Ap­peals court rul­ing gives FTC merger chal­lenges new life

Modern Healthcare - - NEWS - By Erica Te­ichert

Fed­eral Trade Com­mis­sion chal­lenges to hospi­tal merg­ers over the past decade have rested on its be­lief that lim­it­ing com­pe­ti­tion in a wellde­fined 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 Bren- nan 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 four­county 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.”

Penn State Her­shey Med­i­cal Cen­ter is part of the pro­posed merger.

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