A federal appeals court decision Tuesday pausing Penn State Hershey (Pa.) Medical Center's merger with PinnacleHealth System has placed the Federal Trade Commission's hospital antitrust review program back on stable ground after a couple concerning losses.
The U.S. Court of Appeals for the 3rd Circuit reversed the FTC's May loss in the Penn State-PinnacleHealth case, temporarily pausing the proposed merger while the agency takes on administrative review of the case. The 3rd Circuit judges said the lower court ignored the impact of the proposed merger on insurers when it ruled against the FTC, saying its analysis of the FTC's and Pennsylvania state regulators' proposed geographic market for the challenge was “economically unsound” and ignored commercial realities in the healthcare market.
Many experts saw the 3rd Circuit reversal as a necessary win for the FTC, according to Bruce Sokler, chair of Mintz Levin Cohn Ferris Glovsky and Popeo PC's antitrust section. Without this decision, FTC's hospital antitrust enforcement program could have been in jeopardy after two courts rejected its theories on geographic markets.
“It revives their program,” Sokler said. “It looks to me like the FTC got everything they wanted and needed, and some on top of that.”
The FTC claimed that the Penn State-PinnacleHealth merger would raise prices and lower healthcare quality in the Hershey region. The new entity would control 64% of the south-central Pennsylvania market and 76% of the Harrisburg market, according to the agency's initial complaint.
But the court wasn't dissuaded by the alleged efficiencies the hospital merger would create, including that they had private agreements with two of central Pennsylvania's largest insurers to keep rates steady for five and 10 years, or that capital avoidance could be considered an efficiency.
“That was important,” Sokler said. “It endorsed the FTC's view that it really was a bad thing because it reduced capacity.”
Private agreements between health plans and hospitals have no place in the court's geographic market analysis, the 3rd Circuit judges said, though they could come to bear later in the administrative review.
“If we allowed such private contracts to impact our analysis, any merging entity could enter into similar agreements—that may or may not be enforceable—to impermissibly broaden the scope of the relevant geographic market,” the decision said. “This would enable antitrust defendants to escape effective enforcement of the antitrust laws.”
That move wasn't unusual, according to Leslie Overton, a partner on Alston & Bird's antitrust team, but it's a good reminder for hospitals that private agreements may not sway enforcement agencies to approve prospective mergers.
“The FTC and DOJ have noted on a number of occasions that they are antitrust enforcers, they are not regulators,” she said. “They are looking to preserve competition rather than to have price caps that simply go to specific rates.”
Although the lower court focused on how patients would be affected by the proposed merger—via price increases or going to new providers for their healthcare—the 3rd Circuit said it was more important to look at how insurers would be affected. U.S. District Judge John Jones III ignored that issue in his May ruling.
“Patients, in large part, do not feel the impact of price increases. Insurers do,” the 3rd Circuit said. “And they are the ones who negotiate directly with the hospitals to determine both reimbursement rates and the hospitals that will be included in their networks.”
Geographic markets have long been an in issue for the FTC in regards to hospital mergers, according to Jeffrey Brennan, a partner at McDermott Will & Emery and former head of FTC's health care services and products division. In the 1990s, FTC and the U.S. Department of Justice lost a string of hospital merger challenges, many of them turning on geographic market issues. Since then, FTC has adapted its outlook by focusing on how health plans are affected by prospective mergers, rather than patients, and it's since been largely successful in hospital challenges.
“It's a completely different methodological approach that the 3rd Circuit really affirmed,” Brennan said.
The decision is a bright spot in what's otherwise been some disappointing last few months for the FTC, which has racked up a couple of big losses as it challenged high-profile hospital mergers. Experts are closely watching another case involving the proposed merger of Advocate Health Care and NorthShore University HealthSystem in the Chicago area. In that case, a federal judge similarly refused the FTC's request for a preliminary injunction due to geographic market issues.
It's unknown how the U.S. Court of Appeals for the 7th Circuit will rule in the Advocate-NorthShore appeal, but Sokler sees some hope for FTC in Chicago too.
“Advocate North Shore was the first time they had waded into the thicket of an urban merger and an urban geographic market, because it's tough,” he said. “Based on the arguments, I think they've got a real shot in Advocate as well.”
For Penn State and PinnacleHealth, the next step will be a hearing in front of an FTC administrative law judge, if the health systems don't drop their merger entirely. Experts say it's unlikely there will be a settlement between the hospitals and the FTC, as there is little to spin off for concessions in a hospital merger.
