PinnacleHealth-Penn State Hershey merger: What happens now?

While the U.S. Court of Appeal's decision to halt the merger between Harrisburg, Pa.-based PinnacleHealth System and Penn State Hershey (Pa.) MedicalCenter represented a strong win for the Federal Trade Commission, the decision may also impact the future of several other high-profile mergers in the health industry.

According to Jeffrey Brennan, a partner at Chicago-based McDermott, Will & Emery, the major issue in the appeal was the definition of what constituted as a relevant geographic market.

The FTC's complaint against the integration of the two health systems alleged the merged organization would account for over half of the hospital market in the counties surrounding the Harrisburg area, likely leading to increased healthcare costs and reduced quality of care for patients. The district judge ruling on the case in April sided with the health systems, arguing that the geographic market is much larger than the FTC's proposed definition.

The Third Circuit of the U.S. Court of Appeals reversed the lower court's decision on Sept. 27, issuing an injunction to stop the merger, pending the outcome of an administrative hearing on the issue. The appeals court endorsed the FTC's analytical approach to market definition.  If the parties proceed to the administrative hearing, the FTC staff will attempt to prove the merits of its analytical method to an administrative law judge.

"Geographic market definition, through application of the hypothetical monopolist test, is a critically important analytical concept in hospital merger cases. In several consecutive healthcare cases over the last 10 years ─ until the Penn State Hershey district court ruling ─ either the parties did not dispute the geographic market or they did and the court agreed with the FTC's approach," Mr. Brennan says. "The Third Circuit's decision on appeal restores the FTC's winning streak – pending the upcoming appellate decision in the Chicago hospital merger case – and adopts its analytical methods for market definition."

Brennan’s reference is to the FTC's case against the proposed merger of Chicago-based health systems Advocate Health Care and NorthShore University HealthSystem, where the district court judge also ruled against the FTC on geographic market definition grounds. Mr. Brennan did not predict an outcome in the FTC’s appeal of that case. 

So what happens now? Mr. Brennan says the parties in the PinnacleHealth-Penn State Hershey merger have basically two options: either they continue forth with the administrative trial, or decide to forgo the merger and remain independent competitors. Though it's impossible to foresee the parties' courses of action, Mr. Brennan notes that merging parties that lose the FTC’s preliminary injunction suit often call off their merger rather than proceed to administrative trial.

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