On May 9, 2016, the Middle District of Pennsylvania in FTC et al. v. Hershey Medical Center et al. (“Hershey”) denied a preliminary injunction request by the FTC to block a merger between Penn State Hershey Medical Center and PinnacleHealth System. The District Court rejected the FTC’s request based on its finding that the FTC’s geographic market definition was “unrealistically narrow and does not assume the commercial realities faced by consumers in the region.” The proper geographic market is one from which the defendant hospitals draw the bulk of their patients, with few patients entering in from outside that area to seek medical care and few patients within that area leaving to seek care from other hospitals. The District Court found the FTC’s proposed geographic market to be “starkly narrow,” particularly “given the realities of living in Central Pennsylvania, which is largely rural and requires driving distances for specific goods and services.” By failing to set forth a relevant geographic market, the District Court held that the FTC could not demonstrate a likelihood of success on the merits of its Clayton Act case against the merger and denied the preliminary injunction.
The important takeaways from Hershey, however, lie in the District Court’s recitation of “several important equitable considerations.” First, the District Court noted that the combined hospital had negotiated long-term rate-capped agreements with two large insurers representing over 75% of the hospitals’ commercial patients. Since these rates could not increase for at least five years, the District Court found it imprudent to enjoin a merger based on a mere prediction of how rates may change five years into the future.
The District Court found compelling the hospitals’ efficiencies argument that the merger would help alleviate capacity constraints and overcrowding at one of the two hospitals and achieve better allocation of higher- and lower-acuity patients between the two hospitals. The District Court also noted the transition in the healthcare industry to risk-based contracting and how the merger would help the combined hospitals to adapt to risk-based contracting by providing size of scale and “spreading the costs…of population health over a larger health care system.”
The District Court, however, then issued a harsh critique of the FTC’s merger policies in the new world order of the Affordable Care Act. Specifically, the District Court made clear that in acknowledging the “growing need for all those involved to adapt to an evolving landscape of healthcare,” its decision “reflects the healthcare world as it is, and not as the FTC wishes it to be.” The District Court concluded by noting:”
“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.”
To nobody’s surprise, the FTC immediately appealed the District Court’s decision on numerous grounds to the Third Circuit. It remains to be seen whether the District Court’s rationales and conclusions gain traction at the appellate court level. In the near term, however, Hershey provides groundwork for potential new defenses against federal antitrust law attacks.