“the state and federal government looks at these kinds of things for antitrust . . . and you can’t create a monopoly. And so you know the reality of it is even if they wanted to, Geisinger would not have been able to acquire us.”
This quote, from the CEO of Evangelical Community Hospital (“Evangelical”), is prominently featured in the Antitrust Division’s complaint seeking to unwind the community hospital’s partial acquisition by its central Pennsylvania competitor, Geisinger Health. While a governmental challenge of a hospital acquisition is not surprising given the regulatory atmosphere1, this particular challenge is sure to raise interest because the parties negotiated down from a merger to a partial acquisition under pressure from the government, and the novel allegations spelled out in the complaint.
An Interesting Complaint: Subtext Leads the Way
The first ten pages of the DOJ’s thirty-four page Complaint are dedicated to an in-depth discussion of the parties’ motivations for the transaction and the history of the deal negotiation, none of which goes directly to the elements of proof they will need to prevail. The DOJ's Complaint is focused on the motivations for this transaction but relatively sparse with regard to economic theories or reasons why a partial acquisition, as opposed to a full merger, will harm competition in this instance.
According to the Complaint, Geisinger is the largest health system in a six-county region in central Pennsylvania, operating 12 hospitals in Pennsylvania and New Jersey, as well as numerous urgent-care centers and other outpatient facilities in those states. Evangelical is the largest independent community hospital in the same region. DOJ alleges that “Geisinger competes for virtually all of the services that Evangelical provides . . .” and the Complaint describes the parties as “each other’s closest competitor.” The Complaint notes that in the past the parties had both lowered prices in order to better compete for patients belonging to several religious communities, including Amish and Mennonite practitioners in central Pennsylvania.
Beginning in late 2017, Evangelical announced a bidding process for its sale, and Geisinger responded by seeking to acquire the entirety of Evangelical. This is where DOJ’s dive into the parties’ motivations began. DOJ alleges that Geisinger’s attempted complete acquisition was motivated by a fear “that Evangelical could partner with a hospital system or insurer to compete even more intensely with Geisinger” and that Geisinger’s bid for the acquisition was “substantially larger” than any comparable offer.
According to the Complaint, the parties recognized the significant antitrust risks of the acquisition, and decided to alter the nature of the transaction from an outright acquisition to a “Collaboration Agreement” under which Geisinger would acquire a 30% interest in Evangelical in exchange for a $100 million pledge for Evangelical’s investment projects and IP licensing. Importantly, in addition to the 30% interest in Evangelical, Geisinger was also to receive rights of first offer and first refusal with respect to any future joint venture, competitively significant asset sale, or change-of-control transaction. Additionally, Geisinger was given approval rights over Evangelical’s use of the $100 million pledge. Because the transaction would not result in Geisinger acquiring control of Evangelical, an HSR filing was not required, and the Complaint paints the picture that the parties structured the deal this way to attempt to avoid antitrust scrutiny. Nevertheless, the DOJ’s Antitrust Division learned of the agreement and opened an investigation in short order.
At the outset of the Justice Department’s investigation into the partial acquisition, the acquisition agreement provided Geisinger with a number of rights perhaps more akin to that of a complete acquisition. Those rights included: (1) the right to appoint six members to the Evangelical board of directors; (2) the potential for Geisinger to fund revenue lost by Evangelical; (3) proposed a joint ventures in areas where the parties historically competed; and (4) the right to provide input on would be Evangelical’s CEO. While the agreement was amended twice, in part to address DOJ concerns, the DOJ alleges that the amendments cannot fix Geisinger’s motivation for doing the deal or its anticompetitive effects.
Central to the Complaint’s factual allegations are quotes by the parties, which DOJ suggests show that the partial acquisition was a thinly veiled attempt at Geisinger seeking to acquire and control its closest rival, albeit by a different name. Those quotes include:
- In 2016, an internal Geisinger document noted that “alignment” with Evangelical would provide it with “[d]efensive positioning against expansion by [UPMC] and/or affiliation with [another] competitor.”
- A senior employee at Geisinger wrote that the agreement was “[k]inda smart really” because it did “not require AG approval.”
- Testimony of one Geisinger employee included that “one of Geisinger’s objectives was to integrate . . . to the fullest extent possible.”
- A senior employee at Geisinger wrote that through the investment, Evangelical is “tied to us” so “they don’t go to a competitor.”
The Economics: What is the Harm?
The DOJ’s theory of competitive harm is somewhat unclear. The Complaint alleges that due to the increased market concentration and market power from the transaction, the defendants will be able to jointly raise prices through an agreement or other collusive behavior. The government alleges concentration statistics in the typical way, as measured by the Herfindahl-Hirschman Index (HHI), and asserts the relevant market is highly concentrated, with a current pre-merger HHI of 3,979, and after the acquisition, 5,799.2 Under the Horizontal Merger Guidelines, HHIs in this range trigger a legal presumption that the transaction violates Section 7. However, the presumption of illegality, is not triggered with a partial acquisition, as the DOJ acknowledged in the Complaint. Instead of explaining why the HHIs are a reliable indicator of market power in this instance, it asserted that “[a] partial acquisition that creates the incentive and ability for two close competitors to coordinate in such a highly concentrated market poses a similar danger to consumers” when compared to that of a complete control transaction.
Ultimately, DOJ alleges that the partial acquisition will reduce incentives of the parties to compete on quality, scope, and availability of inpatient general acute-care (GAC) services, and is likely to lead Geisinger to raise prices to commercial insurers and other purchasers of GAC services, resulting in consumer harm. Moreover, the Complaint alleges that Geisinger would maintain improper influence over Evangelical, which would prevent Evangelical from engaging in any joint ventures that might otherwise compete against Geisinger. Assuming the economic incentives are true, it is unclear how they result in economic harm, to whom, and to what extent, and how those potential harms related to the purported benefits of the deal.
DOJ Brings Sherman Act Section 1 Claim
Perhaps due to the uncertainty of relying on a Section 7 claim based on the acquisition of only 30% of a rival, DOJ also asserted a claim under Section 1 of the Sherman Act. Section 1 of the Sherman Act prohibits agreements between two or more entities to unreasonably restrain trade and is rarely used as a count in a merger or acquisition case.
Interestingly, the Complaint alleges that the parties have improperly coordinated in the past, which increases the risk that Geisinger’s minority ownership would in fact be much more. In particular, the Complaint alleges the Geisinger and Evangelical have had “regular touch base meetings” to discuss topics including strategic growth options, and have entered into an agreement to avoid recruiting each other’s employees. None of the past conduct is alleged to be illegal. However, one could argue that this evidence of previous coordination serves two purposes, supporting not only the DOJ’s Section 1 claim, but also the government’s Section 7 claim, which is predicated on a coordinated effects theory not typically utilized in partial acquisition challenges.
This case is an important reminder for parties negotiating an acquisition, but at the same time evaluating a “plan B.” Here, the parties inherently acknowledged the antitrust risk of a full acquisition, and decided to pivot to a partial acquisition—that doesn’t lead to a presumption of illegality under the Sherman or Clayton Acts. But the fact remains that acknowledging the significant antitrust risk, the parties still structured the partial acquisition as providing substantial rights to the buyer, speaking to Geisinger’s motivations for the transaction, and as DOJ alleges, its wish to control its closest rival. Moreover, this case provides a stark reminder that parties are not clear of antitrust enforcement when they avoid HSR filings. FTC and DOJ have the authority to challenge mergers that are otherwise non-reportable, and if this case is of any educational value, will be aggressive where it appears the parties have done their best to avoid being flagged by agency review. Whether the interestingly-pleaded Complaint speaks to DOJ’s behavior in the future is to be determined, but we will be eager spectators.
1 The 2019 Hart-Scott-Rodino Annual Report noted multiple healthcare-related challenges, including UnitedHealth’s proposed merger with DaVita Medical Group and CVS Health’s proposed acquisition of Aetna. With respect to hospital transactions, the FTC has in recent history litigated multiple hospital mergers, including Penn State Hershey Medical/PinnacleHealth and Advocate/Northshore. In 2020, the FTC has challenged Thomas Jefferson University’s acquisition of Albert Einstein Healthcare Network, which is set for administrative trial in September.
2DOJ alleges that a combination of the two entities would result in a ~71% market share for general acute care (GAC) services in a 6 central Pennsylvania county region.