Following a winning streak dating back to its 2007 win in Evanston,1 the Federal Trade Commission (FTC) has suffered two losses over the last month in two of its three pending hospital merger challenges. On June 14, 2016, a district court judge for the Northern District of Illinois denied the FTC’s motion for a preliminary injunction in FTC v. Advocate Health Care.2 This order follows last month’s denial of the FTC’s request for a preliminary injunction in FTC v. Penn State Hershey Medical Centerby a federal district court judge for the Middle District of Pennsylvania. While the full details of the basis for the Advocate/NorthShore decision are not yet available,4 the Hershey/Pinnacle decision is notable for its very different analysis of market definition, efficiencies, and the impact of the Affordable Care Act (ACA) from prior FTC successes.

Background to Hershey Challenge

Penn State Hershey Medical Center (Hershey) and PinnacleHealth System (Pinnacle) first announced their merger plans in April 2015. Hershey, a 551-bed hospital in Hershey, Pennsylvania, is a leading academic medical center and the primary teaching hospital for Penn State College of Medicine. Pinnacle is a not-for-profit health system with 646 beds across three community hospitals in Harrisburg and Cumberland County, Pennsylvania, focused on cost-effective acute care.

In December 2015, following an eight-month investigation, the FTC filed an administrative complaint to block the proposed merger. According to the FTC, the transaction would create a dominant provider of general acute care inpatient hospital services in the Harrisburg area, with a combined share of 76% in the area defined by the FTC. In March 2016, the FTC together with the Pennsylvania Attorney General also filed a complaint in the District Court for the Middle District of Pennsylvania seeking a preliminary injunction to stop the deal pending the administrative trial.

Court Rejects FTC’s Case

After conducting expedited discovery and a five-day evidentiary hearing, Judge John E. Jones denied the FTC’s motion for a preliminary injunction, finding that the FTC failed to demonstrate a likelihood of success on the merits in its underlying merger challenge. The reasoning stands in stark contrast to recent decisions in favor of the FTC, such as the Idaho District Court and Ninth Circuit Court of Appeals in the St Luke’s case.5

As with St Luke’s, the Court’s decision turned on the definition of the relevant geographic market. In finding the FTC’s market definition too narrow, the court focused on the “commercial realities faced by consumers in the region” and based its market definition on patient location. The decision cited evidence that more than 40% of Hershey’s patients traveled to Hershey from outside of the FTC’s designated geographic market, half of Hershey’s patients travel at least 30 minutes for care, and 20% of Hershey’s patients travel over an hour. In addition, several thousand of Pinnacle’s patients resided outside of the FTC’s designated area. In a broader geographic market of 65 minutes travel time, there were 19 hospitals that competed with Hershey and Pinnacle.

Geographic market definition also was hotly contested in the Advocate/NorthShore case, with the merging hospitals complaining that the FTC had gerrymandered its market definition, and even within the alleged market had excluded key competitors. Presumably, the court accepted these arguments in finding against the FTC, although it remains to be seen whether patient draw or other evidence formed the basis for those findings.

The Court in Hershey/Pinnacle also considered whether the merging hospitals would be able to raise prices. The Court found it “extremely compelling” that the hospitals had already taken steps to preserve the hospitals’ rate differential and prevent rates with the two largest payers from increasing post-merger for at least five years. The Court explained that it simply could not ignore the hospitals’ inability to walk away from the payers’ rates and categorized the FTC’s arguments that short-term agreements should be disregarded as “essentially asking that the merger be blocked based on a prediction of what might happen to negotiating position and rates in 5 years.” The Court also ignored the FTC’s evidence of insurer concerns, as well as arguments that the agreements would do nothing to address anticompetitive effects of non-price competition, such as quality of care, expansion of services and innovation, which have been effective in prior cases.

A Different Take on Efficiencies

Although not necessary for the outcome, the court in Hershey/Pinnacle went on to discuss the hospitals’ efficiency justifications for the merger. The merging hospitals claimed two major areas in which there would be efficiencies: better use of facilities to alleviate overcrowding and avoid capital expenditures, and movement to risk-based contracting.

Hershey provided evidence of routine overcrowding and capacity problems at Hershey, renovation efforts to remedy the problem being insufficient, and how such problems would be alleviated by the merger. The Court accepted as procompetitive the plan that Hershey could transfer patients to Pinnacle’s less expensive, lower-acuity facilities, and allow Hershey to forego the expense of constructing a new bed tower to address its capacity concerns.

The Court also relied on testimony from Hershey’s CEO that the merger would provide the scale and ability to spread healthcare costs across a larger system to enable the hospitals to adapt to risk-based contracting. That transition to risk-based contracting is one of the changes promoted by the ACA and was further support of the value of these factors.

Efficiencies of a different nature were at issue in Advocate/NorthShore. In those proceedings, the parties introduced evidence of a new health insurance plan that the merged system planned to offer that would cost 10% less than the lowest-priced comparable product available, saving consumers $210 million to $1.1 billion a year. Although the FTC disputed whether these claims were substantiated or needed a merger to be achieved, it remains to be seen whether they were persuasive to the Court.

Key Takeaways

Unsurprisingly, the FTC has appealed the Hershey/Pinnacle decision to the Third Circuit, and the FTC’s administrative case has been temporarily stayed. The FTC has also announced that it will appeal in Illinois.6 While these two losses present a sharp contrast to the FTC’s recent winning streak, their full implications will not be realized until the appeals processes have been completed.

As the FTC has pointed out, Hershey/Pinnacle represents a stark departure from how courts in the past have viewed certain issues, such as geographic market definition.7 On the other hand, the Hershey/Pinnacle case does reflect a potential for judges to have greater sensitivity to the realities of the healthcare field. While the FTC is firmly focused on competition, the parties seek quality improvements and to remedy a broader array of other social issues, including access to low-income care. The merging parties in this case may also have more effectively quantified their claimed efficiencies to contradict the FTC’s position.

At this stage, the future of hospital merger enforcement is unclear. Are the recent FTC losses a coincidence? Only time will tell if these cases are a real change in the tides for the FTC’s hospital merger enforcement efforts.