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US appeals court blocks Hershey Medical Center and PinnacleHealth System merger

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Penn State Hershey Medical Center

According to a statement released by both Milton S. Hershey Medical Center and PinnacleHealth System, the hospitals are presently not permitted to merge.

The opinion issued Tuesday, Sept. 27 by the Third Circuit reads, “The Federal Trade Commission opposes their merger and filed an administrative complaint alleging that it violates the Clayton Act because it is likely to substantially lesson competition.” The U.S. Court of Appeals for the Third Circuit ruled in favor of the Federal Trade Commission and the Pennsylvania Attorney General’s Office. The appeals court overturned a Monday, May 9 decision by Federal Judge John Jones.

In doing that, the statement reads, the Third Circuit judge granted Tuesday the Federal Trade Commission and the Pennsylvania Attorney General’s office an injunction to prevent the integration of Hershey Medical Center and PinnacleHealth System.

Hershey Medical Center expressed disappointment of the Court’s ruling. Over the next several days, according to the hospital, leadership and respective boards of both Hershey Medical Center and PinnacleHealth will carefully review the decision, and together will determine their next course of action.

Penn State Hershey Medical Center and Pinnacle Health in June 2014 signed a letter of intent for the proposed merger. Their respective boards subsequently approved the merger in March 2015, court documents show. The following month, the Hospitals notified the Federal Trade Commission of their proposed merger and, in May 2015, executed a “Strategic Affiliation Agreement.”

When the Federal Trade Commission began its investigation into the merger, officials alleged that it would violate the Clayton Act, which would substantially lesson competition in the market for general acute care services sold to commercial insurers in the Harrisburg market. According to the government, the combined Hospitals would control 76% of the market.

Following hearings, the District Court denied the government’s request for a preliminary injunction on the basis that the government had failed to meet its burden to properly define the relevant geographic market. Without a properly defined relevant geographic market, the District Court held there was no way to determine whether the proposed merger was likely to be anticompetitive.

The government argued that the relevant market area of Harrisburg included the four counties encompassing Harrisburg’s immediate surroundings of Dauphin, Cumberland, Lebanon and Perry counties. The District Court rejected the government’s proposed geographic market based on the observation that 43.5% of Hershey’s patients – 11,260 – travel to Hershey from outside the four-county area, which strongly indicated that the Federal Trade Commission had created a geographic market that was too narrow because it does not appropriately account for where the Hospitals, particularly Hershey, draw their business.”

The appeals court also reports that patient medical costs were not analyzed properly.

Hershey Medical Center presented two efficiencies-based defenses, claiming that they put forth enough evidence in an attempt to show that the merger will produce procompetitive effects, including relieving Hershey’s capacity constraints and allowing Hershey to avoid construction of an expensive bed tower that would save $277 million – savings which could be passed on to patients. Secondly, the Hospitals claim that the merger will enhance their efforts to engage in risk-based contracting. The Hospitals maintained that their merger would not create anticompetitive effects.

In response to the ruling, the Federal Trade Commission issued this statement.

“The FTC is very pleased with today’s ruling from the Third Circuit Court of Appeals, which found that we have a likelihood of success on the merits. We look forward to proving our case,” said Debbie Feinstein, Director of the FTC’s Bureau of Competition.