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FTC Alleges “Three-to-Two” Hospital Merger Will Reduce Competition

Last week the Federal Trade Commission (FTC) authorized an action to block a proposed hospital merger pending an administrative trial. According to the FTC, the merger of Penn State Hershey Medical Center (Hershey) and PinnacleHealth System (Pinnacle) would create a dominant provider of general acute care inpatient hospital services sold to commercial health plans in the Harrisburg, Pennsylvania area.  The FTC filed its administrative complaint on December 7, 2015 (public redacted version posted on December 14, 2015). In the Matter of The Penn State Hershey Medical Center and PinnacleHealth System, FTC Docket No. 9368.  The Commission filed jointly with the Pennsylvania Office of the Attorney General a complaint under seal in federal district court seeking a temporary restraining order and preliminary injunction, which the district court granted. FTC v. Penn State Hershey Medical Center, 1:15-cv-02362 (M.D. Penn Dec. 9, 2015).

In 2014, Hershey and Pinnacle entered into a letter of intent to combine their assets. Hershey owns one general acute care hospital in the Harrisburg area, and Pinnacle operates three in the area.  The FTC alleged in its administrative complaint  that the two health systems compete head-to-head, offering overlapping high-quality primary, secondary, tertiary, and quaternary services.  According to the FTC, post-merger the combined entity would account for approximately 64% of all general acute care services in the Harrisburg area.  The FTC further alleged that the merger is presumptively unlawful under the 2010 Merger Guidelines, with a post-merger market concentration HHI measure of 4,500 and an increase of 2,000 points.  The FTC also asserted that of the three other hospitals that provide general acute care services in the Harrisburg area, only Holy Spirit Hospital—a smaller community hospital with a more limited range of services—is of any competitive significance.  Thus, the transaction would reduce the number of meaningful competitors from three to two.

The FTC’s administrative complaint alluded to Hershey and Pinnacle documents that suggest the two hospitals view each other as close competitors. According to the FTC, health plans in the Harrisburg area can currently negotiate lower rates by threatening to exclude Hershey or Pinnacle from their networks because the other hospital serves as a close competitor.  The merger would thus result in increased bargaining leverage for the combined entity, allowing it to raise rates.  Beyond price competition, the FTC alleges that competition between the hospitals over the years has resulted in the expansion of services and improved quality of care, both of which would be harmed by the merger.

While not quite clear from the redacted version of the administrative complaint, it appears that Hershey and Pinnacle may have entered into certain agreements with some health plans in an attempt to forestall opposition to the merger. The FTC concluded, however, that the agreements do not alleviate the anticompetitive effects of the merger.

Finally, noting that “no court ever has found, without being reversed, that efficiencies rescue an otherwise illegal transaction,” the FTC argued that the parties “would need to present evidence that extraordinary merger-specific efficiencies, which will be passed on to consumers, outweigh the Merger’s likely significant harm to competition.” Instead, the FTC asserted that the parties’ efficiency claims are “overstated, speculative, unverifiable, not merger-specific, or result from an anticompetitive reduction in output, quality, or services, and are largely non-cognizable.”

The evidentiary hearing before the administrative law judge is set for May 17, 2016.

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Dionne Lomax