FTC Rejects Another Health System M&A

The Federal Trade Commission's administrative complaint says the merger would create a dominant provider of general acute care inpatient services sold to commercial health plans in a four-county region of south-central Pennsylvania.

For the second time in about a month, the Federal Trade Commission has rejected the proposed merger of two healthcare systems.

This week, the FTC and the Pennsylvania Office of the Attorney General jointly moved to block Penn State Hershey Medical Center's proposed merger with PinnacleHealth System after stating that the combined providers would "substantially reduce competition in the area surrounding Harrisburg, PA, and lead to reduced quality and higher healthcare costs for the area's employers and residents."

The FTC and the Pennsylvania Attorney General said they would file a complaint in federal district court this week for a preliminary injunction to stop the deal, pending an administrative trial.

"The proposed merger would eliminate the significant competition between these hospitals, resulting in higher prices and diminished quality," Debbie Feinstein, director of the FTC's Bureau of Competition, said in prepared remarks.

Penn State Hershey and PinnacleHealth issued a joint statement saying they were "extremely disappointed" by the FTC's actions, and that the boards of both systems will "examine our options" over the next several days to determine if they will fight the ruling.

"We firmly believe that the integration of PinnacleHealth and Penn State Hershey serves the best interests of patients and the entire central Pennsylvania community," the two systems said. "The joining of our two health systems is completely consistent with the goals of the Affordable Care Act. It creates the depth of services and scale that is required to manage the health of distinct populations of patients and better positions us to provide the most appropriate care, in the most appropriate setting at the lowest possible cost."

The FTC's administrative complaint said the merger would create a dominant provider of general acute care inpatient services sold to commercial health plans in a four-county region of south-central Pennsylvania. The merged health system would control 64% of this market, which the FTC said would lead to increased healthcare costs and reduced quality of care for more than 500,000 regional residents.

Hershey is a 551-bed, not-for-profit healthcare system in Dauphin County. It also owns the Penn State Hershey Cancer Institute and the Penn State Hershey Children's Hospital. Hershey's total revenues in FY2014 were $1.39 billion.

Pinnacle is a not-for-profit three hospital system also in Dauphin County, which operates three acute care hospitals: Harrisburg Hospital, Community General Osteopathic and West Shore Hospital with a combined total of 610 beds. Pinnacle had total revenues in fiscal year 2015 of $1.07 billion.

The Commission vote to issue the administrative complaint and the vote on the temporary restraining order and preliminary injunction were both 4-0. The complaint was filed in the U.S. District Court for the Middle District of Pennsylvania, and the administrative trial is scheduled for May 2016.

More FTC Scrutiny of Healthcare M&As?
In early November, the FTC said it would block Cabell Huntington (WVA) Hospital's proposed acquisition of St. Mary's Medical Center.

"The combination would create a dominant firm with a near monopoly over general acute care inpatient hospital services and outpatient surgical services in the adjacent counties of Cabell, Wayne, and Lincoln, West Virginia and Lawrence County, Ohio likely leading to higher prices and lower quality of care than would be the case without the acquisition," the FTC said in an administrative complaint.

Jay Levine, an antitrust attorney with Porter Wright's Washington, DC, office, says it's not clear if the FTC and the Department of Justice are targeting health system mergers.

"Is this part of a trend? The trend is that there are more of these combinations happening," he says. "There is a perception that we may be seeing more of these [FTC actions], but that is partly because more of these [mergers] may be happening."

Levine says healthcare mergers have been on regulators' radar screens for years now as market pressures and economies of scale push providers toward consolidation.

"To the extent that this is causing providers to merge, then there are more mergers being put in front of the FTC and DOJ, and there are probably more strategic mergers put before them because the thought process is that these types of strategic combinations will cause the types of efficiencies and cost reductions the parties are trying to achieve. At the same time they also can produce the kind of anticompetitive effects that the enforcement agencies are worried about."

Levine says it's hard to generalize or identify trends with state and federal regulators because each healthcare M&A is unique and "fact-specific."

"Any two systems, especially if they are large systems and they are close geographically, they are going to be somewhat of a red flag," he says. "Look for big hospitals getting together and touting the big efficiencies that they are going to get. If that is the rationale they're hyping, then it could well be that they're looking to get together because they think they can essentially pressure the managed care companies. Beyond that, it's the same old, same old. All of these deals are going to be scrutinized. It's not going to go away."