The Third Circuit upheld the district court’s decision to grant a preliminary injunction enjoining the merger between Englewood Healthcare Foundation and Hackensack Meridian Health, Inc., handing a victory to the Federal Trade Commission (FTC) in the health care market.
The decision bolsters the FTC’s efforts to challenge combinations in the health care market. The decision emphasized:
- the flexibility of the Horizontal Merger Guidelines when defining geographic markets; proving price discrimination—that patients in the proposed market could be charged higher prices than patients living outside the proposed market—is not required;
- the importance of insurer testimony even in a patient-location focused geographic market;
- the impact of internal documents from the parties and their strategic consultants commenting on the anticipated competitive effects;
- establishment of prima facie case through Herfindahl-Hirschman Index measurements of market concentration; and
- the contours of a possible efficiencies defense to a merger challenge, as well as the sliding scale used to rebut potential anticompetitive effects.
The Bottom Line
Health care executives and their attorneys should take early steps, such as concentration analysis, discussions with consultants and employees, and geographic market analysis, to measure and minimize antitrust risk with any potential merger or acquisition.
On March 22, 2022, the Third Circuit affirmed a decision by the District Court of New Jersey to grant a preliminary injunction enjoining the merger between Englewood Healthcare Foundation and Hackensack Meridian Health, Inc. (HMH) as violating Section 7 of the Clayton Act due to its likelihood of substantially lessening competition.
The merger would have combined Hackensack Meridian Health’s 16-hospital system, including two hospitals in Bergen County, NJ, with Englewood Health’s community hospital located in the county. The ruling expands upon the court’s prior decision upholding the FTC’s challenge to Penn State Hershey Medical Center’s proposed merger with Pinnacle Health System. See FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327 (3d Cir. 2016).
As a prerequisite of any Clayton Act challenge, the court had to determine the relevant product and geographic markets. The parties agreed that the relevant product market was “the cluster of inpatient [general acute care] services offered by Englewood and Hackensack’s Bergen County hospitals and sold to commercial insurers.” FTC v. Hackensack Meridian Health, No. 21-2603, 2022 U.S. App. LEXIS 7476, at *8 (3d Cir. Mar. 22, 2022) (internal citation and quotation omitted). But the parties disputed the geographic market analysis.
The FTC focused on patient location, rather than hospital location, resulting in Bergen County being the relevant geographic market because “(1) Englewood and [Hackensack University Medical Center (HUMC), the busiest hospital in NJ], are in Bergen County; (2) the majority of Bergen County residents receive care in Bergen County; and (3) Bergen County is an economically significant area for insurers.” Id. at *9-10.
On appeal, the hospitals argued that as a prerequisite for drawing the geographic market based upon patient location, the FTC had to show that the merged entity could engage in price discrimination—that is, patients in Bergen County could be charged higher prices for inpatient general acute care services than patients living outside of Bergen County. Analyzing the Horizontal Merger Guidelines, and other authorities, the Third Circuit emphasized the flexibility built into the “permissive language” guiding regulators to establish geographic markets. Because price discrimination represents only one analytical framework to define a geographic market, there is no requirement for it to be used. The court emphasized the need for merger analysis to consider the commercial realities of the industry.
Adopting another tool used by regulators and economists, the Third Circuit also relied on the hypothetical monopolist test, which measures whether the merged entity could institute a small but significant non-transitory increase in price (SSNIP). Insurers testified that they could not market a plan that did not include a Bergen County hospital, which, according to the FTC’s economist, would force insurers to accept a SSNIP from a hypothetical monopolist of all hospitals supplying the acute services of the product market to residents of Bergen County, affirming the bounds of FTC’s geographic market.
Moving from its analysis of the geographic market, the Third Circuit next tackled whether the FTC had sufficiently pled a prima facie case that the merger would lead to anticompetitive effects in that market. The Third Circuit analyzed both the market concentration, as measured by the Herfindahl-Hirschman Index (HHI), and direct evidence of anticompetitive effects. The HHI pointed to a highly concentrated market post-merger and a presumption of enhanced market power. Interestingly, the Third Circuit suggests that the HHI alone could establish the FTC’s prima facie case. However, the district court also analyzed direct evidence, including the insurer’s comments, and the parties' and consultant’s own documents referring to the other as a competitor. Indeed, the Third Circuit took note that a consultant advised that Englewood Health’s acceptance of “Hackensack’s offer would slow down competition between the hospitals, but accepting another northern New Jersey health system’s offer would intensify competition with Hackensack.” Id. at *27.
The Hospitals tried to rebut the prima facie case of anticompetitive effects of the proposed merger by arguing that a variety of benefits—such as expansion, cost-savings from optimization, and quality and capacity improvements—offset any anticompetitive effects. The Third Circuit rejected the hospitals’ framing of the argument and instead viewed it as an “efficiencies defense.” Having not yet formally adopted the “efficiencies defense,” the Third Circuit recognized that such a defense “may be viable” if the efficiencies were shown to: “(1) offset the anticompetitive concerns in highly concentrated markets; (2) be merger-specific (i.e., the efficiencies cannot be achieved by either party alone); (3) be verifiable, not speculative; and (4) not arise from anticompetitive reductions in output or service.” Id. at *34-35.
The Third Circuit further clarified its view of how efficiencies compare to the HHI concentration levels. Efficiencies should be viewed “as a sliding scale” with the necessary magnitude of efficiencies “to overcome a prima facie case depend[ing] on the strength of the likely adverse competitive effects of a merger.” Id. at *35. Here, the benefits were not significant enough to outweigh the anticompetitive effects of the merger. The court thought they were too speculative, or not merger specific. The court did find that the district court erred by not considering that the New Jersey Attorney General and Department of Health determined that the merger was in the community’s interests, but that did not prove compelling enough reason for the Third Circuit to overturn the ruling.
The Third Circuit’s opinion reiterates much of the existing precedent in the Third Circuit, while clarifying its position regarding the efficiencies defense. The Horizontal Merger Guidelines remain the analytical framework that parties should utilize. The Third Circuit reiterated the bedrock principle that market analysis requires analysis of the commercial realities of the industry in question. HHI numbers may be enough to state a prima facie case. Comments by insurers, the parties themselves, and the parties’ advisers served as direct evidence for the regulators as to the anticompetitive nature of the transaction. The decision underscores the need to perform an antitrust analysis early in merger discussions among health care providers.
Ballard Spahr’s Health Care Group and its Antitrust and Competition Group offer strategic guidance on securing antitrust clearances and developing a cogent competition strategy that will hold up in court or before an antitrust agency.
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