(This story was updated at 5:08 p.m. ET.)
The Federal Trade Commission has decided to continue battling a merger between Penn State Hershey (Pa.) Medical Center and PinnacleHealth System in Harrisburg despite a loss in federal court this week.
Often, the FTC will drop a merger challenge if it can't win a preliminary injunction in court to temporarily block the deal pending the outcome of its own administrative proceedings. Earlier this week, a federal judge rejected the FTC's request for a preliminary injunction in the Pennsylvania case. Despite that decision, the FTC has filed documents in federal district court asking it to temporarily halt the merger while the FTC appeals the judge's decision.
The ruling earlier this week was an unusual setback for the FTC, which has otherwise prevailed in a string of hospital merger cases in recent years.
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.
FTC spokeswoman Betsy Lordan said the agency had no comment. PinnacleHealth and Penn State Hershey declined to comment Wednesday.
In newly filed court documents, the FTC argues that the judge in this case used an incorrect methodology to define the geographic market.
In his ruling, U.S. District Judge John Jones III 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 wrote that the FTC did not include enough hospitals in its definition of the market.
But the FTC fired back Wednesday that the judge shouldn't have focused on the geographic location of some Hershey patients because patients are relatively insensitive to price. Rather, he should have focused, the FTC argued, on the merger's potential effects on commercial insurers.
The question in defining the market should have been whether the merged hospitals would be able to raise prices on insurers or whether insurers would be able to include alternate hospitals in their networks, the FTC argued.
David Ettinger, a partner with law firm Honigman, said the judge appeared to use an analysis that was more common 20 years ago.
“The decision did read a little bit more like the cases in the '90s than the more recent cases,” said Ettinger, who was involved in a recent FTC case against St. Luke's Health System in Idaho. A federal appeals court ultimately ruled against St. Luke's acquisition of a major medical practice in that case.
The judge in the Pennsylvania case also said he found it “compelling” that the hospitals had already worked with central Pennsylvania's two largest insurers, CBC and Highmark, to ensure their rates wouldn't increase following a merger.
The FTC argued in its new court filing that that agreement shouldn't have anything to do with the definition of the geographic market.
Richard Feinstein, a former director of the FTC's Bureau of Competition, said if the way the judge allowed the market to be defined is upheld, hospitals in other merger cases might have an easier time making such an argument.
Healthcare industry stakeholders might also be interested in Jones' criticism of the FTC for going after certain hospital mergers in this changing healthcare environment, said Feinstein, who is now a partner at Boies, Schiller and Flexner.
Jones wrote that his opinion recognizes a need for everyone involved in healthcare to adapt to changes including the implementation of the Affordable Care Act, fluctuations in Medicare and Medicaid reimbursement and the adoption of risk-based contracting.
“Our 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 intended here.”
The FTC didn't address that contention in its new court filing, but Feinstein said he imagines the ruling might be cited in other contexts. The FTC may also worry about how the judge's decision earlier this week might influence other hospital challenges, including one now playing out in federal court in Chicago over a merger between NorthShore University HealthSystem and Advocate Health Care.
In that case, the FTC wants the district court to put a hold on its ruling over the preliminary injunction, so the merger can't move forward while the FTC appeals the decision to the U.S. Court of Appeals for the 3rd Circuit.