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DOJ Sues to Block Geisinger Health’s Minority Investment in Evangelical Community Hospital

Aug.07.2020

The federal antitrust agencies continue to devote significant resources to aggressively enforce the antitrust laws throughout the healthcare industry, and on August 5, 2020, the Department of Justice (“DOJ”) sued to block Geisinger Health’s acquisition of a minority interest in Evangelical Community Hospital and to rescind the terms of the agreement.  The DOJ alleges that the transaction—which also involved various “entanglements between these close competitors,” including an alleged “no-poach” agreement—violated both Section 7 of the Clayton Act, as an acquisition that substantially lessens competition, and Section 1 of the Sherman Act, as an agreement that unreasonably restrains trade. 

Background and the Challenged Agreement

Geisinger is a large not-for-profit hospital system in central and northeastern Pennsylvania, and Evangelical is an independent not-for-profit community hospital in Lewisburg, Pennsylvania.  According to the DOJ’s complaint, the parties operate five of the eight hospitals in a six-county area in central Pennsylvania, compete to provide inpatient general acute-care hospital services (along with two other providers), and combined account for 71% of inpatient GAC discharges in that area. 

In 2017, Evangelical announced that it was considering entering into a partnership with or selling itself to another healthcare entity.  The DOJ alleges that Geisinger was interested in acquiring Evangelical to prevent it from becoming a stronger competitor or simply to end competition with Evangelical, but claims that both hospitals realized that such an acquisition would likely raise antitrust concerns. 

Therefore, according to the DOJ, the two instead entered into a “Collaboration Agreement” designed “in part, to avoid antitrust scrutiny.”  Under the agreement, Geisinger would acquire 30% of Evangelical, have a right of first offer and first refusal with respect to future Evangelical joint ventures and competitively significant transactions, and pledged $100 million for investment projects and intellectual property licenses to Evangelical.  The DOJ also alleges that senior executives of both hospitals entered into a “no-poach” agreement—through “verbal exchanges and confirmed by email”—not to hire hospital personnel from each other.

Notable Aspects of the Case

The suit is notable for several reasons:

  • Litigating a partial acquisition.  Though not unprecedented—in fact, the FTC recently challenged a partial acquisition—it is still relatively uncommon for the agencies to litigate a merger case involving a minority-interest. While the DOJ acknowledges that partial acquisitions “vary in their potential for anticompetitive effects,” in this case the DOJ viewed the partial acquisition as an indefinite partnership that “permanently and fundamentally altered the competitive relationship between Geisinger and Evangelical by linking them together in a number of ways that, taken together, raise the likelihood of coordination and reduce Defendants’ incentive to compete aggressively against each other.”  These links allegedly included:
    • Geisinger having right to approve Evangelical projects funded by Geisinger, which de-incentivized Evangelical and Geisinger from competing to attract patients away from each other.
    • Geisinger having a right of first offer and first refusal with respect to future Evangelical joint ventures, strategic partnerships, and other transactions, potentially giving Geisinger notice and the ability to block Evangelical’s ability to enhance its competitiveness through collaborations with other parties.
    • Providing additional opportunities for improper sharing of competitively sensitive information, thereby facilitating coordination.
    • Creating incentives for Geisinger to raise prices because it would partially recover lost revenues from patients who seek care at Evangelical instead.
  • M&A investigation uncovers other issues.  This is not the first time a merger investigation resulted in the antitrust agency uncovering evidence of other allegedly anticompetitive conduct.  In its complaint, the DOJ alleges that Evangelical and Geisinger have a history of “picking and choosing” when to compete and when to coordinate behavior.  For example, the DOJ alleges that the parties entered into an employee “no-poach” agreement; conducted “regular touch base” meetings where they discussed competitively-sensitive topics such as strategic growth options; and established a co-branded urgent-care center with a non-compete clause to avoid competing with each other. 
  • DOJ brought the suit.  Since the mid-2000s, the Federal Trade Commission (“FTC”) has taken the lead in reviewing and challenging, where necessary, healthcare-provider mergers and acquisitions.  Although the FTC can challenge mergers involving non-profit healthcare providers, the FTC Act does not permit the FTC to challenge anticompetitive conduct among non-profits.  Whether it was because it was initially unclear if the transaction was an acquisition or a non-merger collaboration (putting the FTC’s jurisdiction in doubt), or because it appeared that the transaction involved both merger and conduct elements, the investigation was run by DOJ. 
  • Parties sought to remedy DOJ’s concerns.  The complaint notes that the parties twice amended their transaction in response to some of DOJ’s concerns, but says that these amendments did not eliminate the competitive harm from the transaction.
  • Party documents and public statements highlighted.  As the agencies typically do, the DOJ cited to the parties’ own documents and statements to supports its complaint, including a video interview by the Evangelical CEO suggesting that Geisinger could not have acquired Evangelical for antitrust reasons, a document in which a senior Geisinger employee alleged wrote that the partial acquisition agreement was “[k]inda smart really” because it [d]oes not require AG approval,” and an alleged request by the Evangelical CEO to her counterpart at Geisinger to stop recruiting their nurses.
  • PA not a co-plaintiff.  In nearly all provider-merger cases brought by the FTC, the respective state Attorney General has joined the suit.  Indeed, the FTC and State of Pennsylvania are currently co-plaintiffs in litigating challenging another hospital merger in the state.  Here, however, the Pennsylvania Attorney General did not join the DOJ’s complaint.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Alexis J. Gilman
Partner – Washington, D.C.
Phone: +1 202.624.2570
Email: agilman@crowell.com
Shawn R. Johnson
Partner – Washington, D.C.
Phone: +1 202.624.2624
Email: srjohnson@crowell.com
Juan A. Arteaga
Partner – New York
Phone: +1 212.803.4053
Email: jarteaga@crowell.com
Richard Stella
Associate – New York
Phone: +1 212.895.4333
Email: rstella@crowell.com