FTC v. Penn State Hershey Med. Ctr. - 838 F.3d 327 (3d Cir. 2016)

Rule:

Consistent with the mandate to determine the relevant geographic market taking into account the commercial realities of the specific industry involved, when a court applies the hypothetical monopolist test, it must also do so through the lens of the insurers: if enough insurers, in the face of a small but significant non-transitory price increase, would avoid the price increase by looking to hospitals outside the proposed geographic market, then the market is too narrow. It is error for a district court to completely disregard the role that insurers play in the healthcare market. This does not mean that, in the healthcare context, considering the effect of a price increase on patients constitutes error standing alone. Patients, of course, are relevant. For instance, an antitrust defendant may be able to demonstrate that enough patients would buy a health plan marketed to them with no in-network hospital in the proposed geographic market. It would necessarily follow that those patients who purchased the health plan would have to turn to hospitals outside the relevant market (lest they pay significant out-of-pocket costs for an out-of-network hospital). In this scenario, patient response is clearly important, but it is not important with respect to patients' response to the price increase demanded by the post-merger hospitals.

Facts:

Penn State Hershey Medical Center ("Hershey") is a leading academic medical center and the primary teaching hospital of the Penn State College of Medicine. PinnacleHealth System ("Pinnacle") is a health system with three hospital campuses—two located in Harrisburg in Dauphin County, and the third located in Mechanicsburg in Cumberland County. In June 2014, Hershey and Pinnacle signed a letter of intent for the proposed merger. The following month, the Hospitals notified the Federal Trade Commission (FTC) of their proposed merger, and in May 2015, executed a "Strategic Affiliation Agreement." The FTC investigated the combination, and together with the Commonwealth of Pennsylvania, filed suit alleging that the merger violated Section 7 of the Clayton Act. The Government sought a preliminary investigation, alleging that the Hospitals' merger would substantially lessen competition in the market for general acute care services sold to commercial insurers in the Harrisburg, Pennsylvania market. The district court denied the Government’s request for a preliminary injunction on the basis that the Government had failed to meet its burden to properly define the relevant geographic market. Without a properly defined relevant geographic market, the district court held there was no way to determine whether the proposed merger was likely to be anticompetitive. Thus, the district court held that the government could not show a likelihood of success on the merits, and its failure to properly define the relevant geographic market was fatal to its motion. The district court also analyzed what it called “equities,” which it held supported denying the injunction request. The government appealed. 

Issue:

Did the district court correctly deny the government’s request for a preliminary injunction on the basis that the Government had failed to meet its burden to properly define the relevant geographic market? 

Answer:

No.

Conclusion:

In denying a preliminary injunction under Federal Trade Commission Act § 13(b) (15 U.S.C.S. § 53(b)), the district court improperly formulated and applied the hypothetical monopolist test to define the relevant geographic market in determining whether a hospital merger would violate Clayton Act § 7 (15 U.S.C.S. § 18) because patient flow data was unhelpful in light of commercial realities that required considering insurers' response to a small but significant non-transitory price increase, but not considering private agreements between the hospitals and the insurers. According to the court, the government adequately defined the relevant geographic market by analyzing whether insurers would accept a price increase. Efficiencies did not rebut a prima facie case based on market concentration evidence, and a likelihood of success was shown. The court concluded that equities favored granting the injunction.