The 3rd U.S. Circuit Court of Appeals heard argument Tuesday in a closely watched antitrust case stemming from the Federal Trade Commission’s challenge to the proposed merger of two of central Pennsylvania’s largest hospitals.

A Harrisburg federal judge in May refused to put the brakes on the merger of Penn State Hershey Medical Center and Pinnacle Health System, setting the stage for an expedited appeal.

Related: Researchers: Cross-market hospital deals also raise prices

The appeal comes at a time of increased consolidation in the health care sector, and its outcome could impact the way courts measure the potential effects of hospital mergers on competition. Among the issues raised by the case are how to define the geographic market for hospital services and whether cost increases to insurers or patients should be the focus of antitrust analysis.

Several states, an association of doctors and a coalition of academics are backing the FTC and the state of Pennsylvania as amicus appellants urging the court to intercede and block the merger.

William H. Efron, an attorney for the FTC, argued Tuesday that the merger would eliminate competition between hospitals in the Harrisburg area and put insurance companies at the mercy of a monopoly, which is likely to raise rates for medical services.

Insurers in the area would likely face a 5 percent to 25 percent rate increase, and because they rely on Hershey and Pinnacle as in-network hospitals, they would be unable to go elsewhere without losing substantial business, Efron told 3rd Circuit Judges D. Michael Fisher, Joseph A. Greenaway Jr. and Cheryl Ann Krause.

Krause acknowledged that there was evidence to suggest some future price increase, but suggested that the FTC may have overstated it.

Efron responded that even a 5 percent increase would be detrimental to the local insurers, who would be unable to market their services outside of the four-county coverage area of the hospitals.

Touching on one of the central debates in the case, Fisher asked Efron what standard was used to determine the relevant geographic market for antitrust analysis. Efron replied that the FTC had shown that insurers could not realistically send patients in the region to hospitals outside the four county areas and would have to accede to rate hikes.

“What’s an insurer going to do?” he said. “It’s absolutely going to pay that. It has no choice.”

But the hospitals’ attorney, Louis K. Fisher of Jones Day, countered that insurers maintain some leverage in negotiations because hospitals don’t want to risk losing in-network status from insurers by overcharging them.

He said the FTC improperly framed the question as “whether insurance companies would be better off paying or leaving.”

“Was that the right question?” Judge Fisher asked.

The right one, the hospitals’ lawyer responded, was the one the district court asked: “whether patients can reasonably turn to outside hospitals.”

Hershey and Pinnacle struck their merger agreement in 2015, and the FTC followed with an administrative complaint to block the combination on the grounds that it would substantially lessen competition.

U.S. District Judge John E. Jones of the Middle District of Pennsylvania refused to grant a preliminary injunction, ruling after a five-day hearing that the “FTC failed to meet its burden to show a likelihood of ultimate success on the merits of their antitrust claim against the hospitals.”

The FTC and Pennsylvania appealed and the 3rd Circuit on May 24 entered an injunction pending appeal. The government entities have backing from the Association of Independent Doctors, a coalition of economic professors and a dozen states including California, Connecticut, Illinois and Washington.

The physicians argued in their brief that large hospital systems provide lower quality of care at a higher price. “Competition among hospitals offers a number of very important benefits to both quality and cost for individual patients and the health system as a whole—benefits that are undermined when hospitals merge to become one behemoth system monopolizing a market.”

The states referenced the rise of behemoth health care systems through mergers.

“This growth has resulted in increased, if not lopsided, bargaining power of those healthcare systems in negotiations with health insurers,” the brief states. “That increased leverage translates to higher healthcare prices for citizens.”

P.J. D’Annunzio covers the federal courts for The Legal Intelligencer and Law.com. Email him at pdannunzio@alm.com.

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