Court Denies Preliminary Injunction in Pennsylvania Hospital Merger Challenge
On May 9, 2016, a Pennsylvania federal judge denied government requests for a preliminary injunction to block the merger between Penn State Hershey Medical Center (Hershey) and PinnacleHealth System (Pinnacle), finding the governments' market definition impermissibly narrow and stating that the merger would benefit patients. The Federal Trade Commission (FTC) and the Pennsylvania Attorney General (AG) sought the injunction to block the Hershey-Pinnacle merger pending completion of the FTC's administrative trial, scheduled to begin in May 2016. The governments argued that the merger would have anticompetitive effects, in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act.
Defining the Relevant Geographic Market
Geographic market definition was "dispositive to the outcome" of the governments' motion for injunctive relief, according to the United States District Court for the Middle District of Pennsylvania.
In that motion, the FTC and AG argued that the relevant geographic market was the Harrisburg Area, contending that a relevant geography is inherently local because patients in need of hospitalization prefer to be near their families and homes. The FTC further argued that the two main health insurance payors in the Harrisburg Area recognize the Harrisburg Area as a distinct market and would not be able to exclude the merged entity from their networks in the event of a price increase.
The court disagreed, finding that the governments' definition of the relevant geographic market was "unrealistically narrow and d[id] not assume the commercial realities faced by consumers in the region." In doing so, the court referenced "uncontroverted data" demonstrating that a high volume of patients at both Hershey and Pinnacle travel from outside the Harrisburg Area for healthcare. The court further found that, if the merger resulted in an increase in pricing or a decrease in quality of healthcare, other hospitals within a 65-minute drive from Harrisburg could serve as a reasonable alternative for patients. Ultimately, after reviewing "hours of testimony and thousands of pages of exhibits," the court determined that the governments failed to set forth a relevant geographic market and thus could not be granted injunctive relief.
After finding that the FTC and AG had not established a likelihood of success on the merits based on faulty geographic market definition, the court went on to address and endorse the merging parties' procompetitive effects arguments.
First, the court found that the merger would alleviate Hershey's current capacity constraints. According to the court, the merger would be preferable to the alternative plan, which would involve Hershey building a new, expensive bed tower in order to accommodate more patients—the cost of which may necessarily be passed on to patients.
Second, the court found that the merger would benefit Harrisburg Area residents by allowing Hershey and Pinnacle to remain competitive in the face of "extensive repositioning" by, and recent consolidation among, nearby competitors.
Third, the court credited Hershey and Pinnacle efforts to secure contracts with the two main health insurance payors in the Harrisburg Area to ensure that the merger would not result in a rate increase for patients.
Finally, the court agreed with the Hershey CEO, who testified that the merger would lead to efficiencies in risk-based contracting, which the court found would "have a beneficial impact."
Contrary to the governments' arguments, the court concluded that Hershey and Pinnacle patients would benefit from the merger. The court specifically pointed to the "evolving landscape of healthcare that includes . . . the institution of the Affordable Care Act, fluctuations in Medicare and Medicaid reimbursement, and the adoption of risk-based contracting," which requires hospitals to adapt accordingly.
This is the first loss following a string of successful hospital merger challenges by the FTC. Of particular note is the critical role of geographic market definition in the governments' case. Not only did the court reject a market roughly equivalent to a Metropolitan Statistical Area—a definition commonly used in this context—the court looked solely to patient flow data instead of impact on payor networks to do so. The focus on where individual patients choose to receive care, rather than the merger's effect on health insurers' bargaining leverage in negotiating lower-cost provider networks, is a significant departure from other recent court decisions and FTC practice.
Also notable is the emphasis on the parties' procompetitive effects arguments. Although the court could have largely dispensed with balancing the equities given its geographic market determination, it opted instead to consider and credit claimed efficiencies—which many federal courts have avoided doing in merger challenges. The court also regarded the parties' efforts to negotiate long-term payor contracts as a viable way to head off potential anticompetitive effects.
Looking ahead, if the decision stands, the geographic market issue and efficiencies defenses are likely to play an important role in future FTC hospital merger challenges.
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