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Appeals Court Blocks Penn State-Pinnacle Health System Merger

October 14th, 2016

The United States Court of Appeals for the Third Circuit in Philadelphia blocked the proposed merger of Penn State Hershey Medical Center (Hershey) with Pinnacle Health System (PHS), finding the merger would violate antitrust statutes. The court awarded a preliminary injunction to the Federal Trade Commission (FTC), reversing the lower court ruling.

Hospitals looking to combine services with other hospitals and health systems often argue that mergers create high-quality, coordinated care with administrative and delivery efficiencies. The Third Circuit addressed this so-called “efficiencies defense” that Hershey/PHS argued should be the deciding factor in approving the merger. Although the merger might theoretically create higher prices, Hershey/PHS argued that Congress, by adopting the Affordable Care Act, is encouraging healthcare mergers to improve efficiency in the current system. The court disagreed, ruling that despite the fact that other courts of appeal have appreciated this defense, the Third Circuit looks at competiveness alone when assessing antitrust actions, notwithstanding the efficiencies that may be gained.

The Pennsylvania ruling was a major win for the FTC which has recently had mixed results in fashioning its arguments concerning healthcare mergers. In February 2015, the FTC won when a three-judge panel of the Ninth U.S. Circuit Court of Appeals affirmed a district court's decision that St. Luke Health System’s acquisition of the Saltzer Medical Group violated state and federal antitrust laws by decreasing competition that could lead to increased costs. But the FTC lost an important ruling in June 2016 when a U.S. district court in Illinois refused to issue a preliminary injunction to halt the merger of Advocate Health Care and NorthShore University HealthSystem in Chicago, stating that the federal government failed to prove the deal would reduce competition in the area and increase the costs of healthcare services. The ruling allowed Advocate to join its 12 hospitals with NorthShore’s four hospitals, creating the largest integrated healthcare delivery system in Illinois. The appeal court ruling on this case is pending.

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