Handing the Federal Trade Commission (FTC) its first defeat in a federal court hospital merger challenge in more than a decade, a federal district court judge yesterday denied the joint request of the FTC and the Attorney General of Pennsylvania for a preliminary injunction to prevent Penn State Hershey Medical Center (Hershey) and PinnacleHealth System (PinnacleHealth) from merging. The defeat could have significant effects on the future of hospital merger enforcement and spur further consolidation among health care providers.
The FTC alleged that the proposed merger would substantially lessen competition in the Harrisburg, Pennsylvania area for medical and surgical services requiring an overnight hospital stay sold to commercial health insurance payors. As with many hospital merger cases, the key question was the definition of the geographic market. The court forcefully rejected the FTC’s “inherently local” definition, concluding that the market encompassed a broader swath of central Pennsylvania than just the Harrisburg area. The court relied on evidence showing that thousands of Hershey and PinnacleHealth’s patients come from outside the Harrisburg area and that there were 19 hospitals within a 65-minute drive of Harrisburg. In addition, the court found “extremely compelling” evidence that the two largest commercial payors had signed contracts with the merging hospitals preserving pricing terms for at least five years. The court thus concluded that the FTC had not met its burden of proof.
Not content to stop there, the court also found that the merger would likely benefit consumers. In particular, the court explained that the merger would provide efficiencies, such as solving overcrowding problems at Hershey, save Hershey from straining resources by building a bed tower, and allow patients greater access to more of Hershey’s offerings. Before yesterday, most courts looked skeptically at any efficiencies defenses in health care cases. The court also credited the evidence showing that other rivals have repositioned themselves as competitors to the two hospitals in order to draw patients away, and showed that increased “size of scale” will help the two hospitals move toward risk-based contracting. In a pointed conclusion, the district court characterized the decision as recognizing the need to adapt to the “evolving landscape of health care” and as “reflect[ing] the health care worlds as it is, and not as the FTC wishes it to be.”
Providers and payors should pay close attention to what the FTC will do next, particularly whether it will attempt to maintain the administrative challenge to the merger, while the parties continue to move toward integrating their businesses. While the failure to secure a preliminary injunction is usually a debilitating blow to the related administrative proceeding, the FTC’s next steps will signal whether it is willing to continue to fight hospital merger cases with the vigor that has characterized its posture over the past decade, including when it filed this case and two hospital merger challenges within six weeks of one another at the end of 2015. In turn, what the FTC does likely will substantially influence the pace of provider consolidation, pushing providers to quicken that pace, which in recent years has already reached unprecedented levels.
Ballard Spahr’s Health Care and Antitrust Groups regularly counsel clients on mergers and other antitrust issues. If you are considering consolidation—or are concerned about how consolidation might affect your business—please call any member of our Health Care and Antitrust Groups. For access to a recording of our Health Care Group’s May 10, 2016 webinar on this topic, “Let’s Make A Deal – Public and Private Antitrust Challenges to Health Care Combinations,” please contact Brittney McKeever at firstname.lastname@example.org.