FTC Battles Hospital Mergers: What to Watch for in this Summer’s High-Profile Appeals

18 July 2016 Health Care Law Today Blog
Authors: H. Holden Brooks Roger D. Strode

In a town that is no stranger to landmark hospital merger cases, last month a Chicago federal judge denied the Federal Trade Commission’s (FTC) motion for a preliminary injunction to temporarily block a merger between 13-hospital Advocate Health Care and four-hospital NorthShore University HealthSystem, both located in the city’s northern suburbs. Judge Jorge Alonso’s much-awaited, but ultimately simple, to-the-point decision, finding that the FTC had not carried its burden of defining a relevant geographic market, is currently on appeal to the Seventh Circuit. The case will be heard on August 19, just a few weeks after the summer’s other major hospital merger appeal is heard by the Third Circuit on July 26. That matter, in which Judge John Jones of the Western District of Pennsylvania denied the FTC’s motion to block the merger of 551-bed Penn State Milton S. Hershey Medical Center and three-campus, 646-bed PinnacleHealth, is also viewed as a critical win for the FTC.

Until these two losses in the district court, the FTC had enjoyed a long record of wins in provider merger challenges and had honed a framework for defining relevant markets and demonstrating the likelihood that a transaction would cause anticompetitive harm in that market. By focusing on the transaction’s effect on bargaining leverage with commercial payors—namely the ability of a merged entity to profitably demand increased rates because payors need the entity to compose a saleable network—the FTC was able to allege local geographic markets and high market shares within those boundaries. Based in the FTC’s own merger guidelines, this so-called “hypothetical monopolist” test had to some degree come to be perceived as governing hospital merger analysis as a matter of law.

Varying Court Opinions 

The Chicago and Pennsylvania judges, however, both rejected the FTC’s mode of market definition and eschewed the hypothetical monopolist test, albeit in very different opinions:

In the trial-like hearing before Judge Alonso, the FTC argued that northern Cook County and southern Lake County comprised a relevant geographic market, with the relevant service being general acute care services. NorthShore and Advocate argued that the FTC “gerrymandered” the relevant geographic market to exclude several competitor hospitals, and also improperly excluded outpatient services from the relevant product market. The Court sided with the parties, finding that the FTC’s market definition “ignores the commercial realities of this industry,” in which patients travel for care at so-called “destination hospitals” beyond the area in which they live. In post-decision filings, the FTC has foreshadowed the basis for its appeal as being the court’s error in “basing its geographic market determination on an analysis of how the candidate market was constructed” rather than on whether commercial payors will accept higher rates to keep the new system in their networks pursuant to the hypothetical monopolist test. The parties shot back at that notion, challenging that the judge’s only option was to apply the FTC’s test and asserting that the law actually requires courts to consider where consumers can practicably turn for alternatives to the merged entity.

In Pennsylvania, the parties also vigorously disputed the FTC’s market definition—the four counties comprising metropolitan Harrisburg, PA—as too narrow and not inclusive of the full range of competitor hospitals to which commercial payors could turn for network coverage. In language similar to that used by Judge Alonso, Judge Jones found that general acute care is not “inherently local,” despite the FTC’s characterization, and that the FTC’s alleged market was “untethered to the commercial realities facing patients and payers,” who could turn to alternative providers in a much broader area in light of patients’ willingness to travel for care. But rather than simply stopping at the critique of the FTC’s market definition, Judge Jones went on to apply what appeared to be an alternative test for market definition that has been discredited as applied to hospital mergers, according to the lengthy amicus filing made by several prominent antitrust economists in the case. Like the Seventh Circuit, the Third Circuit has an opportunity to clarify how courts should treat market definition evidence in provider transaction challenges going forward.

What to Expect 

The Third Circuit has promised a decision at some point this summer, with the Seventh Circuit likely to rule in the fall. Because the first step in evaluating antitrust risk associated with any proposed transaction is to predict how a regulator will perceive the parties’ market shares, understanding how a court is likely to define the market is key. Together, these decisions should provide hospitals, systems, and other providers with solid insight into whether they are bound to look at their markets as highly local through the lens of the hypothetical monopolist test, or whether they might have some latitude in pointing to the “commercial realities” of where patients can realistically seek care. This information should be useful in crafting short- and long-term affiliation and acquisition strategies.

Furthermore, it will be interesting to see if either appellate court addresses what has become the “elephant in the room” in health care antitrust, and that is the ascendancy among providers of consolidation and scale-building as a means of addressing the economic challenges of health care reform in the face of the dogged preservation of competition by the antitrust enforcers. Although Judge Alonso did not address the efficiencies arguments set forth by NorthShore and Advocate in his courtroom, Judge Jones spent considerable time speaking to what he viewed as the “equitable” issues presented by the Hershey/Pinnacle merger, namely the parties’ ability to come together to lower the cost of care, improve the quality of care, and enhance access by resolving capacity issues.

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