Jefferson-Einstein merger would cut competition, raise prices for Philadelphia patients, FTC says

The Federal Trade Commission on Thursday said it will sue to block Thomas Jefferson University’s acquisition of Einstein Healthcare Network, a deal that has been pending since September 2018, alleging that the combination would reduce competition and raise prices in Philadelphia and Montgomery Counties.

“Jefferson and Einstein have a history of competing against each other to improve quality and service, including by upgrading medical facilities and investing in new technologies,” the FTC said in a statement. “The proposed merger would eliminate the robust competition between Jefferson and Einstein for inclusion in health insurance companies’ hospital networks to the detriment of patients.”

The commission said it will seek a temporary restraining order and a preliminary injunction in the U.S. District Court for the Eastern District of Pennsylvania to prevent Jefferson from completing the acquisition.

The transaction would make Jefferson, already the largest health system in the Philadelphia region by beds, even larger, with 1,000 more beds than the next largest system, the FTC said in its administrative complaint. The deal would result in a concentration of hospitals under common ownership, stretching from Northeast Philadelphia into Montgomery County, which would make it difficult for a commercial insurer to sell a plan there that excluded the Jefferson-Einstein hospitals, the regulator said.

The FTC’s pushback presents a stumbling block for Jefferson chief executive Stephen K. Klasko’s aggressive bid to significantly expand the Center City nonprofit’s footprint in the Philadelphia region, where it competes with the University of Pennsylvania Health System, the market’s other dominant player.

Klasko’s expansion has faced other setbacks. Last week, the university terminated its agreement to pay $55 million for Hahnemann University Hospital’s residency programs. That deal was stuck in an appeal by federal regulators. Over the summer, Klasko led a group exploring the purchase of St. Christopher’s Hospital for Children but ultimately did not bid at the September bankruptcy auction.

If the FTC succeeds in blocking the merger, questions would arise about the viability of money-losing Einstein, which has long sought a financially stronger partner to merge with, preserving Einstein’s vital role in North Philadelphia.

Jefferson and Einstein said in a joint statement Thursday that they would review the FTC’s challenge, which was joined by the Pennsylvania Office of Attorney General.

“We believe we have presented a strong and comprehensive case as to how the merger would benefit the patients we serve and advance our academic mission without reducing competition for health-care services,” the statement said.

“At a time when regional and national politicians and leaders are seeking ways to better support essential safety net hospitals, we see this merger as a creative solution to preserve access and enhance services to the residents of North Philadelphia,” the health systems said.

Neither Klasko nor Einstein’s CEO, Barry Freedman, was available for an interview while the two nonprofits review their options, a spokesperson said.

Under Klasko, Jefferson has ballooned in size, from three hospitals in 2015 to 14 now. Annual revenue has more than doubled to $5.2 billion, making Klasko’s health-care empire a big player in the Philadelphia region. More recently, Jefferson agreed to acquire Temple University’s Fox Chase Cancer Center and Temple’s interest in Health Partners Plans, a Medicaid insurer, for an undisclosed amount. Those deals are under regulatory review.

In a 2018 interview, Klasko described Einstein, which has three hospitals with 965 licensed beds, as the “missing piece” that would fill a geographic gap between Abington Hospital in Montgomery County and three former Aria hospitals from Frankford in lower Northeast Philadelphia to Langhorne in Bucks County.

That geographic impact is exactly what the FTC objected to.

The FTC said that together, Jefferson and Einstein would control at least 60% of general acute-care hospital services in and around North Philadelphia, and at least 45% of that market in and around Montgomery County, where Einstein owns Einstein Medical Center Montgomery in East Norriton and Jefferson owns Abington and Abington Lansdale Hospital.

The combination of Jefferson’s Magee Rehabilitation Hospital and Einstein’s MossRehab also raised alarms for the FTC. “As a result of the merger, the parties would control at least 70% of the inpatient acute rehabilitation services market in the Philadelphia area,” the FTC said.

Pennsylvania Attorney General Josh Shapiro raised a different objection to the deal.

“Unfortunately, the deal Jefferson and Einstein have put forward does not do enough to ensure the ongoing stability of Einstein Medical Center Philadelphia as a key, full-service care provider for the people of North Philadelphia,” Shapiro said in a statement.

In the year ended June 30, 119,196 patients visited the emergency departments at Einstein Medical Center in Philadelphia and the much smaller branch in Elkins Park, both of which operate under the same hospital license.

Some observers have suggested that a failure of the Jefferson-Einstein merger could turn out to be a blessing for Jefferson, given Einstein’s perpetual losses that come from its large presence in North Philadelphia, where many of its patients have Medicaid insurance, which typically doesn’t cover the full cost of care.

“Not necessarily,” said Joshua Nemzoff, a New Hope-based investment banker for nonprofit hospitals. “It is an important piece of the puzzle for Jefferson. That is why they want it.”

Sometimes when the FTC challenges a merger, the parties agree to sell businesses to make the deal palatable for the gatekeepers, but Stuart H. Fine, an associate professor at Temple University’s College of Public Health, said he doesn’t see anything that Jefferson would be “interested in giving up in exchange for Einstein.”

If the merger is dropped, Einstein will be in a tough spot. It has had operating losses in four of the last five years, and last year, its credit rating fell into junk-bond status.

“They have a very big problem, and I suspect time is running out,” said Dan Grauman, CEO of Veralon, a Philadelphia-based health-care consulting firm. “If there was ever a time for the city and state to step up, it is now, or will be soon.”

Elected officials started weighing in soon after the FTC announcement.

“This is an outrageous action by the Federal Trade Commission and Pennsylvania Attorney General’s Office,” U.S. Rep. Dwight Evans (D., Phila.) said. “The proposed merger would provide enhanced stability and access to high-quality care for the residents of North Philadelphia for the foreseeable future. I urge these agencies to drop this ill-considered action at once.”