Antitrust Law Daily Pennsylvania hospitals abandon merger plans after Third Circuit FTC win
Monday, October 17, 2016

Pennsylvania hospitals abandon merger plans after Third Circuit FTC win

By Greg Hammond, J.D.

Penn State Hershey Medical Center and Pinnacle Health Systems have called off plans to merge. The decision comes on the heels of a decision of the U.S. Court of Appeals in Philadelphia, which ordered a district court to enter a preliminary injunction that would prohibit the two hospital systems from taking any steps to consummate the proposed deal, pending the completion of the FTC’s administrative trial on the merits of its underlying antitrust claims (FTC v. Penn State Hershey Medical Center, FTC File No. 141 0191, FTC Dkt. No. 9368).

"We firmly believe the integration of our two health systems would have served the best interests of patients and the entire central Pennsylvania community," the two organizations announced in a joint press release. "But given the time and cost associated with continuing litigation, PinnacleHealth and the Milton S. Hershey Medical Center have decided to bring our integration efforts to a close."

The FTC challenged the proposed transaction, claiming that it would violate Section 5 of the FTC Act and Section 7 of the Clayton Act by eliminating price competition, increasing the merged entity’s bargaining leverage, and eliminating vital quality competition in the Harrisburg area. The district court denied the FTC’s request for a preliminary injunction, finding that the FTC failed to meet its burden to properly define the relevant geographic market, and that there was consequently no way to determine whether the proposed merger was likely to be anticompetitive. On September 27, the appellate court reversed the lower court’s decision, finding that the FTC demonstrated that the proposed transaction would be presumptively anticompetitive and the two hospital systems failed to rebut that presumption.

In fighting the FTC action, the two hospital systems argued that the merger would produce procompetitive effects and efficiencies, such as relieving Hershey’s capacity constraints and allowing Hershey to avoid construction of an expensive bed tower that would save $277 million—savings that allegedly could be passed on to patients. The appellate court rejected this efficiencies defense argument, finding that the evidence was ambiguous at best that Hershey needed to construct the 100-bed tower to alleviate its capacity constraints. Rather, the hospital systems’ efficiencies analysis demonstrated that Hershey needed only 13 additional beds in order to operate at 85 percent capacity—a hospital’s optimal occupancy rate.

FTC response. "The parties’ decision to abandon this transaction preserves hospital competition in the Harrisburg area," stated FTC Bureau of Competition Director Debbie Feinstein. "Had it been consummated, the merger would have likely led to lower quality and higher cost health care, at the expense of Harrisburg residents and their employers."

Chicagoland hospital merger. The FTC has an appeal pending before the U.S. Court of Appeals in Chicago, involving the proposed merger of Advocate Health Care Network and NorthShore University HealthSystem. The federal district court in Chicago denied the FTC’s request to block the proposed combination of two of the leading providers of general acute care inpatient hospital services in Chicago’s northern suburbs, pending administrative proceedings, on the ground that the FTC failed to meet its burden of proving a relevant geographic market. The FTC filed a notice of appeal in June 2016 and the district court enjoinedconsummation of the proposed merger, pending appellate review. Eleven state attorneys general filed anamicus brief, also urging the appellate court to reverse the district court’s order (FTC v. Advocate Health Care Network, FTC File No. 141 0231, FTC Dkt. No. 9369).

Companies: Penn State Hershey Medical Center; Pinnacle Health System; Advocate Health Care Network; NorthShore University HealthSystem

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