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The Penn State Hershey–Pinnacle Merger: A Turning Point in FTC’s Enforcement Authority, or Just a Temporary Setback?

As we have reported previously, the Federal Trade Commission recently has taken an aggressive stance in regulating mergers in the healthcare sector.  The Commission has racked up a string of victories, but last week the Middle District of Pennsylvania dealt a blow to that track record by denying the Commission’s request for a preliminary injunction to block a merger of two major healthcare providers in central Pennsylvania: Penn State Hershey Medical Center and PinnacleHealth Systems.  The FTC is pursuing an emergency appeal to the Third Circuit, but this loss could signal a waning in the FTC’s enforcement authority in the healthcare sector.

In June 2014, Penn State Hershey and PinnacleHealth signed a letter of intent for a proposed merger.  The parties touted many potential benefits of the merger, including enhancing the quality of patient care, increasing consumers’ access to specialized healthcare servicing, and stabilizing the economic future of Penn State Hershey’s medical school.

In December 2015 FTC issued an administrative complaint, alleging that the proposed merger would violate Section 7 of the Clayton Act and Section 5 of the FTC Act.  In March of this year, the Commission moved for a preliminary injunction before Judge John E. Jones III of the U.S. District Court for the Middle District of Pennsylvania, to stop the hospitals from consummating the merger.

Following expedited evidentiary hearings, last week Judge Jones denied the Commission’s request for a preliminary injunction.  A major focus of Judge Jones’s ruling was the geographic market, which FTC argued consisted of only four counties (Dauphin, Cumberland, Perry, and Lebanon).  Judge Jones concluded that this proposed market was far too restrictive, as a significant proportion of the hospitals’ patients reside outside this area and travel to the hospitals to receive medical care.  Furthermore, Judge Jones noted there are 19 hospitals within a 65 minute drive of Harrisburg that could readily offer alternatives for consumers if the proposed merger were to be anticompetitive.  Judge Jones also found it “extremely compelling” that the hospitals had taken steps to ensure that post-merger rates would not increase for central Pennsylvania's two largest health insurance payors, which represent about 75-80% of Penn State Hershey and PinnacleHealth’s patients.

In closing remarks, Judge Jones noted that the Affordable Care Act, fluctuations in Medicare and Medicaid reimbursement, and other developments had created “a growing need for all those involved to adapt to the evolving landscape of health care.”  The Court found “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.”

On Thursday, FTC filed an emergency motion for an expedited appeal to the U.S. Court of Appeals for the Third Circuit.  The hospitals are scheduled to respond to that motion by Wednesday.  In the meantime, the district court has agreed to extend the stay of proceedings for the next two weeks while the emergency appeal motion plays out.

The district court’s ruling is a blow to the FTC’s record in the healthcare sector, but the Commission has indicated that it is not cowed by the loss.  Giving the keynote remarks last week at the American Bar Association meeting on Antitrust in Healthcare, FTC Chair Edith Ramirez appeared undeterred, arguing that the district court’s ruling “diverges significantly from that taken by the commission and other federal courts in recent years in health care provider mergers.”  Ramirez gave no indication that FTC intends to back down on its enforcement efforts in the healthcare sector, emphasizing that “vigorous enforcement of the federal antitrust laws is more important than ever.”

While it remains to be seen how the appeal will play out, FTC may be buoyed by its victory in blocking the Staples-Office Depot merger—a ruling that came just a day after Judge Jones’s ruling.  Emboldened by that major victory in the retail sector, FTC may pursue the appeal to the Third Circuit with new resolve.

It is noteworthy, moreover, that several other pending healthcare merger challenges could be affected by the Penn State Hershey-Pinnacle decision.  Among others, FTC has brought challenges to Cabell Huntington Hospital’s acquisition of St. Mary’s Medical Center in West Virginia and the proposed merger of Advocate Health Care Network and NorthShore University HealthSystem in Chicago. Those enforcement efforts involve many of the same legal issues as the Penn State Hershey-Pinnacle merger (including, most notably, the appropriate analysis for the relevant geographical market in healthcare mergers), raising the stakes in its Third Circuit appeal.