FEDERAL TRADE COMMISSION v. PENN STATE HERSHEY MEDICAL CENTER, THE UNITED STATES COURT OF APPEALS…

FEDERAL TRADE COMMISSION v. PENN STATE HERSHEY MEDICAL CENTER, THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, 838 F.3D 327 (2016) In June 2014, Penn State Hershey Medical Center and PinnacleHealth System signed a letter of intent for a proposed merger. Hershey is located in Hershey, in Dauphin County in Pennsylvania and PinnacleHealth has two hospitals in Dauphin County and a third in Cumberland County, located less than 50 miles from Dauphin County. The FTC began investigating the proposed merger and, on December 7, 2015, filed an administrative complaint alleging the merger
FEDERAL TRADE COMMISSION v. PENN STATE HERSHEY MEDICAL CENTER, THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, 838 F.3D 327 (2016) In June 2014, Penn State Hershey Medical Center and PinnacleHealth System signed a letter of intent for a proposed merger. Hershey is located in Hershey, in Dauphin County in Pennsylvania and PinnacleHealth has two hospitals in Dauphin County and a third in Cumberland County, located less than 50 miles from Dauphin County. The FTC began investigating the proposed merger and, on December 7, 2015, filed an administrative complaint alleging the merger violated Section 7 of the Clayton Act. Two days later, the FTC and the Commonwealth of Pennsylvania filed a suit against the hospitals, seeking a preliminary injunction of the merger until the FTCs administrative adjudication was concluded. The district court held five days of evidentiary hearings, admitting thousands of pages of exhibits and hearing testimony from sixteen witnesses. Following the hearing, the district court denied the FTCs request for a preliminary injunction because it had failed to properly define a relevant geographic area. The FTC and the Commonwealth of Pennsylvania appealed. According to Horizontal Merger Guidelines issued by the Department of Justice and the FTC, if a hypothetical monopolist could impose a small but significant non-transitory increase in price(SSNIP) in the proposed market, the market is properly defined. The district court had ruled that because 43.5 percent of the hospitals patients came from outside the proposed geographic area, the proposed area was too narrow. The appellate court overturned this line of reasoning, asserting that improperly applied the hypothetical monopolist test commonly used by courts and the FTC. What follows is the appellate courts reasoning regarding if the preliminary injunction should be granted. CIRCUIT JUDGE FISHER_Our conclusion that the District Court incorrectly formulated and misapplied the proper standard does not end the inquiry. We must still determine whether the Government has met its burden to properly define the relevant geographic market. We conclude that it has. The Government presented extensive evidence showing that insurers would have no choice but to accept a price increase from a combined Hershey/Pinnacle in lieu of excluding the Hospitals from their networks. First, two of Central Pennsylvanias largest insurersPayor A and Payor Btestified that they could not successfully market a network to employers without including at least one of the Hospitals. Payor As representative stated in his deposition that . . . there would be no network without a combined Hershey and Pinnacle; and that the combined entity would have more bargaining leverage. A representative from a second large insurer, Payor B, also expressed concerns that the Hospitals would control greater than 50% of the market and would have too much leverage. He testified that the insurer would need to market a combined Hershey/Pinnacle in its network in order to be marketable. Employers in the area similarly stated that they would have a difficult time marketing a health plan without the Hospitals after the merger. Finally, payors testified that they consider the Harrisburg area a distinct market and do not consider hospitals in other areas, such as York or Lancaster counties, to be suitable alternatives. The Hospitals argue that the payors have enough bargaining leverage that they would be able to defeat a SSNIP. In the Hospitals view, the payors, which supply patients to the Hospitals, can threaten to exclude the Hospitals from their network; this would in turn cause the Hospitals to lose significant numbers of patients . . . The question here, however, is whether the merger will cause such a significant increase in the Hospitals bargaining leverage that they will be able to profitably impose a SSNIP and, in the face of demand for the SSNIP, whether the payors will be forced to accept it . . . The Governments evidence shows that the increase in the Hospitals bargaining leverage as a result of the merger will allow the post-merger combined Hershey/Pinnacle to profitably impose a SSNIP on payors. . . . Considering the evidence put forth by the Government, we conclude that the Government has met its burden to properly define the relevant geographic market. It is the four-county Harrisburg area. Once the relevant geographic market is determined, a prima facie case is established if the plaintiff proves that the merger will probably lead to anticompetitive effects in that market. Market concentration is a useful indicator of the likely competitive, or anticompetitive, effects of a merger. Market concentration is measured by the HerfindahlHirschman Index (HHI). The HHI is calculated by summing the squares of the individual firms market shares . . . The Government can establish a prima facie case simply by showing a high market concentration based on HHI numbers. The Government put forth undisputed evidence that the post-merger HHI is 5,984more than twice that of a highly concentrated market. The increase in HHI is 2,582 well beyond the 200-point increase that is presumed likely to enhance market power. These numbers, the accuracy of which the Hospitals conceded at oral argument, are significantly higher than post-merger HHIs and HHI increases that other courts have deemed presumptively anticompetitive. Furthermore, the Government has alleged that the postmerger combined Hershey/Pinnacle will control 76% of the market in Harrisburg. Together, these numbers demonstrate that the merger is presumptively anticompetitive. Furthermore, the Government has alleged that the post-merger combined Hershey/Pinnacle will control 76% of the market in Harrisburg. Together, these numbers demonstrate that the merger is presumptively anticompetitive. Once the Government has established a prima facie case that the merger may substantially lessen competition, the burden shifts to the Hospitals to rebut the Governments prima facie case. In order to rebut the prima facie case, the Hospitals must show either that the combination would not have anticompetitive effects or that the anticompetitive effects of the merger will be offset by extraordinary efficiencies resulting from the merger. The Hospitals present two efficiencies-based defenses. First, they put forth considerable evidence in an attempt to show that the merger will produce procompetitive effects, including relieving Hersheys capacity constraints and allowing Hershey to avoid construction of an expensive bed tower that would save $277 millionsavings which could be passed on to patients. Second, the Hospitals claim that the merger will enhance their efforts to engage in risk-based contracting. And finally, in addition to their efficiencies defense, the Hospitals argue that, because of repositioning by other hospitals in the area, the merger will not have anticompetitive effects. An efficiencies analysis requires more than speculative assurances that a benefit enjoyed by the Hospitals will also be enjoyed by the public. It is similarly unclear how this ability to engage in risk-based contracting will counteract any of the anticompetitive effects of the merger. In an attempt to show that the merger will not, despite high HHI numbers, produce anticompetitive effects, the Hospitals claim that repositioningthe response by competitors to offer close substitutes offered by the merging firmswillbe sufficient to constrain postmerger prices. . . We agree that recent affiliations and acquisitions, at least in the Harrisburg area, assuage some of the concerns that the proposed combination will have anticompetitive effects. We do not believe, however, that repositioning by these hospitals would have the ability to constrain post-merger prices, as evidenced by the extensive testimony by payors that there would be no network without Hershey and Pinnacle. We therefore conclude that the Hospitals have not rebutted the Governments prima facie case that the merger is likely to be anticompetitive. Accordingly, we hold that the Government has carried its burden to demonstrate that it is likely to succeed on the merits. Although the [Governments] showing of likelihood of success creates a presumption in favor of preliminary injunctive relief, we must still weigh the equities in order to decide whether enjoining the merger would be in the public interest. . . . . .The principal equity weighing in favor of issuance of the injunction is the publics interest in effective enforcement of the antitrust laws. [S]hould the Hospitals consummate the merger and the FTC subsequently determine that it is unlawful, divestiture would be the FTCs only remedy. At that point, since it is extraordinarily difficult to unscramble the egg, On the other side, the Hospitals claim that granting the injunction would preclude the many public benefits recognized by the [district] court. In making this argument, the Hospitals misconstrue our equities inquiry. By statute, we are required to weigh the equities in order to decide whether granting the injunction would be in the public interest. In answering this 5 question, therefore, we consider whether the injunction, not the merger, would be in the public interest. Nevertheless, even accepting the Hospitals assertion that they would abandon the merger following issuance of the injunction, the resultthat the public would be denied the procompetitive advantages of the mergerwould be the Hospitals doing. We see no reason why, if the merger makes economic sense now, it would not be equally sensible to consummate the merger following a FTC adjudication on the merits that finds the merger lawful. On balance, the equities favor granting the injunction. None of the private equities, or those equities that may have public benefit, on the Hospitals side of the ledger are sufficient to overcome the publics strong interest in effective enforcement of the antitrust laws. We recognize that certain extrinsic factors have made these types of mergers beneficialperhaps even necessaryto the continued success of some hospital systems. Yet, in this case, we are tasked with deciding only whether preliminary injunctive relief would be in the public interest. Opining on the soundness of any legislative policy that may have compelled the Hospitals to undertake this merger is not within our purview. We therefore conclude that, after determining the Governments likelihood of success and weighing the equities, a preliminary injunction would be in the public interest. Accordingly, we will reverse the District Courts denial of the Governments motion for a preliminary injunction. We will also remand the case and direct the District Court to preliminarily enjoin the proposed merger between Hershey and Pinnacle pending the outcome of the FTCs administrative adjudication. CRITICAL THINKING On October 14, 2016, Hershey and PinnacleHealth announced they would no longer pursue the merger due to the costs of continuing litigation. In the United States, certain courts handle specialized cases. For example, the Court of Appeals for the Federal Circuit handles patent law. Considering the impact even a preliminary injunction has on company decision making, do you think specialized courts should handle antitrust cases? Explain your reasoning. ETHICAL DECISION MAKING A possible defense against the prima facie case of lessened competition that potentially merging companies can make is to show the increased efficiency from merging outweighs the loss of competition. What values did the appellate court embrace when it rejected Hersheys and PinnacleHealths efficiency defense? If you were form upper and lower boundaries of acceptable loss of competition from a merger in relation to increased efficiency from the merger, what would they be and why? What factors would you consider?

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