Federal Appeals Court Blocks PA Hospital Merger

Hershey Medical Center and PinnacleHealth weigh their options after district court ruling is overturned and appellate judges grant a preliminary injunction to block the merger.

A federal appeals court on Tuesday granted a preliminary injunction that blocks the merger of Pennsylvania's PinnacleHealth System and Penn State Milton S. Hershey Medical Center.

In a unanimous ruling, a three-judge panel at the U.S. Court of Appeals for the Third Circuit overturned a May 9 ruling in district court and said that the trial court "erred in both its formulation and its application of the proper legal test."

The preliminary injunction had been sought by the Federal Trade Commission and the Pennsylvania Attorney General's Office, which had claimed that the merger of PinnacleHealth, a Harrisburg-based three-hospital system based, and Hershey Medical, a 551-bed academic medical center, would create a dominant acute care provider that would hinder competition in the four-county service area.

"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," said Debbie Feinstein, director of the FTC's Bureau of Competition. "We look forward to proving our case."

PinnacleHealth and Hershey on Tuesday issued a joint statement saying they were "disappointed by the court's ruling. Over the next several days, the leadership and respective boards of both organizations will carefully review the decision, and together we will determine our next course of action."

The preliminary injunction means that, if the two hospital pursue the merger, any further arguments would be heard before an administrative law judge who works for the FTC.

An appeal of that ruling would go to the commission that voted out the complaint in the first place. An appeal of the commission ruling would go back to the appeals court under substantial deference.

The appeals court said it found three errors in the district court ruling, which came after a five-day hearing last spring.

"First, by relying almost exclusively on the number of patients that enter the proposed market, the District Court's analysis more closely aligns with a discredited economic theory, not the hypothetical monopolist test," the appeals court wrote in a 46-page ruling.

"Second, the district court focused on the likely response of patients to a price increase, completely neglecting any mention of the likely response of insurers. Third, the district court grounded its reasoning, in part, on the private agreements between the hospitals and two insurers, even though these types of private contracts are not relevant to the hypothetical monopolist test."

Jay Levine, a disinterested observer and Washington, DC-based antitrust litigator with Porter Wright Morris & Arthur LLP, says the district court's ruling in support of the merger relied in part on the Elzinga-Hogarty test, which was not designed for the task.

The Elzinga-Hogarty Test
"The district court, when it was trying to determine the scope of the geographic market, relied heavily on where the hospitals draw their patients from, and within those ZIP Codes, where do patients go to," Levine says.

"It saw that a lot of these patients are going to other hospitals, which indicated to the court that the geographic market is broader and therefore includes more hospitals, and hence any merger between these hospitals would not restrain competition."

The Elzinga-Hogarty test was a well-used crutch to support the case for merging hospitals in the 1980s and 1990s but has fallen out of favor in the past two decades, Levine says. "The test was originally designed to deal with how much foreclosure of a market there is on exclusionary provisions," Levine says.

"The FTC said it should not be used to define a relevant market because it only focuses on static measures and not on dynamic pressures. Even Prof. (Kenneth) Elzinga said no one should be using his test for those purposes."

Levine says he doesn't see a ripple effect with the ruling. "To the extent that your best argument is patient flow, it probably tells you you've got some issues," he says.

"At the end of the day, we all know how the FTC evaluates these mergers and most of the courts that have evaluated these mergers have evaluated it in that context. This case was a little bit sui generis in that it harkened back to the old days."