Hospital Merger Stayed Pending Federal Review

(CN) — Two Pennsylvania hospitals cannot merge until the Federal Trade Commission reviews the deal for antitrust concerns, the Third Circuit ruled Tuesday.

Penn State Hershey Medical Center and PinnacleHealth System agreed to merge in March 2015. But according to the government, the combined hospitals would control 64 percent of the south-central Pennsylvania market, and 76 percent of the market in the state's capital, Harrisburg.

In May, a federal judge issued a rare ruling against the FTC, refusing to stop the merger.

Twelve states intervened in a friend-of-the-court brief on the FTC's behalf on appeal, arguing that the growth of large healthcare systems has resulted in "lopsided" bargaining power that "translates to higher healthcare prices for citizens."

The Third Circuit ruled in favor of the FTC and the states Tuesday, finding it critical to analyze how insurers would be affected by the merger, not just how patients would be affected.

"Patients, in large part, do not feel the impact of price increases. Insurers do," Judge D. Michael Fisher said, writing for the three-judge panel.

Even if a hospital raises the prices of its services, the cost will be spread among many insured patients in the form of higher premiums, and will not just fall on the shoulders of one severely ill patient, the ruling states.

"This is the commercial reality of the healthcare market as it exists today," Fisher wrote.

The lower court ignored this reality when analyzing whether the Penn State-PinnacleHealth merger would create a monopoly in south-east Pennsylvania, according to the 46-page judgment.

"We do not mean to suggest that, in the healthcare context, considering the effect of a price increase on patients constitutes error standing alone," Fisher said. "Patient response is clearly important, but it is not important with respect to patients' response to the price increase demanded by the post-merger hospitals."

In this case, insurers repeatedly testified that they could not market a health insurance plan in the Harrisburg area without negotiating with both Hershey and Pinnacle. One insurer that attempted to do so, in fact, lost half of its members, the ruling states.

The Third Circuit panel found that private agreements between the hospitals and certain insurers to maintain the existing rate structure for between five and10 years are irrelevant to the FTC's analysis.

"If we allowed such private contracts to impact our analysis, any merging entity could enter into similar agreements to impermissibly broaden the scope of the relevant geographic market. This would enable antitrust defendants to escape effective enforcement of the antitrust laws," Fisher wrote.

Otherwise, would-be monopolists could enter into such limited agreements to create a combined entity that would have overwhelming control of the market at the end of the five or 10-year agreements, the panel ruled.

The Third Circuit remanded the case for the lower court "to preliminarily enjoin the proposed merger between Hershey and Pinnacle pending the outcome of the FTC's administrative adjudication."

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