Antitrust Law Daily Wrap Up, TOP STORY—M.D. Pa.: FTC denied preliminary injunction in Penn State Medical Center, PinnacleHealth merger challenge, (May 10, 2016)

By Linda O’Brien, J.D., LL.M.

The federal district court in Harrisburg, Pennsylvania has denied the FTC’s request for a preliminary injunction in its challenge to Penn State Hershey Medical Center’s proposed merger with PinnacleHealth System, finding that the Commission failed to show a likelihood of success on the merits of its antitrust claim (FTC v. Penn State Hershey Medical Center, May 9, 2016, Jones, J.).

Penn State Hershey Medical Center is a 551-bed hospital located in Hershey, Pennsylvania and is the primary teaching hospital of the Penn State College of Medicine. PinnacleHealth System is a non-profit health system with 646 licensed beds across three campuses. Penn State and PinnacleHealth executed a letter of intent of their proposed merger in June 2014. Following an investigation, in December 2015, the FTC issued an administrative complaint, alleging that proposed transaction violated Section 5 of the FTC Act and Section 7 of the Clayton Act by eliminating price competition, increasing the merged entity’s bargaining leverage, and eliminating vital quality competition in the Harrisburg area.

Before the court was the FTC’s motion for a preliminary injunction, barring Penn State and PinnacleHealth from taking steps to consummate the proposed merger pending the completion of the FTC’s administrative trial.

The court determined that the FTC could not establish a likelihood of success on the merits of its antitrust claim against the two hospitals, since the agency failed to set forth a relevant geographic market. The FTC contended that the relevant geographic market was the Harrisburg metropolitan area and that the market for general acute care services was inherently local since patients want to be hospitalized near their families and homes.

The FTC’s Harrisburg area relevant geographic market was too narrowly drawn and did not account for the commercial realities faced by consumers in the region, according to the court. It was undisputed that, in 2014, 43.5 percent of Penn State’s patients traveled to Hershey from outside the Harrisburg area, over half of Penn State’s revenue originated outside of the Harrisburg area, and thousands of PinnacleHealth’s patients resided outside of the Harrisburg area. Further, there were 19 hospitals within a 65 minute drive of Harrisburg, and many of those hospitals were closer to patients who came to Penn State. Given the realities of living in the largely rural Central Pennsylvania, those 19 other hospitals provided a realistic alternative that patients could utilize, in the court’s view.

The court found compelling that the two hospitals took steps to ensure that post-merger rates did not increase for CBC and Highmark—Central Pennsylvania’s two largest payors—by executing long-term contracts. Since those payors represented 80 percent of the hospitals’ commercial patients, the hospitals could not walk away from those payors, and rates could not increase for the length of the contracts.

Furthermore, the hospitals presented ample evidence that anticompetitive effects would not arise from the proposed merger. Specifically, the merger would create efficiencies by alleviating some of Penn State’s capacity constraints and eliminate Penn State’s need to expend capital for construction of a new bed tower, the court found. The merger also would allow the hospitals to remain competitive in a market where nearby hospitals were routinely partnering with other hospitals to achieve growth and dominance. Finally, an injunction would deny consumers the procompetitive advantages of a combined entity that could compete with other merged and growing hospital systems in the region, the court concluded.

The case is No. 1:15-cv-02362-JEJ.

Attorneys: Gerald A. Stein for the Federal Trade Commission. Adrian Wager-Zito (Jones Day) for Penn State Hershey Medical Center and PinnacleHealth System.

Companies: Penn State Hershey Medical Center; PinnacleHealth System

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