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Appeals Court Supports FTC Request to Stop PA Hospital Merger

An appeals court granted a FTC request to halt a hospital merger in Pennsylvania because the previous court improperly applied the hypothetical monopolist test.

By Jacqueline LaPointe

- A federal appeals court recently reversed a lower court’s decision to deny the Federal Trade Commission’s (FTC) request to temporarily pause the hospital merger between Penn State Hersey Medical Center and PinnacleHealth System until an administrative review is conducted.

The federal judge granted the FTC’s request after it concluded that the lower court did not appropriately carry out the hypothetical monopolist test, which is used to determine if a hospital merger would create a monopoly. The lower court erred by relying on patient flow data to identify the geographic market, neglecting to account for payer responses, and accounting for private payment agreements between the merging hospitals and payers.

“These errors together render the District Court’s analysis economically unsound and not reflective of the commercial reality of the healthcare market,” the decision stated. “The District Court did not properly formulate the hypothetical monopolist test, nor did it properly apply that test.”

The most recent decision stemmed from a 2015 FTC complaint challenging the potential hospital merger. The commission contended that the combined hospitals would gain control of over 76 percent of the healthcare market in Harrisburg, Pennsylvania, resulting in higher healthcare costs and lower care quality.

In May, a district court denied the FTC’s request to halt the hospital merger because the FTC failed to properly define the geographic market and, therefore, could not prove whether the proposed merger would be anticompetitive. The court reported that it used the hypothetical monopolist test to make its decision.

READ MORE: Boost Healthcare Competition to Drive Down Prices, Up Quality

However, the appeals court found that the test was not properly applied to the Harrisburg-based hospital merger because the district court relied on patient inflow data to determine geographic markets. As a result, the district court used part of the Elzinga-Hogarty test, a non-healthcare market test.

The appeals court noted that research has “demonstrated that utilizing patient flow data to determine the relevant geographic market resulted in overbroad markets with respect to hospitals.”

The Elzinga-Hogarty test also does not account for other healthcare consumer drivers other than price. The appeals court stated that patients consider location and quality of care when deciding what facility to use for services. Professor Elzinga stated in a FTC testimony that the test was not appropriate for the hospital sector.

“In other words, the inadequacy of using patient flow data to determine the geographic market does not depend on whether the District Court used an exact percentage or whether it used a more flexible approach: relying solely on patient flow data is not consistent with the hypothetical monopolist test,” the appeals decision explained.

Additionally, the appeals court found that the district court failed to account for payer responses to the potential hospital merger. Payers are significantly affected by healthcare price increases resulting from mergers because they pay for patient services. Higher prices may cause payers to increase premiums and include less expensive hospitals outside the geographic market in their coverage plans.

READ MORE: Healthcare Mergers May Face New Federal Rules Under SMARTER Act

Local payers told the court that the hospital merger would create economic burden. Payers would not be able to market a health plan in the Harrisburg area without including Penn State Hersey Medical Center and PinnacleHealth since 91 percent of patients residing in Harrisburg receive general acute care services from local hospitals.

The merger would increase the healthcare system’s bargaining power, the appeals court remarked. Payers would have to either face higher healthcare costs or risk losing beneficiaries if the combined hospitals were excluded from coverage plans.

The district court also erred in using private payment agreements between the merging hospitals and payers, the appeals court argued. The hospitals had entered into contracts with two of Central Pennsylvania’s largest payers to maintain current claims reimbursement rates for five years with one payer and ten years with another.

According to the appeals decision, the private contracts cannot be used to determine geographic markets because it does not reflect the hypothetical situation.

“The hypothetical monopolist test is exactly what its name suggests: hypothetical,” the appeals decision stated. “This is for good reason. If we considered the agreements, then our inquiry would be simple: the Hospitals would not be able to profitably impose a SSNIP [small but significant non-transitory increase in price] because the agreements forbid them from doing so.”

READ MORE: Value-Based Reimbursement Spurs 8% Hospital Merger Growth

The appeals court concluded that the court system must define geographic markets, not the merging entities through private contracts. If private contracts were used to assess hospital mergers, any merging entity would be able to avoid antitrust complaints through private agreements with payers.

While the FTC’s request was granted because of the hypothetical monopolist test, some healthcare industry groups have recently criticized the assessment. In August, the American Hospital Association (AHA) urged the US Courts of Appeals to reject the FTC’s approach to evaluating healthcare monopolies because it did not account for current healthcare trends, such as the uptick in outpatient services and practice consolidation.

The AHA contended that hospital mergers are part of the changing healthcare sector and some can “offer significant pro-competitive benefits by allowing hospitals to increase access, provide cost savings, and deliver more integrated and innovative care to communities.”

Despite some stakeholder backlash, the most recent court decision appears as a win for the FTC, which has recently faced several request denials to stop hospital mergers. A more recent decision struck down the FTC’s wish to prevent a hospital merger between two Chicago-based healthcare organizations. The commission opposed the hospital merger because it would create the largest healthcare system in the north shore area of Chicago, controlling over half of the general acute care inpatient hospital services.

A federal court, however, found the antitrust allegations unrealistic in the four-county market of the area. The combined healthcare systems would still face competition from other merging and developing hospital systems, the judge argued.

While the Chicago-based hospital merger case is still in progress, the next step in the Penn State Hersey Medical Center and PinnacleHealth merger case is a FTC administrative adjudication.

Dig Deeper:

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