By Jad Chamseddine, CQ Roll Call

May 10, 2016 -- A federal judge denied the Federal Trade Commission’s (FTC) request to block Penn State Hershey Medical Center and PinnacleHealth System from merging assets, arguing the commission misjudged the affected market area.

The decision is a rare setback in the FTC's efforts in the past five years to stop hospital mergers it considers harmful to competition. The agency was joined by the Pennsylvania attorney general's office in blocking the proposed combination between the two hospitals in December on grounds the combination would hurt consumers.

District Judge John E. Jones III of the U.S. District Court for the Middle District of Pennsylvania rejected the request for a preliminary injunction to block the deal, questioning whether the FTC was correct in its relevant market determination. Competitive effects in a merger analysis cannot be conducted properly “without a well-defined relevant market" which takes into consideration a "product market and a geographic market," the judge said, citing case law.

The FTC said the deal would hurt competition in the “Harrisburg area,” which takes into account the counties of Dauphin, Cumberland, Perry, and Lebanon. Patients “want to be hospitalized near their families and homes” and would chose nearby hospitals, the FTC argued, saying the area's two large commercial health insurance payors, Capital Blue Cross and Highmark, “recognize the Harrisburg area” as a distinct market.

But Jones sided with the argument put forward by the two hospitals that the FTC's relevant market area was “far too narrowly drawn.” He pointed to facts showing 43.5 percent of Hershey’s patients came from outside the FTC’s defined market area and a similar number of Pinnacle patients also came from outside the Harrisburg area. The judge also said at least half of Hershey’s patients drive at least 30 minutes to the hospital, with 20 percent of those driving about an hour for care.

“These salient facts controvert the FTC’s assertion that general acuity services are 'inherently local' and strongly indicate that the FTC has created a geographic market that is too narrow,” Jones said in his ruling.

The FTC said in a statement in December when it filed for a preliminary injunction “the merger would create a dominant provider of general acute care inpatient hospital services sold to commercial health plans in the area of south-central Pennsylvania.” But the judge said Pennsylvania would not lack competition between hospitals if the deal is approved.

Jones added that 19 hospitals exist within a 65-minute drive of Harrisburg and will maintain a competitive landscape and offer an alternative to patients unhappy with the service, quality or price at the merging hospitals.

“Given the realities of living in Central Pennsylvania, which is largely rural and requires driving distances for specific goods or services, it is our view that these 19 hospitals  . . .  provide a realistic alternative,” the judge said in his ruling.

The judge also took into account the merger would be able to alleviate capacity constraints experienced by Hershey. In its complaint, the FTC said the merged entity “would control 64 percent of the southern Pennsylvania market, affecting the health care costs of about 500,000 residents and patients.”

But the merging parties took into account the possibility of rising health care costs, with rates frozen for at least five years. The judge criticized the FTC for speculating what would happen after five years. “In the rapidly changing arena of health care and health insurance, to make such a prediction would be imprudent,” the court said.

A loss at the preliminary injunction stage means the FTC was not able to “show a likelihood of ultimate success” in a trial on the merits of the case, and the government agency could still appeal. The FTC has yet to comment, but the hospitals said they would proceed with the merger.