The Justice Department has a strong case as it looks to prove that Geisinger Health's partial acquisition of Evangelical Community Hospital will likely reduce competition, merger and acquisition experts said.
Danville, Pa.-based Geisinger's 30% acquisition of the neighboring independent hospital in Lewisburg will lead to less independent expansion, sharing of competitively sensitive information, lower quality care and higher prices, the DOJ outlined in a complaint filed Wednesday that aims to block the deal. The competitors account for around 71% of the general acute-care hospital service market in their six-county region in central Pennsylvania, which raises some red flags, M&A experts said.
While regulators typically don't intervene on partial acquisitions, this case is so egregious that they were bound to object, said Beth Vessel, a partner at Waller Lansden Dortch & Davis, noting that the providers are about 17 miles apart and face minimal competition in the market, among other concerns.
"There are clear anticompetitive effects in an already concentrated market even if it is not a full-fledged acquisition," she said.
Part of the motivation to pursue a partial acquisition was to skirt antitrust scrutiny, the DOJ said. Geisinger said in 2016 that "alignment" with Evangelical would provide "defensive positioning against expansion by (UPMC) and/or affiliation with (another) competitor," according internal documents cited in the complaint.
While Geisinger would have preferred to fully acquire Evangelical and initially submitted a bid for a full acquisition, as it has done with other community hospitals, executives realized that would "present serious antitrust concerns," the DOJ said.
After the letter of intent was signed, a senior employee at Geisinger allegedly wrote that the agreement was "kinda smart really" because it "does not require AG approval." Nevertheless, the antitrust division opened an investigation shortly after the agreement was made, the DOJ said.
"That would be the DOJ equivalent of saying 'nice try,'" said Joe Lupica, chairman of Newpoint Healthcare Advisors. "The concentration here would certainly invite scrutiny—some of the statements of the participants really didn't help their situation with the DOJ."
Geisinger said that it was disappointed in the challenge, citing "overwhelming community support" for the arrangement and a commitment to maintain Evangelical's independence.
"We continue to believe that this collaboration is the best way to make healthcare easier, more affordable and more accessible to Central Pennsylvanians," the integrated health system said in a statement.
Evangelical's CEO, Kendra Aucker, said the hospital will work with its counsel to address the Justice Department's concerns.
"We are disappointed by the decision and continue to believe enhancing our relationship with Geisinger is in the best interest of the region and will provide efficient, cost-effective healthcare to the communities we serve," she said in a statement. "It is important, now more than ever, that patients have accessible and affordable healthcare and this collaboration is the best way to provide those benefits."
Under the agreement, Geisinger would invest $100 million in Evangelical, much of which is earmarked for specified projects approved by Geisinger. According to Geisinger documents quoted in the complaint, Geisinger's investment makes Evangelical "tied to us" so "they don't go to a competitor."
The deal also gives Geisinger rights of first offer and first refusal for certain transactions and joint ventures. Provisions in the agreement work together to substantially lessen competition and unreasonably restrain trade in the market for inpatient hospital services, according to complaint, which noted the DOJ's standstill order that prevented Geisinger and Evangelical from fully integrating during the investigation.
Even the partial-acquisition agreement would result in a highly concentrated market, regulators said.
The organizations' efficiency justifications, as they relate to improving electronic medical records for instance, could have happened absent of an acquisition, Vessel said.
"The efficiency justifications weren't necessarily predicated on this deal," she said. "It does seem like a pretty good case for the government given all the facts."
It is relatively common for health systems grow market share by pursuing smaller deals that fall under regulators' radar, whether they involve hospitals or physician groups, antitrust experts said. Those small acquisitions improve their bargaining leverage with insurers and allows them to raise prices, they said, supporting a number of other studies that show similar effects.
In the Geisinger-Evangelical deal, the ability to partially recover the value of lost patients through Geisinger's ownership of Evangelical gives it greater bargaining leverage with insurers and the ability to set higher prices for the uninsured, according to the complaint.
Federal regulators quashed the then-Advocate Health Care proposed merger with NorthShore University HealthSystem that regulators over similar concerns, said Erik Gordon, clinical assistant professor at the University Michigan Ross School of Business.
"The consolidation of healthcare systems is on the radar of federal and state regulators who worry that consolidation gives systems like Geisinger the power to raise or maintain prices," he said, adding that the DOJ has legitimate concerns.
Geisinger drew $7.1 billion in revenue in its fiscal 2019, generating a 1.7% operating margin. It unwound its relationship with AtlantiCare in March after initially suing the Egg Harbor Township, N.J.-based provider to prevent it from leaving the Geisinger network. Evangelical recorded more than $259 million in annual revenue in 2019, generating an unaudited net income of $15.6 million, according to its annual report.