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Appeals court overturns Pa. hospital merger

In a ruling with the potential to shape key aspects of President Obama's health-care reform, a federal appeals court in Philadelphia has upheld the right of federal regulators to halt a large health-care merger in the Harrisburg area.

A three-judge panel of the U.S. Court of Appeals for the Third Circuit said the Federal Trade Commission has authority to halt the merger of Penn State Hershey Medical Center and Pinnacle Health System because a combination could cause health-care costs to rise.

The unanimous decision puts on hold the planned merger of Pinnacle Health and Hershey Medical Center, both in Dauphin County, until the FTC can conduct its own detailed analysis of the merger's impact on health-care prices in the area.

"This is an important development in the law that health-care providers will need to be aware of in future transactions," said Leslie John, an antitrust lawyer at Ballard Spahr who focuses on the health-care industry.

In essence, the Third Circuit decision reaffirms the authority of the FTC to weigh in on health-care mergers at a time when hospitals are under pressure to combine operations and increase efficiencies, a consequence of the Affordable Care Act.

"This is a reminder of what the FTC and the Department of Justice have been saying all along; while they make allowances for this type of activity and it is encouraged under the Affordable Care Act," traditional antitrust principles still apply, said Christopher Raphaely, a transactional lawyer at Cozen O'Connor who specializes in health care.

The proposed merger between Pinnacle and Hershey was announced in 2014, but the FTC filed suit a short time later, arguing that anticompetitive aspects of the deal could cause health-care costs to rise.

In the past, the FTC has been a critical player in such health-care mergers, helping to determine whether they would help or hurt consumer pocketbooks. But in a string of recent cases in Pennsylvania, Chicago, and West Virginia, its analysis had been rejected. The Third Circuit opinion, issued Tuesday, would help to restore its authority in future proposed mergers, say lawyers who specialize in antitrust law.

The Third Circuit decision reverses an opinion in May by U.S. District Judge John Jones lll, who found that the FTC, in analyzing the transaction, had drawn its potential market area too narrowly, and thus had failed to show the merger's true impact on prices. Since the two hospital systems drew from a larger area, Jones found, competitive pressures would serve to limit prices.

He noted as well that the Affordable Care Act, passed in an effort to expand health insurance to tens of millions of Americans who had gone without health coverage, created incentives for such mergers.

But the Third Circuit, citing testimony from health insurance executives whose patients used both hospital systems, said the evidence showed the insurers would lose their bargaining power if the hospital merger went through, and that would affect prices. In its original complaint, the FTC said that the merged health-care system would control about 64 percent of the market.

"The government presented extensive evidence  showing that insurers would have no choice but to accept price increases from a combined Hershey/Pinnacle," the panel said.