Big Win for FTC in Health System Merger Challenges

The Federal Trade Commission (FTC) just scored a big victory in its attempt to prevent large healthcare system mergers if the merger reduces competition in a marketplace.

In May 2016, the FTC lost its case in a federal district court challenging the Penn State Hershey-PinnacleHealth merger.

On September 27, 2016, the U.S. Court of Appeals for the 3rd Circuit reversed that decision based on the lower court’s erroneous definition of geographic markets. It was good news for the FTC, which has seen two courts reject its geographic market definitions.

The FTC claimed that the Penn State-PinnacleHealth merger would raise prices and lower healthcare quality in the Hershey region. The new entity would control 64% of the south-central Pennsylvania market and 76% of the Harrisburg market, according to the agency’s initial complaint.

Rate Agreements Irrelevant

The appeals court didn’t care that private agreements with two of central Pennsylvania’s largest insurers would keep rates steady for 5 and 10 years, or that capital avoidance could be considered an efficiency. The court determined that private agreements between health plans and hospitals have no place in the court’s geographic market analysis.

“If we allowed such private contracts to impact our analysis, any merging entity could enter into similar agreements—that may or may not be enforceable—to impermissibly broaden the scope of the relevant geographic market, ” the decision said. “This would enable antitrust defendants to escape effective enforcement of the antitrust laws.”

“That was important, ” Bruce Sokler, chair of Mintz Levin Cohn Ferris Glovsky and Popeo PC’s antitrust section told Modern Healthcare. “It endorsed the FTC’s view that it really was a bad thing because it reduced capacity.”

Without this decision, Sokler said the FTC’s hospital antitrust enforcement program “could have been in jeopardy after two courts rejected its theories on geographic markets. It revives their program. It looks to me like the FTC got everything they wanted and needed, and some on top of that.”

Leslie Overton, a partner on Alston & Bird’s antitrust team, said it’s a good reminder for hospitals that private agreements may not sway enforcement agencies to approve prospective mergers.

Antitrust Enforcers, Not Regulators

“The FTC and DOJ [Department of Justice] have noted on a number of occasions that they are antitrust enforcers, they are not regulators, ” she said. “They are looking to preserve competition rather than to have price caps that simply go to specific rates.”

This decision will likely inform other federal district courts currently considering FTC objections to mergers of large health systems. For example, the FTC is currently waiting in another circuit to rule on another failed challenge in the Chicago-area Advocate-NorthShore merger.

The pressure to get bigger and capture patients continues, but so is the government’s antitrust armamentarium to keep market competitive.