Federal Trade Commission v. Penn State Hershey Medical Center

Citations: 185 F. Supp. 3d 552; 2016 U.S. Dist. LEXIS 60814; 2016 WL 2622372Docket: Civil Action No.: 1:15-cv-2362

Court: District Court, M.D. Pennsylvania; May 9, 2016; Federal District Court

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A motion for a preliminary injunction was filed by the Federal Trade Commission (FTC) and the Commonwealth of Pennsylvania to prevent Penn State Hershey Medical Center and PinnacleHealth System from proceeding with their proposed merger until the FTC's administrative trial on antitrust claims is concluded. The Court, led by Judge John E. Jones III, denied the motion. 

Background details reveal that Penn State Hershey operates a 551-bed academic medical center with specialized services, while PinnacleHealth includes three community hospitals with a total of 646 licensed beds offering various acute care services. The hospitals initiated their merger discussions in June 2014, obtained board approval in March 2015, and notified the FTC in April 2015, followed by a Strategic Affiliation Agreement. The FTC issued an administrative complaint on December 7, 2015, alleging the merger would violate antitrust laws, with a trial scheduled for May 17, 2016. 

The Court conducted an evidentiary hearing over five days starting April 11, 2016, where 16 witnesses testified and extensive evidence was presented. The analysis for the preliminary injunction centered on the FTC's likelihood of success and the public interest. The Court determined that the FTC did not meet the necessary criteria for granting the injunction.

Section 7 of the Clayton Act prohibits mergers that may significantly lessen competition or create a monopoly, focusing on the potential effects rather than certainties. The Act aims to prevent the early stages of competitive harm from corporate acquisitions. Establishing a relevant market is crucial for analyzing competitive effects, which includes both a product market and a geographic market. The Federal Trade Commission (FTC) has the burden to define a valid market, which for this case is identified as general acuity services (GAC) sold to commercial payors. GAC encompasses a range of medical and surgical services requiring overnight hospitalization. 

The relevant geographic market is defined as the area where consumers would realistically seek these services, which the FTC claims is the "Harrisburg Area," aligning with the Harrisburg Metropolitan Statistical Area, including Dauphin, Cumberland, Perry, and Lebanon Counties. The FTC argues that GAC services are inherently local due to patient preferences for nearby hospitals and cites that local insurers recognize the Harrisburg Area as a distinct market. Conversely, the hospitals contend that the FTC's definition is overly narrow and disconnected from the realities faced by patients and payors. The resolution of this dispute on the geographic market definition is critical for the outcome of the motion, requiring the court to ascertain whether the alleged market encompasses the area where the defendant operates and from which it attracts a significant percentage of its business.

A court must evaluate whether a plaintiff has identified a geographic market where a limited number of purchasers have alternative suppliers to turn to if a defendant's anticompetitive actions lead to price increases. In the healthcare context, this involves assessing a geographic area where patient mobility is restricted. Key evidence presented shows that in 2014, 43.5% of Hershey’s patients (11,260 individuals) traveled from outside the FTC-designated Harrisburg Area, with many patients commuting significant distances for care. This data challenges the FTC’s claim that GAC services are 'inherently local' and suggests the FTC's defined market is too narrow, failing to reflect the true sourcing of patients.

Additionally, there are 19 hospitals within a 65-minute drive of Harrisburg, providing viable alternatives for patients if the combined Hospitals raised prices or compromised quality. Given Central Pennsylvania's rural nature, these hospitals represent realistic choices for patients. The FTC's argument relies on a geographic market that does not align with the actual patient flow.

During the evidentiary hearing, the court considered extensive economic expert testimony regarding the hypothetical monopolist’s ability to impose a small but significant non-transitory increase in price (SSNIP). The Hospitals have secured contracts with major payors, CBC and Highmark, which restrict any price increases for at least five and ten years, respectively. This contractual obligation indicates that the Hospitals cannot simply raise rates post-merger, rendering the FTC's concerns speculative regarding future negotiating positions.

Ultimately, the FTC's defined geographic market is deemed unrealistically narrow and disconnected from the realities faced by consumers. The government has not established a relevant market sufficient to support a prima facie case under the Clayton Act, leading to the conclusion that the FTC's request for injunctive relief is denied due to insufficient demonstration of likely success on the merits.

The FTC's narrow interpretation of the relevant geographic market has led the Court to conclude that the FTC has not demonstrated a likelihood of success on the merits. If such a likelihood had been established, the Hospitals would have had to prove that their merger would not lead to anticompetitive effects. Nonetheless, the Hospitals provided substantial evidence indicating that the merger of Hershey and Pinnacle would not result in such effects, which is relevant for weighing the equities involved. 

Under Section 13(b), a preliminary injunction may be issued if it serves the public interest, assessed through a balance of equities and the FTC's likelihood of success. However, without a demonstrated likelihood of success, equities alone cannot justify an injunction. The Seventh Circuit employs a 'sliding scale' approach: a higher likelihood of success reduces the burden on plaintiffs to show harm from denying the injunction, while a defendant's demonstration of irreparable harm lessens the likelihood of the plaintiff's success.

The Hospitals argue for efficiencies from the merger to address Hershey's capacity constraints, although the Supreme Court has not officially recognized such a defense under Section 7 of the Clayton Act. Regardless, the efficiencies presented support the notion that the merger would benefit the public, suggesting equitable considerations favor denying the injunction. 

Testimony during the evidentiary hearing, particularly from Sherry Kwater, highlighted Hershey's chronic overcrowding, with average occupancy rates reaching approximately 89% and peaking at 112-115%. Ongoing renovation projects aimed at increasing bed capacity, including expansions in critical areas like maternity and emergency services, further illustrate the need for the merger.

Hershey's CEO Craig Hillemeier and COO Robin Wittenstein testified that existing renovation projects are insufficient to meet care demand. Without the merger, Hershey plans to build a new $277 million bed tower to add approximately 100 inpatient beds, resulting in a net gain of 70-80 beds. The FTC challenged the need for the bed tower, suggesting that only 2 to 13 additional beds would address capacity issues and that Hershey would need just 36 beds in five years. Plaintiffs argue that the cost of the bed tower is overstated and that funding would come from grants or existing budgets, implying that costs would not be passed to patients. They also claim that constructing the tower would strain financial resources, potentially increasing service charges or reducing quality investments.

In contrast, the merger would provide immediate capacity benefits, alleviating Hershey's issues within months. The court would be unreasonable to expect Hershey to rely on uncertain grant funding for the tower. Plaintiffs' request for the court to question Hershey's business decisions is deemed impermissible. Given the aging population and increasing healthcare demands, Hershey's decision to pursue the tower without a merger is seen as reasonable. The merger would allow for patient transfers to Pinnacle, optimizing treatment capacity for both hospitals, generating more revenue, and reducing the financial burden of the tower construction. Ultimately, the merger is positioned as beneficial for consumer competition, with courts typically favoring such combinations when they provide procompetitive advantages.

Repositioning by competitors is likely to limit the market power of Hershey and Pinnacle following their merger. According to the 2010 Horizontal Merger Guidelines, if non-merging firms can reposition to offer close substitutes, significant price increases from the merger are unlikely. The current market shows that nearby hospitals are already repositioning to compete directly with Hershey and Pinnacle. Notable actions include Geisinger Health System acquiring Holy Spirit Hospital to create a regional referral center, WellSpan Health acquiring Good Samaritan Hospital to attract patients from Hershey, and the University of Pennsylvania partnering with Lancaster General Hospital to increase their patient volume at the expense of Hershey and other competitors. This repositioning has occurred independently of the proposed merger and demonstrates an ongoing effort to capture market share from Hershey, particularly in the Harrisburg area. The Attorney General recognizes these hospitals as dominant providers, yet they are situated within a reasonable distance from Harrisburg, thus indicating that the merger could enhance competitiveness rather than create a monopoly. The competition from these rival hospitals is expected to provide a significant constraint on the merged entity, ultimately benefiting local residents.

In addition, testimony during the hearings highlighted the increasing trend towards risk-based contracting. This type of contracting shifts the financial responsibility for patient care costs from individuals to providers. Over the next three years, both government and private payers plan to transition towards risk-based contracts, with the goal of moving 50-80% of payments into this model by 2018. Hershey and Pinnacle are expected to engage in these agreements, which emphasize cooperative frameworks for implementing risk-based contracts.

Hospitals must implement a 'total continuum of care' to excel in risk-based contracting. While the FTC acknowledges that Hershey and Pinnacle can operate independently under this model, Hershey CEO Craig Hillemeier argues that merging the two will provide advantages through economies of scale, specifically in spreading the costs associated with population health management. This merger is anticipated to positively impact Hershey’s College of Medicine, enhancing its ability to attract quality medical students and faculty.

The public interest in enforcing antitrust laws is a significant factor in considering preliminary injunctive relief, as highlighted by Congress in Section 13(b). However, if an injunction would hinder consumers from benefiting from the merger's pro-competitive advantages, its justification weakens. The FTC's concerns about the difficulty of "unscrambling" assets post-merger are noted, yet divestiture of merged entities is a recognized remedy for restoring competition.

The parties involved did not convincingly argue that an injunction would obstruct the merger, a position previously deemed unpersuasive by courts. The court finds that the majority of public interest factors favor the merger, as patients at Hershey and Pinnacle could benefit from a more competitive entity capable of contending with larger hospital systems in the area. This decision acknowledges the evolving healthcare landscape influenced by the Affordable Care Act and changing Medicare and Medicaid reimbursements, emphasizing the necessity for hospitals to adapt through alliances.

The court concludes that the FTC did not demonstrate a likelihood of success on its antitrust claim against the hospitals, leading to the denial of the Plaintiffs’ Motion for a Preliminary Injunction. The order reflects the court's determination based on the analysis presented.

Tertiary care encompasses advanced medical services such as open heart surgery, oncology, neurosurgery, high-risk obstetrics, neonatal intensive care, and trauma services, while quaternary care involves even more complex procedures like organ transplants. Medical literature suggests that an optimal hospital occupancy rate is between 80-85%. An occupancy review by expert Brandon Klar indicated a midnight occupancy rate of 90.5% when excluding pediatric beds. Ms. Kwater testified that hospitals can exceed 100% capacity by using beds not intended for inpatient care, leading to overcrowding and discomfort for patients at Hershey. Klar proposed that site-of-service adjustments could lower Hershey's occupancy rate to 80%, facilitating better patient access in Central Pennsylvania.

Financially, the merger's anticipated revenue increase stems from two primary factors: first, transferring lower-acuity patients from Hershey to Pinnacle, which has a price differential of approximately $3,400 per case, expected to yield savings between $31.3 and $46.2 million over five years; second, replacing these patients with higher-acuity cases at Hershey, significantly increasing revenue by as much as $17,000 per case. Hershey argues that other academic medical centers receive even higher reimbursement rates for high-acuity care.

While the Hospitals assert these financial efficiencies negate the need to impose a significant price increase on payors, the court finds this reasoning unconvincing, suggesting that institutions rarely decide against maximizing profits. Evidence indicates that excess hospital capacity and competition would likely prevent unreasonable price hikes post-merger. Adjustments are projected to save patients and payors $49.5-$82.7 million over five years. Additionally, Geisinger’s investment in Holy Spirit to establish a children’s hospital and trauma center exemplifies competitive pressures against Hershey. Ultimately, the Attorney General's Office faces a contradiction in portraying these hospitals as both dominant entities negatively impacting patient access and as insufficiently competitive against a merged Hershey and Pinnacle institution.