Shortly after Judge John Michael Vazquez ruled on the preliminary injunction, HMH and Englewood announced that they would appeal the ruling to the Third Circuit, which ruled against the merging parties in a hospital merger case in 2016. In the meantime, Judge Vasquez’ opinion (unfortunately heavily redacted) provides important insight for health systems considering a merger with a competitor, particularly with respect to deal planning and consultant materials. Here are a few key areas that weighed heavily in the Court’s decision to halt the deal:

• Commercial payers. Payer testimony continues to be critical when defining a geographic market. Here, the payer witnesses testified that they could not offer a marketable plan in Bergen County that did not include Bergen County hospitals, leading the Court to accept Bergen County as the relevant geographic market. The Court also relied on the FTC’s expert who showing that 75 percent of Bergen County residents received inpatient care from a Bergen County Hospital and dismissed the parties’ candidate market (their combined primary service areas) because that approach viewed the market through the lens of the seller, rather than the buyer.
• Party documents. As in other merger litigations, the parties’ internal documents were critical to the Judge’s decision and the Court cited such documents extensively. For example, the Court cited an Englewood “Q&A” deal document which included the question, “For a long time, Hackensack has been a fierce but respected competitor. So how do we now become partners and colleagues?” as evidence that HMH and Englewood closely compete. The Court also cited numerous examples of ordinary-course business intelligence documents and emails that were unrelated to the transaction, including one that suggested HMH expedited its capex approval process for a technology after Englewood advertised the same technology as “first in the state.” These documents were particularly important because the Court noted that the FTC’s economic diversion analysis (a calculation of the substitutability of the merging parties) alone would not establish an anticompetitive effect. Rather, the Court relied on market share calculations and ordinary-course documents to bolster the economic evidence.
• Acquisition clause. The Court cited an “acquisition clause” in HMH’s contracts with payers as evidence of a post-merger price increase. The clauses allowed HMH to raise the rates of any hospitals it acquired to the rates of HMH’s similar facilities. While HMH sent letters to payers stating that it would not enforce the clauses, the Court held that the letters “are a prime example of alleged business records that were created to bolster Defendants’ litigation position.” Because the letters were sent after the FTC first argued that the acquisition clauses were evidence of a likely price impact and because the waiver letters run contrary to the defendants’ financial interest, the Court gave them little weight. Moreover, the Court pointed out that, as unsolicited letters, the waivers did not constitute binding contracts.
• Consultant documents. The Court also cited materials prepared by a consulting firm as evidence of competition between the parties. In particular, the Court pointed to a consultant’s calculations of market shares and its email communications related to the due diligence process that, while redacted, seem to indicate competition between the parties. The Court also cited a presentation prepared by a consultant to identify potential partners for Englewood. The document referenced pros and cons of a partnership with HMH and another undisclosed party, and suggested that either deal would impact competition between Englewood and HMH.
• Efficiencies/synergies. The Court carefully scrutinized the parties’ claimed “pro-competitive benefits” from the deal, often observing that they appeared to be more prepared to defend the merger in litigation than worthy of reflecting what the merger would likely accomplish. The Court also largely dismissed the commitments made in the Definitive Agreement, holding that many were either unenforceable or did not reflect “firm” commitments, but rather commitments to “explore, assess, or collaborate on different issues.” The opinion reflects the very high bar that parties face when presenting claimed efficiencies or synergies (both before a district court and before the FTC during its investigation). 
• Capacity constraint arguments. As in the Pinnacle-Penn State Hershey Medical Center litigation, the Court was skeptical of the parties’ argument that the transaction would help relieve capacity constraints at HMH. The Court noted in particular that HMH did not signal to insurers or competitors that it faced capacity constraints, never declined a transfer, never went on redirect, and never sought to transfer patients to Englewood. The latter point led the Court to conclude that HMH considered its “financial results [to be] more important than its claimed concern for the community and patients, i.e. “New Jersey First.”

Next steps

Based on the Court’s treatment of the areas discussed above, health systems considering a merger with a competitor should keep in mind the following:

• Timing is critical. The FTC (and district court judges) may view any deal rationales raised post-signing and any efficiencies raised late in the investigation or immediately prior to litigation with skepticism. While parties often would not quantify proposed cost-savings until well into the post-signing integration planning phase, in some situations it may be advisable for parties to do more planning earlier in the transaction timeline.
• Ordinary-course documents and payer testimony will continue to be key components in the FTC’s investigation of a proposed transaction and any ensuing merger litigation. Understanding the ordinary-course documents and the perspective of commercial payers and employers in the parties’ service areas is therefore imperative to assessing the risk that the FTC will seek to block a proposed transaction.
• Engaging antitrust counsel early in the transaction process is important. Antitrust counsel can help parties develop a strategy for prioritizing certain due diligence and integration planning work in order to minimize the risk of prolonged antitrust investigations, potential litigation, and to preserve key arguments in the event of litigation.

Authored by Bob Leibenluft, Leigh Oliver, and Jonathan Elsasser.