Fed. Trade Commission v. Penn State Hershey Med. Ctr. — Sept. 2016 (Summary)

ANTITRUST

Fed. Trade Commission v. Penn State Hershey Med. Ctr.
No. 16-2365 (3d Cir. Sept. 27, 2016)

The United States Court of Appeals for the Third Circuit reversed and remanded a decision by the United States District Court for the Middle District of Pennsylvania with instructions for the lower court to grant a preliminary injunction, requested by the Federal Trade Commission (“FTC”), against the proposed merger between Penn State Hershey Medical Center (“Hershey”) and Pinnacle Health System (“Pinnacle”).

The FTC filed an administrative complaint alleging that the merger between Hershey and Pinnacle violated Section 7 of the Clayton Act because it would “substantially lessen competition in the market for general acute care services” in the Harrisburg area.  The district court dismissed the claim on the basis that the FTC failed to appropriately define the “geographic market” affected by the merger.  The FTC appealed.

The Third Circuit concluded that the trial court erred in both its formulation and application of the legal test to define a geographic market.  Specifically, the Third Circuit found that relying solely on patient flow data was inconsistent with the hypothetical monopolist test that both parties agreed should be used to define the geographic market.  The Third Circuit also found that the trial court had failed to consider patient outflow data which supported that general acute care services (the relevant product market) are inherently local.  The Third Circuit concluded “citing only patient inflows and ignoring patient outflows creates a misleading picture of the relevant geographic market.”  The Third Circuit was also critical of the district court’s analysis because it failed to properly account for the likely response of insurers to changes in price.  “This incorrect focus reflects a misunderstanding of the ‘commercial realities’ of the healthcare market.”

Additionally, the Third Circuit concluded that the trial court erred in basing its analysis of the geographic market on private contracts entered into between the hospitals and insurers maintaining the existing rate structure for five and ten years.  Based on prior case law, the Third Circuit concluded that such private contracts “are not to be considered” in determining the relevant geographic market.  Thus, the Third Circuit concluded:  “These errors together render the District Court’s analysis economically unsound and not reflective of the commercial reality of the healthcare market.”

The Third Circuit then went on to conclude that the FTC had appropriately defined the geographic market by demonstrating that insurers in the market would have no choice but to pay more for services if Hershey and Pinnacle would consummate the merger.  The Third Circuit then considered whether the FTC could prove that the merger “will probably lead to anticompetitive effects on the market.”  Based on the evidence presented by the FTC, the Third Circuit concluded that the merger was presumptively anticompetitive.

The Third Circuit also considered the “efficiencies defense” put forth by Hershey and Pinnacle and noted “we are skeptical that such an efficiencies defense even exists.”  The Third Circuit then concluded:  “Our review of the Hospitals’ claimed efficiencies leads us to conclude that they are insufficient to rebut the presumption of anticompetitiveness.”  Specifically, the Third Circuit noted that capital savings cited by the hospitals could not constitute “efficiencies” unless the savings resulted in some subsequent benefit to consumers.  It reached a similar conclusion with respect to the hospitals’ argument that the merger would enhance their efforts to engage in risk-based contracting.  “Irrespective of whatever benefits the merger may bestow upon the Hospitals in increasing their ability to engage in risk-based contracting, the Hospitals must demonstrate that such a benefit would ultimately be passed on to consumers.  It is not clear from the record how this would be so beyond the mere assertion that it would save the Hospitals money and such savings would be passed on to consumers.”

Ultimately, the Third Circuit concluded that a preliminary injunction would be in the public interest.  Thus, it reversed and remanded the case, directing the district court to grant the FTC’s preliminary injunction to enjoin the proposed merger pending the FTC’s administrative adjudication.