[The Court’s] determination reflects the healthcare world as it is, and not as the FTC wishes it to be. We find it no small irony that the same federal government under which the FTC operates has created a climate that virtually compels institutions to seek alliances such as the Hospitals intend here. Like the corner store, the community medical center is a charming but increasingly antiquated concept. It is better for the people they treat that such hospitals unite and survive rather than remain divided and wither.
Federal Trade Commission and Commonwealth of Pennsylvania v. Penn State Hershey Medical Center and PinnacleHealth System, No. 1:15-cv-02362 (JEJ).
On December 4, 2015, I published a LinkedIn post entitled Can Competition Produce Less for Creditors.
In that post, I used recent successful challenges by the Federal Trade Commission (my prior article mistakenly referred to the Department of Justice) to proposed combinations of health care providers or assets to suggest that federal Antitrust Law may represent the dominant policy among competing policies advanced through the Affordable Care Act and the U.S. Bankruptcy Code. In brief, I noted that:
The ACA, which promotes efficiencies in the delivery of health care services, seems to encourage combinations by, for example, empowering Accountable Care Organizations to control greater portions of reimbursement dollars.
The Bankruptcy Code encourages competitive bidding for assets to maximize the value available for a health care debtor's creditors.
The federal Antitrust Law nonetheless could defeat a proposed combination furthering ACA objectives, or in a bankruptcy case producing the greatest return to all stakeholders, if the probable impact of the proposed combination would be to substantially lessen competition.
On May 9, 2016, the United States District Court for the Middle District of Pennsylvania issued a decision that suggests the opposite conclusion. In this case, the Court finds that advancing ACA objectives can, on appropriate facts, meaningfully counterbalance the FTC's argument that a proposed combination may result in a health care provider with too much power to set high prices for consumers or their proxies (health insurers). The District Court's decision is being appealed to the Third Circuit, so the balancing of these competing polices is far from concluded.
The District Court Decision: The District Court denied the Governments request to preliminarily enjoin the proposed combination of Hershey and PinnacleHealth pending a full administrative trial before the FTC.
The Relevant Geographic Market: The District Court was not persuaded that the proposed combination likely would result in higher consumer prices for inpatient general acuity services (the agreed-upon product market under review) when the relevant geographic market for potentially anti-competitive effect was properly defined. Although the FTC argued that the proposed combination likely would empower the combined hospitals to raise prices within the greater Harrisburg, Pennsylvania area, the District Court concluded that this geographic market advanced by the FTC was inappropriately narrow because, among other things: (a) many of the hospitals’ patients lived, and more than half of Hershey’s 2014 revenue was generated by patients living, outside this area, and (b) there are 19 hospitals within a 65-minute drive from which consumers could choose. The District Court also noted that the hospitals had long-term contracts with the two largest local health insurers fixing prices for 5 years in one case and 10 years in another. As a result, the District Court found that the Governments were not likely to succeed on the merits of their antitrust claim.
The Equities: Although some courts would have ended their inquiry and denied the requested injunction after concluding that the Governments are not likely to succeed on the merits of their antitrust claim, this District Court did not. It went on to balance the equities, to analyze whether the public interest would be advanced by the proposed combination or not. It is in this part of the case that the policy battle was engaged.
In balancing the equities, the District Court concluded, among other things, that:
Hershey requires more inpatient beds to operate more efficiently. Adding beds would require construction, and the substantial costs in doing so would result either in higher consumer prices or lower spending on quality improvements. By contrast, the merger would immediately make additional capacity available to Hershey, causing near instantaneous benefits to Hershey's patients.
Hershey and PinnacleHealth competitors already are repositioning themselves through merger (getting larger) and changing service offerings with the intent of taking market share from PinnacleHealth and, most significantly, Hershey. Even if Hershey and Pinnacle Health care could survive without a merger, they will find themselves competitively disadvantaged absent a combination.
The combined Hershey/PinnacleHealth system will be better able to adapt to risk-based forms of contracting that transfer risk for costs from individuals to the provider. The District Court found the following testimony of Hershey CEO persuasive: [T]here will some advantages in terms of size of scale, in terms of being able to spread of costs [sic] of the infrastructure of population health over a larger health care system. These advantages, the District Court found, also would help Hershey continue to fund its related medical school.
Significantly, the District Court identified the evolving landscape of health care that includes, among other changes, the institution of the Affordable Care Act, fluctuations in Medicare and Medicaid reimbursement, and the adoption of risk-based contracting, as underlying support for its decision to permit the merger to go forward over the FTC’s objections based on anticompetitive effect. Adapting to these changes, created in significant part by Federal law and policy, the District Court posits, compels health care providers to combine in order to survive.
Conclusion: The FTC is appealing the District Court's decision. As a result, the last chapter in the Hershey/PinnacleHealth combination is not written and the Third Circuit likely will get its own chance to weigh in on the “equities.” Regardless of the Third Circuit ultimate decision, health care providers responding to antitrust challenges now know that the business challenges they face as the result of changes in federal regulation and practice may find a sympathetic ear in federal court. Whether a Bankruptcy Court would find the policies of the Bankruptcy Code sufficient to overrule the FTC’s objection to a sale or combination being effectuated through the Bankruptcy Code remains to be seen, although it seems that the public interest equities applied by the District Court in this case may be applicable to a health care provider that finds itself in bankruptcy.