Thomas Jefferson University says the FTC has dropped opposition to its acquisition of Einstein

The Federal Trade Commission said Monday that it has dropped its opposition to Thomas Jefferson University’s acquisition of Einstein Healthcare Network, a deal that would dramatically expand Jefferson’s footprint in the Philadelphia market but also add to its already significant debt load.

Since 2015, Jefferson has expanded from three hospitals to 14; with the Einstein acquisition, that tally would increase to 18.

The FTC had no comment beyond noting that commissioners had voted 4-0 to dismiss the case, which had been pending in the Third Circuit Court of Appeals since December, a spokesperson said.

“Two nonprofit, anchor institutions coming together to preserve access to care and do the right thing by the residents of Philadelphia is a creative solution to ensure Einstein doesn’t face the same fate as Hahnemann University Hospital,” Jefferson president Stephen K. Klasko said in a news release.

In a 2018 interview, Klasko described Einstein as the missing piece to a network of hospitals that would make Jefferson indispensable to any health insurer that wanted to do business in the region. “Nobody can enter Philadelphia without going through us,” he said.

The FTC and the Pennsylvania Attorney General challenged the acquisition, alleging that it would give Jefferson the power to unfairly raise prices.

A federal judge rejected those arguments in December. During an October hearing, he said that he found it hard to grasp why the regulators failed to mention the University of Pennsylvania Health System in their arguments and were asking him to believe that Penn would not be “a competitive constraint on prices that a merged Jefferson-Einstein can get from insurers.”

The FTC’s loss illustrated the difficulty the agency has in mounting successful antitrust challenges in large urban areas when the merger partners are willing to endure long delays, antitrust experts have said.

If the deal were completed as expected within six months, it would cap a long run of consolidation by Jefferson under Klasko, who arrived as CEO in 2013. Since 2015, Jefferson has acquired Abington, Kennedy, and Aria health systems, and added Philadelphia University. The Einstein acquisition would tack on three general hospitals in Philadelphia and Montgomery Counties, plus Moss Rehab.

In all, Jefferson would operate 18 hospitals in the region with 3,600 beds. The University of Pennsylvania Health System has 3,000 licensed beds spread across six hospitals from Princeton to Lancaster.

Klasko has been focused for years on building a large system, and he’s done a remarkable job of it, said Joshua Nemzoff, a veteran nonprofit health-care investment banker based in New Hope.

“As far has having an incentive to start cutting costs and getting some economies, they’ve never been incentivized to do that until the pandemic hit, and now they are,” said Nemzoff, chief executive of StoneBridge Healthcare LLC, a company formed last year to acquire financially troubled health systems.

In the fiscal year that ended June 30, 2020, Jefferson had an operating loss of nearly $300 million on $5.3 billion in revenue. Those losses came despite receiving $325 million in federal COVID-19 aid.

For its part, Einstein had a relatively small operating loss of $4 million on $1.3 billion in revenue during the same period. That was thanks in part to $51 million in CARES Act relief.

Absent federal aid, losses for both health systems have continued through the first half of fiscal 2021. Jefferson logged a $24 million operating gain in the six months ended Dec. 31, including $167 million in federal aid. Einstein had $6 million in operating income, but that included $68 million in CARES Act funding. Losses, not counting federal aid, have continued at most Philadelphia-area health systems.

Jefferson has told bond investors that returning to pre-COVID-19 profitability levels will be a “multi-year” effort and that it doesn’t expect to break even again until the year ending June 30, 2022. It’s not clear whether the addition of Einstein, which typically either loses money or barely gets into the black, will extend that timeline.

Meanwhile, Jefferson is expected to add to the $2.3 billion in long-term debt it had before adding the $460 million that Einstein owes.

Standard & Poor’s said in December that Jefferson was planning to borrow $159 million next year and $511 million in 2023 for the outpatient tower under construction at 11th and Chestnut Streets in Center City.

The ratings agency said Jefferson can maintain its “A” credit rating even with the additional debt, “but only with steady improvement in earnings and cash flow in line with projections.”

Another factor for S&P’s somewhat cautious outlook on Jefferson is the plan to acquire Temple University Health System’s half of Health Partners Plans Inc., a nonprofit Medicaid insurer.

Jefferson already owns 25%. Einstein owns another quarter of the Philadelphia company. Health Partners manages benefits for 253,000 and would catapult Jefferson into the insurance business and put Jefferson into competition with the region’s dominant insurer, Independence Blue Cross.

That deal is still pending and it’s not clear how Jefferson would pay for it. Einstein’s former chief executive Barry Freedman said last fall during the antitrust trial that Health Partners was most recently valued in a potential sale at between $400 million and $450 million.