times, and so I was wondering if you could discuss how it went with the actual depositions and how the hearing went in September of 2020, and if you have any advice for litigants moving forward in these situations.
MR. DONAHUE: I think we did 45 depositions, almost all of which were seven hours long, between the last week of June and the first week of August. That’s a lot. Several things we learned, some of which are just basic and others are more important. One thing is make sure if you are doing a deposition, whether you are asking the questions or defending or you’re the witness, that your laptop is plugged in. Several times we’ve had people—you know, these videoconferences use a lot of your battery power and that they go out.
I think another sort of helpful tip is that you have a court reporting firm that has multiple court reporters in multiple locations. The court reporters were all basically doing this from home, and in one of the depositions a thunderstorm came through and wiped out the electricity in the court reporter’s house, so the firm was able to find another court reporter and get them set up. It wasn’t a huge delay, maybe ten to 15 minutes, but you don’t want to have something happen when you’re doing this stuff remotely and not be able to continue the deposition. On the whole, though, it was actually fairly efficient to do these depositions. You know, people got the hang of sharing their screens and moving exhibits and that type of thing. It’s important that everybody had good Internet connections. Not everybody did. But when they did, things went smoothly.
At the trial, giving the sort of caution that Jamie and Paul did—I am speaking for myself and not the Office of Attorney General—the brand of videoconferencing used by the Eastern District of Pennsylvania is not something I’d recommend. It couldn’t hold a lot of people. It kept crashing. It was really difficult dealing with remote witnesses. And I think that had an impact on the judge, in terms of even people’s credibility. One might think, "If this was really important, they would have come to the courthouse in person, as opposed to doing this remotely."
The other thing that I think is very important is that when you’re doing this, a remote witness has to be, in effect, in a clean room. They can’t have anything that would disturb them and they can’t have their email or their cell phone there. One of the witnesses looked at a text or something that she got during her testimony and everybody remarked on it and thought that maybe she was looking at notes and that sort of thing, and that really hurt that witness’s credibility. So, those are just sort of pragmatic things from doing things remotely. I’m sure Jamie and Paul have other things that they noticed through this process.
MR. SAINT-ANTOINE: So, I’ll jump in with some thoughts, many similar to those shared by Jim. I’m looking at the timeline, and it does just underscore this sort of parallel between our schedule and the really worst part of the pandemic created some unique challenges.
Obviously, as the audience can tell from this discussion, the parties and their counsel had very divergent views on the merits. But I will say that there’s no way we get the case ready for trial in the time we did if it weren’t for the professionalism by both the Federal Trade Commission and the Attorney General office and the cooperation that we got, in terms of scheduling and logistics and technology; the leadership was just essential to getting this done. And if you think about it, we were six days in court, pre-vaccination. That was a very unusual, challenging experience.
In terms of lessons learned, Jim’s absolutely right: make sure that you’ve got good technology, good Internet access, but also think about backup plans. We had some remote witnesses who were going to be looking at documents online, but we know things happen, so we would send them hard copies, with the permission of the other side, and if the technology failed, at least you had a back-up plan.
Again, echoing what Jim said, I thought that the efficiency of the deposition process remotely was surprisingly good. Get a good vendor. It makes a big difference if you have a good vendor. And I think this is something—once we get past this terrible pandemic, I think we’re going to evaluate whether a lot of depositions should continue to be remote, particularly when the alternative is crisscrossing the country. So, very challenging, definitely some lessons learned at a premium, in terms of cooperation between opposing counsel.
MS. FRANCE: I just have one thing to add, which is that we were talking earlier about a central market definition question in the case related to whether skilled nursing facilities should be included in the rehab market, and there were a number of skilled nursing facilities, as well as hospitals that were third
parties in the case, and it was a very sensitive time to be dealing with health care providers as third parties. I think all of the parties in the case really grappled with how to deal with gathering evidence from these very important witnesses, who were the hardest hit by the pandemic at that time. And I think everyone really tried to be sensitive there, but there were a lot of competing interests at play, so I think it was a difficult time and all sides were appreciative of the cooperation from those third parties who had a lot more to think about than complying with a third-party subpoena
VII. CALIFORNIA MERGERS
MS. LIU: Of course this merger is in the Philadelphia area. I actually have learned a lot about the Philadelphia suburbs today. The California AG’s office has been active on hospital mergers as well. Two recent settlements actions come to mind: First, the settlement in the People of the State of California v. Sutter Health;9 and second, the settlement regarding the affiliation of Huntington Memorial in Pasadena with Los Angeles-based Cedars-Sinai Health System.10
MR. DONAHUE: You know, we work very closely with our California colleagues, and a lot of these terms have been in other consent decrees that we have done in prior cases. We share a lot of information, in terms of theories and how to address different problems, and as I said at the beginning, you can look at these cases and say, "Okay, these hospitals shouldn’t merge because it will result in an anticompetitive situation." But sometimes you have a situation where, absent the merger, one of the systems is going to fail or something like that, and a lot of people will be displaced from their jobs and that sort of thing. From the Attorney General’s perspective, we often take a broader view of what is an appropriate remedy.
You’ll see that a lot of these remedies here—and I’m sure Jamie will weigh in on this—the FTC wouldn’t do that. They would really want a structural remedy as opposed to conduct remedies. But from our perspective—and I’m not speaking for the California Attorney General but from our perspective—sometimes you do look at other types of commitments, in terms of a remedy, to address this to deal with the overall impact of a particular transaction.
MR. SAINT-ANTOINE: I’ll jump in with just a general observation. So, this is dealing with contractual provisions outside of the merger context, but nonetheless, when you’re doing the analysis—and often it’s the case that this is very fact-specific, market-specific analysis—you nonetheless don’t want to lose sight of the same thing we’ve been talking about today, and that is the two-stage aspect of competition in the health care space.
So, in evaluating whether any of these provisions are procompetitive or potentially anticompetitive, you can’t lose sight of who’s doing the bargaining, who has the bargaining leverage, and what are the effects at either the insurance stage of competition or the patient stage. So, it is a different context but the same two-stage aspect of competition.
MS. LIU: Well, it looks like we are out of time, but thank you so much for your time and for this great discussion.
1. Shira Liu is Counsel at Crowell & Moring LLP in Orange County. Her practice focuses on antitrust and complex commercial litigation. She earned an A.B. in Economics magna cum laude and an A.M. in Statistics from Harvard as well as a J.D. from Stanford Law School, where she was the Executive Editor of the Stanford Law Review and a member of the Supreme Court litigation clinic. She clerked for Judge A. Wallace Tashima of the U.S. Court of Appeals for the Ninth Circuit.
2. See In the Matter of Thomas Jefferson University and Albert Einstein Healthcare Network, FTC Matter/File No. 181 0128; Complaint, In the Matter of Thomas Jefferson University and Albert Einstein Healthcare Network, Dkt. No. 9392 (Feb. 27, 2020), available at https://www.ftc.gov/system/files/documents/cases/d09392_administrative_part_iii_complaint.pdf.
3. Fed. Trade Comm’n v. Thomas Jefferson Univ., 505 F. Supp. 3d 522, 528 (E.D. Pa. 2020), appeal dismissed sub nom. Fed. Trade Comm’n v. Thomas Jefferson Univ., No. 20-3499, 2021 WL 2349954 (3d Cir. Mar. 4, 2021).
4. Fed. Trade Comm’n v. Penn State Hershey Med. Ctr., 838 F.3d 327 (3d Cir. 2016).
5. See, e.g., In re Bankr. Appeal of Allegheny Health, Educ. & Rsch. Found., 252 B.R. 309, 313 (W.D. Pa. 1999).
6. See Press Release, Office of Att’y Gen. Josh Shapiro, AG Shapiro, Governor Wolf Announce New 10-Year Contract Between UPMC and Highmark (June 24, 2019), https://www.attorneygeneral.gov/taking-action/ag-shapiro-governor-wolf-announce-new-10-year-contract-between-upmc-and-highmark/.
7. See Fed. Trade Comm’n v. Hackensack Meridian Health, Inc., No. CV 20-18140, 2021 WL 4145062, at *1 (D.N.J. Aug. 4, 2021).
8. See Proposed Final Consent Judgment, California v. Providence Group, Inc., No. 3:21-cv-07331 (N.D. Cal. Sept. 21, 2021).
9. Final Approval Order, UFCW & Employers Benefit Trust v. Sutter Health, No. CGC-14-538451 (Cal. Super. Ct. Aug. 27, 2021), available at https://oag.ca.gov/system/files/attachments/press-docs/Final%20Approval%20Order%20Sutter.pdf.
10. See Press Release, Office of Cal. Att’y Gen., Attorney General Becerra Conditionally Approves Affiliation Agreement Between Cedars-Sinai and Huntington Memorial Hospital (Dec. 10, 2020), https://oag.ca.gov/news/press-releases/attorney-general-becerra-conditionally-approves-affiliation-agreement-between.