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May 12, 2016

Pennsylvania Court Decision Offers New Hope For Hospital Mergers

On May 9, 2016, a federal district court in Pennsylvania issued a decision which has the potential to dramatically alter the legal landscape for hospital mergers, especially those undertaken to meet the changing healthcare environment created by the Affordable Care Act. FTC v. Penn State Hershey Medical Center, 2016 U.S. Dist. LEXIS 60814 (M. D. Penn.). The decision comes in a case filed by the Federal Trade Commission (FTC) seeking a preliminary injunction against the merger of two hospitals in central Pennsylvania pending an administrative trial to determine whether the merger violates the antitrust laws. The decision is noteworthy not only because it broke a long winning streak by the FTC in court cases involving challenges to hospital mergers, but also because in doing so the court acknowledged in stark terms the predicament that the FTC’s enforcement policy has created for healthcare providers.

The case involves the proposed merger of Penn State Hershey Medical Center, a 551 bed teaching hospital, with Pinnacle Health System, which operates three hospitals with a combined 646 beds in nearby Harrisburg and Cumberland County.  Penn State saw the merger as a means to avoid the need to build an expensive addition to alleviate overcrowding which, in turn, would help contain costs of serving patients. In addition, the merger would make it possible for both hospitals to treat more patients at the locations best suited to their healthcare needs. Hershey’s CEO also testified that the increased scale of operations resulting from the merger would facilitate adoption of risk-based contracting, in line with market trends being driven by the Affordable Care Act.

There is nothing striking or unusual about these kinds of benefits flowing from hospital mergers. What is significant about the decision, however, is that the court found them persuasive in its decision to deny the FTC’s request to enjoin the merger. In the last several court challenges to such mergers, the FTC has successfully argued that the potential anticompetitive effects arising out of the increased market power of merged hospitals outweighed the hospitals’ claims that consolidation was justified to meet evolving conditions in healthcare markets. Courts have found persuasive the FTC’s claims that hospitals could use other arrangements, short of mergers, to achieve the same efficiencies.

In overruling the FTC’s position, the court observed that its decision “recognizes a growing need for all those involved to adapt to an evolving landscape of healthcare that includes, among other changes, the institution of the Affordable Care Act, fluctuations in Medicare and Medicaid reimbursement, and the adoption of risk-based contracting.”  The court went on to observe that its determination

….reflects the healthcare world as it is, and not as the FTC wishes it to be. We find it no small irony that the same federal government under which the FTC operates has created a climate that virtually compels institutions to seek alliances such as the Hospitals intend here. Like the corner store, the community medical center is a charming but increasingly antiquated concept. It is better for the people they treat that such hospitals unite and survive rather than remain divided and wither.

The court also ruled that the FTC’s arguments as to the anticompetitive effects of the merger reflected an overly narrow view of the geographic area served by the hospitals and ignored increasing competition from other nearby hospitals. The court noted that denying the FTC’s requested relief would not prevent the agency from ultimately ordering Penn State Hershey to divest Pinnacle should the agency conclude, following a full administrative trial, that the merger violated the antitrust laws.

According to a press report, the FTC has decided it will appeal the decision to the United States Court of Appeals for the Third Circuit. A decision on the appeal is likely to take a year or more.

For now, the district court decision should make parties considering hospital mergers more optimistic of their prospects of overcoming antitrust hurdles.

Should you require assistance in examining antitrust issues involved in a healthcare transaction, please contact Arthur Adelberg, Partner in the Barclay Damon Health Care and Human Services Practice Area.


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