FTC asks appeals court to block Pa. hospital merger

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.”