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Hospitals Considering Merger Face Increased Uncertainty

PinnacleHealth System and Penn State Hershey Medical Center have abandoned their merger plans following a Third Circuit defeat last month.  The announcement underscores the uncertainty faced by hospitals considering consolidation as a way to keep costs down and promote a value-based system of payment.

The Third Circuit concluded last month that the Federal Trade Commission (FTC) had met its prima facie burden of demonstrating that the merger would be anticompetitive.  This decision overturned the Middle District of Pennsylvania’s denial of the FTC’s request for a preliminary injunction to block the merger.  The appeals court found that the district court correctly identified the hypothetical monopolist test as the appropriate legal framework, but committed numerous errors in its application of that test.  We previously explained the Third Circuit’s analysis here.

Pinnacle and Penn State Hershey officials reiterated their belief that “the integration of [the] two health systems would have served the best interests of patients and the entire central Pennsylvania community."  However, they said, “the time and cost associated with continuing litigation” prompted them to “bring [their] integration efforts to a close.”  They pledged to collaborate in the future “[w]here circumstances allow and where it makes the most sense for [their] patients.”

The FTC, meanwhile, praised the decision to abandon the transaction.  FTC Competition director Debbie Feinstein said “the merger would have likely led to lower quality and higher cost health care, at the expense of Harrisburg residents and their employers."  Calling off the deal, she said, “preserves hospital competition in the Harrisburg area."

The merger would have been among the larger health care consolidation transactions of the year, as both systems take in more than $1 billion in revenue each year.  Larger transactions are on the rise in the health care space.  One commentator has noted that transactions worth more than $1 billion were few and far between before 2010; now five or six such deals are announced every year.

The abandonment of this deal highlights the challenges faced by health care providers looking to efficiently improve care and operations—an especially pressing concern against the backdrop of the Affordable Care Act (ACA).  The ACA emphasizes integration as a way to reduce health costs and thereby increases incentives for healthcare providers to merge.  (We have previously discussed this dynamic here and here).  This merger defeat and others like it have given rise to concerns that health care providers may avoid pursuing an efficient merger, even if it promotes consumer welfare.