Appeals court ruling gives FTC merger challenges new life

Federal Trade Commission challenges to hospital mergers over the past decade have rested on its belief that limiting competition in a well-defined market would harm insurers—the ultimate purchasers of healthcare services. Actual prices or their impact on consumers and patients—the traditional grounds for antitrust challenges—barely entered into the equation.

Two recent losses on challenges to mergers in Pennsylvania and Illinois seemed to undermine that theory. The FTC seemed headed for a world where providers could consolidate in the name of delivering more coordinated care.

But a federal appeals court decision last week temporarily halting the merger of Penn State Hershey Health System and PinnacleHealth System during the FTC's administrative review has given the antitrust agency new life. Once again, the courts have blessed the idea that a small proposed market and the potential impact on insurers, not actual patient or consumer harm, is a proper test to secure a preliminary injunction.

“Patients, in large part, do not feel the impact of price increases. Insurers do,” the U.S. Court of Appeals for the 3rd Circuit said in its decision. “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.”

The decision has put hospitals on notice that the status quo remains in place on FTC antitrust enforcement. The agency's analysis of the impact of mergers will continue to focus on insurers, not individual patients or their choices. “The FTC is still a formidable hurdle for parties to deal with if they're in highly concentrated markets,” said Jeffrey Brennan of McDermott Will & Emery.

Penn State Hershey operates a 493-bed, not-for-profit hospital in Dauphin County, home of the state capital Harrisburg. PinnacleHealth is a not-for-profit, three-campus system with 662 staffed beds, also in Dauphin County. Hershey's total revenue for fiscal 2014 was $1.39 billion and Pinnacle's in fiscal 2015 was $1.07 billion, according to the FTC.

The two systems combined account for 76% of the market in the four-county region around Harrisburg, according to the FTC. In a joint statement last week, the health systems said they were disappointed in the 3rd Circuit's decision and would be discussing their options in the coming days.

If they move forward, the two systems could face a lengthy administrative trial in front of an FTC administrative law judge and years of appeals. Many mergers cannot endure such a long state in limbo. They either seek a settlement with the agency or drop the merger altogether.

The FTC's proposed market encompassed the four counties around Harrisburg. The agency said that 91% of patients living in the Harrisburg area receive general acute-care services in that market. Given Penn State and Pinnacle are the two largest health systems in the area, agency officials saw a real chance that patients and insurers could be harmed by price increases or narrowing coverage if the merger went through.

Experts say the courts giving the FTC's challenge new life will put hospitals that want to merge on notice that a FTC challenge could result if they control a large share of the prospective market. Although Penn State and PinnacleHealth attempted to assuage these concerns by entering private agreements with the two insurers in central Pennsylvania, the 3rd Circuit said those deals weren't relevant to the market definition, which was an issue in the appeal.

“The hypothetical monopolist test is exactly what its name suggests: hypothetical,” the 3rd Circuit said in its decision upholding the test.

The court made it clear health systems can't negotiate their way out of potential market harms with temporary agreements with payers and third parties. If a hospital wants to show the FTC that its proposed merger won't be anticompetitive, they will have to show that insurers can create a health plan that customers will buy without consolidated health system in the network, said Christopher Raphaely, co-chair of Cozen O'Connor's healthcare practice.

“That's really what it comes down to,” he said. “If a hospital feels there are enough hospitals that are suitable alternatives for people in their service area if they're not in network, then the concern would be less.”