Summary

A Pennsylvania federal district judge recently denied injunctive relief that would have blocked a merger between Penn State Hershey Medical Center and PinnacleHealth System.  The Court’s denial of injunctive relief was built upon an important evidentiary issue in all antitrust matters: market definition.

Penn State Hershey Medical Center (“Hershey Med”) and PinnacleHealth System (“Pinnacle”) signed a Letter of Intent concerning  a merger in June 2014. After both boards approved the proposed transaction, the Federal Trade Commission (“FTC”) was notified, and in May 2015 an agreement was executed setting out the merger’s terms. The FTC investigated and filed an administrative complaint on December 7, 2015, alleging that the merger violated federal antitrust laws. Trial is set to commence in the FTC proceeding on May 17, 2016.

On the heels of the administrative complaint,  the FTC, joined by the Commonwealth of Pennsylvania via its Office of Attorney General (“AG”), filed a complaint in the U.S. District Court for the Middle District of Pennsylvania. The principal purpose of the federal complaint was to halt the merger prior to the FTC trial. Given the exigency of the administrative hearing timeline, the federal case was scheduled to move quickly. The FTC and AG filed a Motion for Preliminary Injunction on March 7, 2016. That motion was fully briefed, expedited discovery was conducted and a five-day evidentiary hearing started on April 11, 2016.

Less than one month after the five-day hearing, District Judge John E. Jones III, in a 26-page Memorandum Opinion and Order, denied the FTC and AG’s injunction request. The foundation of Judge Jones’ denial of injunctive relief is built on several, and in particular, one fundamental-to-every-antitrust-case evidentiary issue: market definition.

The definition of two markets – geographic and product – is central to all antitrust analysis and is absolutely essential in assessing the competitive impact of proposed mergers. Plaintiffs endeavor to prove narrow markets on both issues and defendants go the opposite direction  to show broader markets. In broad terms, to block a merger, it is essential  to prove small and well-defined geographic and product markets in which the merger’s anticompetitive effects would be clear. Failing to prove a relevant geographic or product market  can doom a merger enforcement effort absent serious equitable considerations against the merger.

The FTC and AG failed to convince the Court that the proper geographic market was as they defined it. Defining a geographic market is fact sensitive and as the Court noted, “is the area in which a potential buyer may rationally look for the goods or services he or she seeks.”¹  (The parties agreed that the product market was “general acuity services” – a “broad cluster of medical and surgical services that require an overnight hospital stay.”) The Court noted that the geographic market is also the smallest area in which the parties, post-merger, could “profitably raise prices by a ’small but significant amount’ for a meaningful period of time” – known as a SSNIP, or a “small but significant and non-transitory increase in price.” The FTC posited a “Harrisburg Area” geographic market – which the FTC said was Dauphin, Cumberland, Perry and Lebanon Counties – because the FTC argued that “people want to be hospitalized near their families and homes,” thus making the geographic market for the agreed-to general acuity services product market “inherently local.”  Hershey Med and Pinnacle “heartily disagree[d]” with the FTC and AG’s geographic market definition, and the Court made clear that the “resolution of this threshold dispute…is dispositive to the outcome of the instant Motion.”

The Court determined, based on the evidence presented, that the geographic market is not what the FTC and AG think it is. Noting that the “end goal in this analysis is to delineate a geographic area where, in the medical setting, “’few’ patients leave and ‘few’ patients enter” the Court recited evidence that 43.5% of Hershey Med’s patients, and over half of its revenue, come from outside the “Harrisburg Area” proffered as the relevant geographic market by the FTC and AG. The Court stated that the FTC and AG’s definition was too narrow, and that it also ignored the alternatives – 19 hospitals within a 65-minute drive of Harrisburg that the Court said were “realistic alternatives that patients would utilize.” In addition, the Court noted that Hershey Med and Pinnacle had, by agreement with the two largest insurers in the market, effectively foreclosed the possibility of a SSNIP for at least five years, by agreeing to maintain rate structures and rate differentials between the merging hospitals. “The result of these agreements is that the Hospitals cannot walk away from these payors and that rates cannot increase for at least 5 years.”(emphasis in original). The Court refused to speculate about what might happen five years later, calling such a prediction “imprudent” generally because of the “rapidly-changing arena of healthcare and health insurance.” 

In failing to convince the Court to adopt its definition of the geographic market, the FTC and AG also failed on the threshold injunction issue of proving a likelihood of success on the merits. While those outcomes could have ended the Court’s analysis,  it proceeded to analyze the equities , because had the FTC and AG  succeeded on those issues, the burden would have shifted to Hershey Med and Pinnacle to show that the equities weighted against enjoining the merger.   During the trial, therefore,  Hershey Med and Pinnacle put on relevant equities evidence as a “precaution.”

Ultimately, the FTC and AG fared no better on the equities analysis. The Court ruled that the merger would not have anticompetitive effects and instead, was procompetitive and rational in light of the changing nature of hospital competition in the broader market, highlighting also that in fairly rural Central Pennsylvania, patients are used to driving a bit farther to get the care they need. The Court also noted substantial savings from the merger – Hershey Med would avoid having to solve a capacity constraint by building a $227 million tower with additional bed space; Hershey Med’s capacity needs could be met by shifting lower acuity patients to Pinnacle, which would allow Pinnacle to send higher-acuity patients to Hershey Med. In addition, the Court noted that “repositioning” – or what competitors do in reaction to a merger – has already taken place, and the competition was well positioned, as illustrated by the acquisition and affiliation strategies being executed by Geisinger Health System/Holy Spirit Hospital, WellSpan Health/Good Samaritan Hospital, the University of Pennsylvania/Lancaster General Hospital and Community Health Systems/ Carlisle Regional Hospital in various transactions. At least one of these – WellSpan/Good Samaritan -- was entered into with the “specific goal of taking patients from Hershey” and another – University of Pennsylvania/Lancaster General -- was designed to “take more volume away from Hopkins, Hershey, and Philadelphia competitors.” The Court noted that this “direct and concerted effort to erode” both, but mainly Hershey Med’s patient base, was an effort to “capitalize on the large market of patients in the Harrisburg area.”

While Judge Jones’ opinion has more to say on a detailed basis, one comment in particular deserves highlight: 

We find it no small irony that the same federal government under which the FTC operates has created a climate that virtually compels institutions to seek alliances such as [Hershey Med and Pinnacle] intend here. 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.

This comment, along with others in the Court’s opinion, are most certainly dicta, but they harken a bigger is necessary, if not also better, tone. Has  Judge Jones handed to future health care merger partners  the “Obamacare Defense?”  In other words, to what extent does the dicta referring to evolving health care market dynamics put the FTC’s view of the antitrust laws at odds with the need to deal with the goals of the Affordable Care Act? To what extent will advancing the goals of risk-based contracting, discussed extensively in the opinion, promote the equities in favor of a merger? It appears as if the FTC will have to face the inherent conflict between merger enforcement and Obamacare, which tends to lean in favor of operating on a larger platform in the delivery of health care services. 

At its core, the opinion also expressly highlights the fundamental failure of the FTC’s proof concerning the relevant geographic market that led the court to refuse to enjoin the merger prior to the FTC hearing on May 17. That is an issue on which courts rarely rule against the FTC, so in and of itself it merits notice and attention. What the FTC and AG determine to do next has not been announced.

1. All quotations are from the Court’s opinion, which is available here.