Last week, the Third Circuit Court of Appeals held that the merger between Penn State Hershey Medical Center and PinnacleHealth System, the two largest hospitals in Harrisburg, Pennsylvania, may not move forward at this time. The Court of Appeals overturned the District Court’s (Middle District of PA) denial of the FTC’s and the Commonwealth of Pennsylvania’s request for a preliminary injunction, directing the District Court to enter a preliminary injunction blocking the merger “pending the outcome of the FTC’s administrative adjudication.”

In reaching its decision, the Court of Appeals held that the critical determination of the relevant market for a proper antitrust analysis should be defined primarily “through the lens of the insurers” and that it “was error for the District court to completely disregard the role insurers play in the healthcare market.” The Court of Appeals ruled that the relevant market was the four- county Harrisburg area. It found that the market was highly concentrated and that the combined hospitals would control 76% percent of the market. As a result the plaintiffs were found to have established a prima facie case that the merger “is presumptively anticompetitive.”

In rebuttal, the hospitals alleged, among other things, that, the merger would result in efficiencies leading to capital savings and enhance the hospitals’ efforts to engage in risk-based contracting, but the Court of Appeals found that these arguments failed to demonstrate tangible, verifiable benefits to consumers, and only constituted “speculative assurances.” It remains to be seen whether the hospitals will continue their pursuit of merger through the FTC’s administrative review process or abandon it.

This decision, like others involving hospitals that have preceded it, underscores the unique nature of the markets in which hospitals and other healthcare providers operate. These markets are not primarily defined by the direct impact of market consolidation upon the behavior of the ultimate consumers, the patients. Instead, the markets are defined by the patients’ purchasing surrogates, their health insurers.

For more information about this decision, contact Chris Raphaely, Nicole Martin or a member of Cozen O’Connor’s Health Law team

Nearly four years after the Federal Trade Commission (“FTC”) first challenged the combination of the only two hospitals in Albany, Georgia, the FTC, Phoebe Putney Health Systems, Inc. (“Phoebe Putney”), Hospital Authority of Albany – Dougherty County (“Hospital Authority”) and HCA, Inc. (“HCA”) agreed to enter into a Consent Agreement. The FTC’s vote finalizing the Consent Agreement was 3-0-2, with Commissioners Joshua D. Wright and Terrell McSweeny not participating.  The Phoebe Putney litigation illustrates the challenges that the FTC and entities attempting to consummate a deal face in the merger process.  In Phoebe Putney, the FTC lost in two federal lower courts, won at the U.S. Supreme Court but ultimately was unable to unscramble a hospital merger that was found to be (1) anti-competitive and (2) a monopoly for inpatient general acute-care.

In addition to the Consent Agreement, a Statement was issued by Chairwoman Ramirez on March 31, 2015 summarizing the extensive procedural history of the litigation, the reasons the FTC challenged the merger, why the FTC did not require a divestiture and an explanation of the obligations that Phoebe Putney must meet under the Consent Agreement.  The March 31^st Statement may provide insights into the FTC’s strategies when challenging future hospital mergers.  As explained below in the practice pointers, we anticipate the FTC citing Phoebe Putney in support of their preliminary injunctions and also citing to state certificate of need [CON] laws as evidence of barriers to entry for hospital competitors.

By way of background, since 1890 federal laws have supported national policies in favor of competition.  In Parker v. Brown, a 1943 U.S. Supreme Court decision, the state action doctrine provided that state governments have immunity from federal antitrust laws when they authorize economic activity that normally would be anticompetitive and illegal.  In 1941, Albany, Georgia and surrounding Dougherty County set up the Hospital Authority.  The Hospital Authority acquired an existing hospital, Phoebe Putney Memorial Hospital.  Two miles away Palmyra Medical Center was operated separately by HCA, Inc., one of the largest health care providers in the United States.  Palmyra and Phoebe Putney merged with the Hospital Authority as the buyer of Palmyra with the funds coming from Phoebe Putney.  Palmyra hospital was leased to Putney for $1 a year.  The Hospital Authority approved the merger in December 2010 but was not involved in the merger talks or management of the hospital.

The FTC and the State of Georgia filed a preliminary injunction in federal court to block the transaction but the federal district judge held that the state action doctrine applied and refused to stop the merger.  The FTC appealed to the 11^th Circuit, which also found that the merger was insulated from antitrust inquiry under state action immunity concluding that harm to competition was the “foreseeable result” of the legislature’s establishment of the Hospital Authority.

The 11^th Circuit decision dissolved the injunction pending appeal and on December 15, 2011 the merger was finalized.  The FTC appealed the 11^th Circuit’s decision to the U.S. Supreme Court.  The two issues were: (1) whether the legislature had expressed its intentions clearly enough in allowing hospital proxies to operate in anti-competitive ways, and (2) whether the local hospital arrangement did not have immunity because the hospital authority had not played a large enough role in the merger.

The Supreme Court unanimously answered the first question, ruling that the state legislature had “not clearly articulated and affirmatively expressed a policy to allow hospital authorities to make acquisitions that substantially lessen competition.”  Following the Supreme Court decision, the FTC proceeded with the administrative litigation and proposed a 2013 consent agreement.  However, the 2013 consent agreement was withdrawn after a newly formed health care entity, North Albany Medical Center LLC, expressed interest in Palmyra hospital and sought clarification on Georgia’s CON laws.

In October 2014, the Georgia Department of Community Health (“DCH”) Hearing Officer issued a written finding that the CON laws would preclude Phoebe North from purchasing Palmyra since the Albany region was deemed “over-bedded.”  Given the DCH’s decision, the FTC determined that divestiture of Palmyra – Phoebe Putney was impossible.

The March 31^st Settlement is very similar to the one proposed in 2013.  The Settlement requires:

• Phoebe Putney and the Hospital Authority to notify the FTC in advance of acquiring any part of a hospital or a controlling interest in other health care providers in Albany for the next 10 years.
• Phoebe Putney and the Hospital Authority cannot object to regulatory applications made by potential new hospital providers in the same region for 5 years.
• Phoebe Putney and the Hospital Authority stipulate that the transaction was anti-competitive.

Practice Points:

• The FTC’s March 31^st Statement by Chairwoman Ramirez emphasizes the importance of the FTC and private plaintiffs in obtaining preliminary injunctive relief prior to a transaction closing. The health care industry should anticipate the FTC citing the Phoebe Putney case as supporting authority for why there will be irremediable harm if a hospital transaction closes before all appeals are exhausted.
• We also anticipate that the FTC will use the Phoebe Putney case in support of arguments that state CON laws are additional barriers for entry of potential competitors and should be significant factor when analyzing proposed mergers.

For further information contact the author Ryan P. Blaney (Washington, DC) or other members of Cozen O’Connor’s healthcare antitrust team, R. Christopher Raphaely (Philadelphia, PA), Melissa H. Maxman (Washington, DC) and Jonathan Grossman (Washington, DC).

The New Year started out with a bang in the healthcare antitrust circles with ProMedica Health Systems Inc.’s (“ProMedica”) well-publicized petition to the US Supreme Court and the American Hospital Association’s (AHA) amicus brief in support of ProMedica.  ProMedica hopes that the Supreme Court will hear the case and overturn a Sixth Circuit ruling requiring ProMedica to divest St. Luke’s Hospital, a non-profit hospital in Toledo, Ohio.  As evidence of the complexity and the lengthy litigation challenges between ProMedica and the Federal Trade Commission (“FTC”) this merger occurred almost five years ago in 2010.  The FTC and the Ohio Attorney General had sued to dissolve the deal because they considered it anti-competitive; arguing that ProMedica would control 60% of the hospitals in the greater Toledo area. The FTC ordered ProMedica to divest St. Luke’s (21 HLR 467, 3/29/12).  The Sixth Circuit agreed with the FTC on the grounds that the merger would likely result in higher prices for payors and consumers and lead to unintended precedent for future hospital mergers.

ProMedica’s petition argues that this case is “a rare and uniquely apt vehicle for consideration of the [merger law] issues based on a fully-developed record.”  Hospital merger cases rarely are litigated through appeal and this case is an opportunity for the Supreme Court to clarify fundamental aspects of merger law nearly 40 years after the United States v. General Dynamics Corp., 415 U.S. 486 (1974) decision.  ProMedica argues that over the last 40 years confusion has developed over the FTC’s unilateral-effects theory and consolidation pressures have increased with the passage of the Affordable Care Act and other federal regulations.

ProMedica’s petition focuses on three merger law questions that the lower courts are divided on as the primary reasons why the Supreme Court should hear the case:

1. How the FTC defines relevant market product for a merger analysis and whether the FTC can base it on supply-side considerations. ProMedica argued that the FTC should have either analyzed hospital services market by market because one kind of surgery is not a substitute for another or the FTC should have considered all four levels of hospital services as a package-deal market.
2. Where the FTC relies exclusively on a unilateral-effects theory in challenging a merger may a court adopt a strong presumption of anti-competitive harm based solely on market-share statistics?
3. Can the FTC rely on market-share statistics to preclude consideration of the merger target’s financial weakness to rebut a presumption of harm based on market-share statistics in unilateral-effects cases?

The unilateral effects analysis is the degree to which the merging hospitals are substitutes for each other.  The higher the substitutability between two merging hospitals, the greater the competition among them and the greater the power.  Here, ProMedica argues that Mercy Hospital, not St. Luke’s, is the closest substitute in the Toledo area.

ProMedica received support from the American Hospital Association (“AHA”) on the third issue, the “weakened competitor” doctrine.  On January 21, 2015, AHA filed an amicus brief asking the US Supreme Court to review the Sixth Circuit decision and the lower court’s characterization that the “weakened competitor” argument is a “Hail Mary” that deserves credence only in rare situations.  AHA argues that the Sixth Circuit’s erosion of the “weakened competitor” doctrine leaves the “viability of many small and stand-alone hospitals in jeopardy.”  AHA also argues that there are conflicting interpretations by the lower courts on how to read the General Dynamics decision.  Clarity is needed from the Supreme Court especially in the context of health care mergers.  Hospitals should not have to wait until they are on the edge of bankruptcy to merge.  AHA believes that the Sixth Circuit errored when it did not apply the General Dynamics weakened competitor analysis to the ProMedica acquisition.

The case is ProMedica Health System Inc. v. Federal Trade Commission, case number 14-762, in the Supreme Court of the United States.  The FTC has until March 2, 2015 to file a response.  It is unknown when the Supreme Court will decide about hearing the case.

For further information contact Ryan P. Blaney, Washington, DC, at rblaney@cozen.com.