Jefferson’s CEO boasted of beating IBC executives if his system could merge with Einstein

The Pittsburgh-based health-care giant UPMC tried to buy into the Philadelphia health-care market but was sent packing.

Thomas Jefferson University’s chief executive called saving Hahnemann hospital as pointless as doing CPR on dead dinosaurs.

The same executive used an expletive when he laid out the plan to beat the leaders of the region’s biggest insurer, Independence Blue Cross, in contract negotiations.

These glimpses into the high-stakes world of health care in Philadelphia became public during five days of federal court testimony last week in a bid by antitrust regulators to block Jefferson from buying Einstein Healthcare Network. The Federal Trade Commission alleged in a February lawsuit that the deal would give Jefferson excessive power to raise prices charged under private insurance plans.

Some testimony showed the posturing and bitter divisions between hospital executives and the insurers who pay them. In testimony, Jefferson CEO Stephen K. Klasko scoffed at the FTC’s theory, joined by Pennsylvania’s attorney general, that the nonprofit would acquire Einstein to gain leverage with insurers. “It’s asinine to think that we would be able to charge more because we have Einstein,” he said.

While Klasko and other hospital executives complain about what they call IBC’s “monopolistic” power to dictate prices, years of research suggest that consolidating providers leads to higher prices in health insurance, according to the Kaiser Family Foundation.

The FTC’s antitrust argument that Jefferson will raise prices after acquiring Einstein pivots on intricate judgments about what providers to count as competitors to the combined Jefferson-Einstein, and what geographic areas are right to measure the combination’s market share.

It could be many weeks before U.S. District Judge Gerald J. Pappert weighs in. The disputants are to deliver their closing arguments Oct. 26.

At stake is the future of Einstein, which is anchored by its large hospital in North Philadelphia that cares mostly for poor patients, and is given little chance of surviving unless it sharply curtails services or is acquired by a bigger company that can absorb its $800 million in debt and other liabilities.

It’s been clear for years to Einstein’s board that it faced an uncertain road ahead because most of its patients have Medicare or Medicaid. That kind of government insurance pays far less than commercial insurance and doesn’t cover the hospital costs.

In 2015, Einstein was near a merger with Temple University Health System — the most recent of multiple bids to join the two — that would have moved much of the complex care done at Einstein down Broad Street to Temple University Hospital. That never happened.

Einstein again geared up its search for a partner in 2016 and 2017, inviting nine nonprofit systems to engage in talks, according to testimony by Andre Maksimow, a senior vice president at health-care consulting firm Kaufman Hall.

Only Jefferson and the University of Pittsburgh Medical Center accepted the invitation, Maksimow said. Einstein preferred UPMC because of its strong financial condition, extensive experience in acquisitions, and insurance arm, he said.

The problem was that UPMC’s interest in Einstein was contingent on also acquiring Health Partners Plans Inc., a nonprofit Medicaid insurer in Philadelphia owned by Einstein, Temple, and Jefferson, Maksimow said. Health Partners rebuffed UPMC, so the health-care giant walked away.

That left Jefferson, which entered into exclusive talks with Einstein in the spring of 2017. One of Jefferson’s top reasons for acquiring Einstein, said Klasko, is that Jefferson’s medical school uses Einstein as a teaching location. “Our medical school fundamentally changes if Einstein goes with someone else,” Klasko said.

Einstein CEO Barry Freedman testified that if the FTC succeeds in blocking the deal with Jefferson, it will be much harder for Einstein to find another acquirer due to the financial damage from the pandemic.

“Almost every health-care facility I know faced operating losses or shrinkage in their balance sheet,” Freedman said. “That makes it more difficult to merge with a facility that is financially distressed.”

He didn’t mention Jefferson’s nearly $300 million operating loss in the last fiscal year, despite $320 million in COVID-19-related government aid. Under its agreements with lenders, Jefferson had to hire a consultant to aid “management’s recovery actions necessitated by the COVID-19 pandemic.”

Under questioning by an FTC attorney, the president of Jefferson Health, Bruce Meyer, agreed that he is worried about Jefferson’s ability to effectively “execute on the Einstein deal” because of the COVID-19-related losses.

Under trying financial conditions, the Einstein board has for decades been determined to preserve health-care services in its core North Philadelphia market, and is counting on “verbal representations” from Klasko and the Jefferson board that it will keep its main hospital on North Broad Street open.

Looming in the background were the closures of St. Joseph’s Hospital in the city’s Fairmount section in 2016 and Hahnemann University Hospital in Center City last year, followed this year though March by the wind-down of most inpatient services at Mercy Catholic Medical Center’s Mercy Philadelphia Campus in West Philadelphia.

An attorney for Jefferson, Kenneth M. Vorrasi, asked Klasko if Philadelphia could withstand the loss of another safety-net hospital, suggesting that Einstein’s North Philadelphia flagship could be the next to go if Jefferson doesn’t save it.

“I think it would be a disaster,” Klasko responded. “It wouldn’t harm IBC. It wouldn’t harm United, Aetna, or Cigna. It would harm those patients. It would be harder for them to get care.”

Under cross-examination, FTC attorney Mark Seidman quoted an email Klasko wrote in April 2019 to Steven Altschuler, former chief executive of Children’s Hospital of Philadelphia. The exchange happened several days after Hahnemann owner Joel Freedman first disclosed publicly that Hahnemann and St. Christopher’s were in deep financial trouble.

The full context of the email is not known, but Klasko wrote: “No, we don’t need Hahnemann. If fact, we need many less hospitals.” He described trying to preserve Hahnemann as “doing CPR on dead dinosaurs.”

Later in the hearing, Klasko defended his remark about Hahnemann. “The fact is, I didn’t create the environment. The fact is that more and more and more things are moving” outside the hospital’s walls.

He also said that “with Hahnemann closing, those patients are getting better and more care than they got when Hahnemann was there.”

Independence Blue Cross, the largest health insurer in Southeastern Pennsylvania, has no official part in the case, but the insurer’s dominant role in the local health-care market came up again and again.

Much of the questioning of Jefferson officials centered on negotiations between IBC and Jefferson over a new provider contract that was announced in July 2017. It was the first time Jefferson, which had already acquired Abington Health, Aria, and Kennedy Health, was negotiating a contract that would be system-wide.

The talks didn’t go well from Jefferson’s perspective. DeAngelis, Jefferson’s CFO, said the best the system could do was accept a “take-it-or-leave-it” offer from IBC under which the insurer would pay it $50 million less over the five-year contract — plus $150 million in lost inflationary gains each year.

Why did Jefferson accept the deal?

“In Philadelphia, if you don’t do a deal with IBC, they will channel patients to Penn, Temple, Main Line Health, Tower, just about anybody else, till you capitulate. That’s been the history,” Klasko testified.

IBC spokesperson Donna Farrell said she could not respond to specifics “because this is active litigation.” She also said that a priority for IBC is reducing its health-care costs.

The FTC, on the other hand, contended that Jefferson’s expansion, particularly its acquisition of Einstein, is all about gaining leverage so it can raise prices on insurers.

To bolster its argument, an FTC attorney quoted a Klasko email from 2018: “As to IBC, if we complete the Einstein transaction and actually do the things we need to do around cost, access, patient experience, and quality, we will beat those [expletive].”