(Updated at 8:15 p.m. ET)
In a rare loss for the Federal Trade Commission in a hospital merger case, a federal judge declined Monday to temporarily block a union between Penn State Hershey Medical Center and PinnacleHealth System.
The ruling is an unusual setback for the FTC, which has otherwise prevailed in a string of cases against hospital mergers in recent years. Hospitals and insurers across the country have been watching the Pennsylvania case and several others as mergers continue to proliferate. The loss comes as the FTC pursues an injunction in a hospital merger case in the Chicago area between Advocate HealthCare and NorthShore University HealthSystem.
Martin Gaynor, a former director of the FTC's Bureau of Competition, called the judge's decision Monday “a big deal.” “The FTC has been on a roll” with wins, said Gaynor, now an economics professor at Carnegie Mellon University. “This is certainly a reversal.”
U.S. District Judge John Jones III rejected the FTC's request for a preliminary injunction to stop the merger between Penn State Hershey, a 508-bed, not-for-profit health system in Dauphin County, and PinnacleHealth System, a not-for-profit, three-campus system with 607 beds, also in Dauphin County. He also slammed the FTC in his opinion for its opposition to such mergers in the current healthcare environment.
He wrote that the FTC too narrowly defined the systems' geographic market because the agency didn't account for the distances many of their patients travel to reach the hospitals. He also wrote that the FTC did not include enough hospitals in its definition of the market.
Jones also wrote that he found it “compelling” that the hospitals have already worked with central Pennsylvania's two largest insurers, CBC and Highmark, to ensure their rates wouldn't increase following a merger.
“In sum, we find based on the hours of testimony and thousands of pages of exhibits presented by the parties and considered by this court, that the FTC's four-county 'Harrisburg Area' relevant geographic market is unrealistically narrow and does not assume the commercial realities faced by consumers in the region,” Jones wrote.
He said the FTC did not demonstrate a likelihood of winning the case in its request for a preliminary injunction.
Attempts to reach the FTC for comment Monday afternoon were not immediately successful. The FTC could appeal the decision in federal appeals court, but the commission often drops its merger challenges when it loses at the preliminary injunction stage.
The FTC alleges the merger would lead to higher prices and diminished quality. The merged system, according to the commission's complaint, would control about 64% of the south-central Pennsylvania market.
Several health systems battling FTC challenges since the passage of the Affordable Care Act have argued that the law's incentives to provide more coordinated and efficient care create an imperative for them to consolidate. In several big cases, that strategy has failed in court.
The judge in the Pennsylvania case, however, wrote that his opinion “recognizes a growing need for all those involved to adapt to an evolving landscape of healthcare 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.”
He wrote that it's better for patients if hospitals merge and survive rather than remain apart and die.
“Our determination reflects the healthcare world as it is, and not as the FTC wishes it to be,” Jones wrote. “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 intended here.”
The health systems remain committed to their integration plan, Dr. A. Craig Hillemeier, CEO of Penn State Health, said in a statement Monday.
“Judge Jones' decision reinforces our long-stated position that the proposed integration of PinnacleHealth and the Milton S. Hershey Medical Center is to the benefit of patients, families, employers and our broader community,” said Hillemeier, who would be the CEO of the new organization.
PinnacleHealth CEO Michael Young also said in a statement Monday he's grateful to the many employers, community physicians, insurers and other who have lent their support to the merger. Young is slated to serve as president and chief operating officer of the merged entity.
Last year, a federal appeals court ruled against an acquisition in Idaho by St. Luke's Health System of a major medical practice in an FTC challenge. Also last year, the U.S. Supreme Court denied Ohio health system ProMedica's request to review a ruling in another FTC case that its 2010 hospital deal violated antitrust laws.
It's hard to say whether the judge's ruling Monday is an anomaly or signals a reversal of fortune for the government's antitrust enforcement in hospital cases, Gaynor said. Closing arguments in the Advocate-NorthShore preliminary injunction hearing are scheduled for later this month in U.S. District Court in Chicago.
Tim Greaney, a former assistant chief in charge of healthcare antitrust enforcement at the Justice Department, agreed the judge's decision Monday seems to break the FTC's winning streak.
Greaney, now co-director of the Center for Health Law Studies at St. Louis University School of Law, said he found it surprising that the judge's opinion didn't seem to give much credence to the FTC's arguments that the combined systems would have leverage to raise prices. In the past, he said, there has beem skepticism of commitments like the one Pinnacle and Penn State Hershey made not to raise rates.