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  • Third Circuit Halts Pennsylvania Hospital Merger On Antitrust Grounds, Reversing Previous Loss By FTC
     
    10/03/2016
    On September 27, 2016, the Third Circuit Court of Appeals reversed a District Court ruling and granted the preliminary restraining order sought by the Federal Trade Commission (“FTC”) and the state of Pennsylvania to enjoin a merger of two state hospital systems pending administrative review by the FTC.  FTC v. Penn State Hershey Medical Center, No. 16-2365 (3d Cir. Sept. 27, 2016).  The Court rejected as legally incorrect the District Court’s formulation of the geographic market for evaluating the possible anti-competitive effects of the proposed merger.

    As reported here previously, on May 9, 2016, Judge John E. Jones III of the United States District Court for the Middle District of Pennsylvania denied appellants’ preliminary injunction motion, which sought to stay the merger of two Harrisburg-area hospital groups.  In so holding, the District Court referenced the “hypothetical monopolist test,” a commonly used measure of a proposed relevant geographic market that considers whether a hypothetical monopolist could impose a “small but significant non-transitory increase in price” (or SSNIP) in the proposed market.  The District Court found that the proposed geographic market of four counties was “unrealistically narrow and [did] not assume the commercial realities faced by consumers in the region.”

    The Third Circuit disagreed, finding that the District Court's analysis suffered from three critical legal errors:
    First, the District Court used a hybrid test, rather than applying the more appropriate hypothetical monopolist test, by considering the number of patients from outside the proposed geographic area who used the Harrisburg hospital services while ignoring evidence that 91% of local patients used the Harrisburg hospitals.

    Second, the District Court did not consider the reaction by insurers—more than patients—to a SSNIP.  While the District Court found that patients would simply use other hospitals in the area if a SSNIP occurred, the Third Circuit noted that “[p]atients are largely insensitive to healthcare prices because they utilize insurance, which covers the majority of their healthcare costs,” and, accordingly, any analysis must consider the payors of those costs: the insurers.

    Third, the District Court improperly relied on existing agreements between the hospitals and the two largest payors in the region to maintain the existing rate structure for set periods of time following the merger.  The Third Circuit held that considering private agreements was inappropriate when conducting a hypothetical monopolist test.

    The Third Circuit ultimately concluded that the FTC had established a prima facie case that the at-issue merger would lessen competition.  The Court accordingly directed the District Court to grant a preliminary injunction pending the conclusion of the FTC’s administrative review.
    CATEGORY: Injunctions

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