Will Consecutive FTC Losses Change the Antitrust Landscape for Hospital Mergers?

In late 2015, the Federal Trade Commission (“FTC”), riding a wave of victories, challenged three separate hospital mergers in Harrisburg, Pennsylvania; Huntington, West Virginia; and Chicago, Illinois (for more information on these challenges, see our previous coverage here). Six months later, the FTC’s winning streak has effectively come to an end after suffering at least temporary defeat in all three cases. In both Harrisburg and Chicago, the FTC’s motions for a preliminary injunction were denied by the federal district court when the respective judges took issue with the FTC’s defined geographic markets, giving the hospitals a temporary victory. But the FTC has appealed both cases arguing that each judge incorrectly interpreted the law. In West Virginia, the state passed a Certificate of Public Advantage (“COPA”) law to preempt the FTC’s challenge of the proposed merger. After the West Virginia Health Care Authority approved the merger under the COPA law, the FTC recently abandoned its challenge of the merger. Each challenge provides a relevant case study for any health care provider to consider when pursuing a potential transaction.

Harrisburg, Pennsylvania – Penn State Hershey/Pinnacle Health

In the first big court victory in more than 10 years for hospitals over the FTC, on May 9, 2015, U.S. District Judge John E. Jones III of the Middle District of Pennsylvania denied the FTC’s request for a preliminary injunction to temporarily block the merger between Penn State Hershey Medical Center (“Hershey”) and Pinnacle Health System (“Pinnacle”). Judge Jones rejected the FTC’s definition of the relevant geographic market as too narrow and admonished the FTC for their opposition to mergers in an evolving health care environment that “virtually compels institutions to seek alliances such as the hospitals intended here” (for more information on the district court’s opinion, see our previous coverage here).

Disagreeing with Judge Jones, the FTC appealed to the Third Circuit, arguing that the decision failed to correctly apply the “hypothetical monopolist” test in determining the geographic market by only considering whether patients, and not insurers, would use hospitals outside the FTC’s defined geographic market. The Third Circuit agreed to temporarily stay the merger pending the appeal, which is scheduled to be heard on July 26, 2016.

Huntington, West Virginia – Cabell/Huntington

On November 6, 2015, the FTC challenged the proposed acquisition of St. Mary’s Medical Center (“St. Mary’s”) by Cabell Huntington Hospital (“Cabell”) in Huntington, West Virginia, despite the hospitals having entered into an agreement with the West Virginia Attorney General to limit certain conduct of the merged entity for a period of seven years (click here for previous coverage). In response to the FTC challenge, the West Virginia legislature passed the COPA law in March of 2016. Under the COPA law, certain hospital mergers are deemed exempt from the federal antitrust laws under the “state action doctrine” if the West Virginia Health Care Authority approves the hospital merger.

On June 22, 2016, the West Virginia Health Care Authority approved the merger (click here for a copy of the decision). In light of the ruling by the West Virginia Health Care Authority, on July 6, 2016, the FTC announced via press release that it had voted unanimously to abandon the challenge and dismiss their complaint without prejudice.

Although West Virginia’s COPA law was the impetus for the FTC abandoning their challenge of the Cabell/Huntington transaction, the FTC expressed continued skepticism over the use of cooperative agreements and their ability to mitigate the anticompetitive effects of potential mergers. The FTC went so far as to say that the “decision to dismiss the complaint without prejudice does not necessarily mean that we will do the same in other cases in which a cooperative agreement is sought or approved.”

Chicago, Illinois – Advocate/North Shore

In the second big court victory in more than 10 years for hospitals over the FTC, on June 14, 2016, Judge Jorge L. Alonso denied the FTC’s motion for a preliminary injunction to block the proposed merger of Advocate Health Care (“Advocate”) and NorthShore University Health System (“NorthShore”). In his decision, Judge Alonso found that the FTC and the state of Illinois had not “shouldered their burden of proving the relevant geographic market” and that, absent that showing, had not demonstrated a likelihood of succeeding on their claim. In rejecting the FTC’s market definition, Judge Alonso highlighted the growing influence of outpatient facilities as a key driver of hospital admission and the FTC economist’s exclusion of so-called “destination hospitals” (i.e., academic medical centers, high acuity/quality hospitals or other specialty service hospitals) from the market definition.

As with the Harrisburg case, the FTC disagreed with the district court’s decision and appealed the decision, this time to the Seventh Circuit. The appeal is scheduled to be heard on August 19, 2016.

Practical Takeaways

Providers will be pleased to see a few antitrust victories in the hospital merger arena given the FTC’s unprecedented winning streak over the last decade. But with two of the cases pending appeal, these provider victories could prove to be merely a temporary setback for the FTC and, regardless, are unlikely themselves to alter the FTC’s hospital merger enforcement focus or methodology. Antitrust challenges are very complex and fact-specific. Until there is a growing trend of case law against its position, the FTC will likely continue to view health care as local in nature, drawing geographic markets narrowly and discounting many efficiencies as “not merger specific,” including those based on “meeting the goals of healthcare reform.” To that end, we likely will continue to see the FTC take an aggressive stance in challenging hospital mergers that it finds to be problematic from a competition standpoint.
These cases continue to show that defining the relevant geographic market is a critical component of any antitrust analysis in a hospital merger case. In Harrisburg, the district court decision looked at patient outmigration in concluding that the FTC’s proposed geographic market was too narrow. On appeal, the FTC argued that patient outmigration is the incorrect method for determining geographic market, and the court’s analysis has widely been criticized by economists. In Chicago, the district court decision found the FTC incorrectly excluded “destination” hospitals from the proposed geographic market. Further, the decision focused on a new concept of considering outpatient facilities as a relevant factor in determining the geographic market for general acute inpatient care. While the determination of the relevant geographic market is often more art than science and critically dependent on the facts and circumstances in each case, it will be interesting to see how the appellate courts rule on this point.
If local stakeholders, including the state legislature, are supportive of a hospital merger for reasons outside the typical antitrust analysis conducted by the FTC, then the enactment of a state COPA law may provide a path to exemption from the federal antitrust laws under the “state action doctrine.” As evidenced by the FTC’s comments here, the FTC clearly recognizes the effectiveness of such COPA laws in exempting the efforts of the FTC and the Department of Justice in enforcing federal antitrust laws but believes the COPA laws can facilitate anticompetitive mergers so may not always defer to such state statutes in the future. In practice, COPA laws often substitute a state regulatory process for a federal enforcement process, creating a situation where the hospitals agree to be actively supervised by a state regulatory agency, including filing certain reports, disclosing certain information and agreeing to certain restrictions, in order to be exempted from the federal antitrust laws.

If you have any questions or would like additional information about this topic, please contact one of the following members of Hall Render’s Antitrust Practice Group: