In 2014, the powers that be at two of central Pennsylvania’s dominant health systems laid out a plan to merge their systems, creating a health care behemoth in a county of about 270,000 people. Even a regulatory challenge filed by the Federal Trade Commission (FTC) and Pennsylvania’s attorney general couldn’t stop them; a federal judge in May turned back their objections and the merger stayed on track.
Map of Pennsylvania with Counties - Single Color by FreeVectorMaps.com
But the FTC and attorney general did not give up. They appealed to the U.S. Third Circuit Court of Appeals. All eyes that cared about hospital system mergers were now on Pennsylvania. In late September, the appellate court overturned the lower court decision and granted the injunction the FTC and attorney general had sought. The principals of the health systems seeking merger, PinnacleHealth System of Harrisburg and Penn State Health’s Milton S. Hershey Medical Center, in the nearby town named for the chocolate magnate, went back to the drawing board to figure out their next steps. Last month, the two hospitals threw in the towel and decided to abandon their efforts to combine.
Because hospital spending makes up the largest piece of U.S. health care spending—32%, according to data from CMS—any judicial rulings or legislative move to curb a hospital’s market dominance are key to controlling overall health care costs.
That Third Circuit Court of Appeals ruling—and PinnacleHealth and Hershey’s subsequent retreat—may be the shot heard round the world of health system mergers. With FTC actions pending on other mergers, most notably Advocate Health Care Network and NorthShore University Health System in Chicago, the agency may now have the upper hand. Insurers have a rooting interest in how this turns out. “There is a large and very solid body of research evidence that mergers between hospitals that are close competitors drive up prices,” says Martin Gaynor, an economics professor at Carnegie Mellon University in Pittsburgh, who was director of FTC’s Bureau of Economics in 2013–2014.
The appellate court ruled that the Penn State Hershey–PinnacleHealth case validated the “hypothetical monopolist” antitrust test of mergers, says Bruce Sokler of Mintz Levin.
Bruce Sokler, chair of the antitrust section at Mintz Levin, a law firm headquartered in Boston, says the Pennsylvania ruling is “very significant” for further FTC policing of health system mergers. “I was of the school that thought that unless the FTC could get the district court decision in the Penn State Hershey case reversed, they would have to go back to the drawing boards on how they approach hospital mergers because that transaction looked like a very straightforward hospital merger antitrust case,” he says.
The appellate court ruling validated one of the FTC’s key principles in evaluating antitrust implications, the “hypothetical monopolist” test. A warhorse of antitrust analysis that was first used more than three decades ago, the hypothetical monopolist test assesses whether a proposed merger will severely diminish competition in a particular market.
Penn State Hershey Medical Center is a standalone academic center in Hershey with 551 beds. PinnacleHealth System has three campuses—two in Harrisburg, which is about 20 miles from Hershey and in the same county, and a third across the river in Mechanicsburg, Cumberland County, with 646 beds. In its complaint to stop the merger, the FTC claimed that the combined Penn State Hershey–PinnacleHealth entity would control 64% of the market in a four-county area around Harrisburg.
Sokler highlights a couple of other key points in the appellate court decision that nixed the merger. One is that merger partners were told that they cannot invoke the ACA or planned efficiencies as valid arguments to justify potentially monopolistic mergers. So, for example, Penn State Hershey claimed overall health care costs would be reduced because the merger would allow the hospital to scrap plans to build a new patient care tower. “Instead, the court said that was a reduction in capacity; that was bad news, not good news,” Sokler says.
Another point the appellate court made was that forward-looking, private contracts the merger partners made with two of the largest health plans in central Pennsylvania to freeze reimbursement rates for five and 10 years did not erase antitrust concerns. “The Third Circuit said that can be used to disguise bad mergers and raised the question of what would happen after those contracts run out,” says Sokler.
The Third Circuit decision is the latest win for the FTC and its antitrust efforts. In February 2015, trade commission lawyers won an appeal in the Ninth Circuit to block the merger of St. Luke’s Health System and Saltzer Medical Group, a physician group in Boise, Idaho. And if anyone is looking for tea leaves to read in how the Supreme Court might view the FTC’s role in policing hospital system mergers, the Phoebe Putney Health Services case in Georgia may provide them. The Hospital Authority of Albany-Dougherty County acquired Palmyra Park Hospital from Hospital Corporation of America and transferred its control to Phoebe Putney Health. In 2013, a unanimous Supreme Court overturned lower court decisions and ruled the FTC had jurisdiction to intervene in the merger. It took a couple years, but in March 2015 the FTC entered a consent agreement with Phoebe Putney Health Systems in Albany, Ga.
Meanwhile, the FTC is fighting antitrust battles left and right. It appealed a federal district court ruling denying its motion for an injunction to block the Advocate–NorthShore merger in Chicago. Along with the state of Virginia, it is fighting the proposed merger of Mountain States Health Alliance and Wellmont Health System in eastern Tennessee and southwest Virginia. And it has filed a complaint to block Cabell Huntington Hospital’s proposed acquisition of St. Mary’s Medical Center, in Huntington, W. Va. That acquisition, the FTC claims, “would create a dominant firm with a near monopoly” in a four-county area.
The Advocate–NorthShore case is a little different for the FTC because it’s in an urban area. “I didn’t think the Advocate case is a must win for the FTC because drawing markets in urban areas is inherently difficult,” says Sokler, “and it’s why there aren’t too many hospital challenges in urban areas.”
In Sokler’s view, the FTC could lose that case in Chicago without the loss foreshadowing its chances in the other cases, whereas what now looks like a win in the Penn State Hershey–PinnacleHealth case could send a strong signal in the other direction. Lawyers at the FTC may now be encouraged to take a tougher look at hospital tie-ups in urban areas, he says.
The FTC seems to have the upper hand in blocking mergers, says Martin Gaynor, a Carnegie Mellon economics professor and former FTC official.
Of course, there’s the small matter of that election on November 8 and the future occupant of the familiar white building and control of the lower and upper chambers in the domed building down the street. (We went to press before Election Day.) Gaynor doesn’t see the outcome of the 2016 political season as having a huge effect on the FTC and its health care antitrust efforts. “If a merger will harm competition, the FTC will try to block it,” he says.
The odds for fighting on wouldn’t have been in Penn State Hershey’s and PinnacleHealth’s favor. Their next move would have been a hearing before an FTC administrative law judge, and then if denied the merger, partners could have appealed to the full FTC. A denial there would have sent them back to the appellate court, a process that might have taken two years to play out. “There’s a big home-court advantage for the FTC until you get back to the court of appeals,” Sokler says.
An encouraged FTC, playing on its home court, may be poised to take on all comers.