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Split opinions in Hershey-Pinnacle merger battle

The final outcome of the Hershey-Pinnacle merger battle could set a precedent for health care mergers going forward, and so far two courts have formed opposite opinions on whether the Dauphin County health systems should become one.

Last week a federal court overturned a district court’s earlier opinion that a merger between Harrisburg-based PinnacleHealth System and Derry Township-based Penn State Health Milton S. Hershey Medical Center should be allowed. The ruling prevented the merger from taking place until the case is heard by an administrative law judge from the Federal Trade Commission, which opposes the merger.

Experts predict  that the health systems will abandon the merger, because the next steps in the fight are long and costly.

The latest opinion, from the U.S. Third Circuit Court of Appeals’ opinion, disagreed with a decision by U.S. Middle District Court Judge John Jones. It also argued that the legal method Jones used to arrive at his decision was outdated.

“In a masterful, carefully reasoned opinion, the Third Circuit explained why the district court’s analysis was flawed,” said William Markham, a trial attorney in San Diego at the Law Offices of William Markham who has been observing the case.

Some key points where the two courts disagreed were the geographic market the health systems serve, the impact of health care costs on the region as a result of a merger and the benefits to the health systems by merging.

Geographic Market

When the FTC and Pennsylvania’s Attorney General originally opposed the merger in December 2015, they said that a union between Hershey Medical Center and PinnacleHealth would essentially eliminate competition in the four-county region the health systems serve – Dauphin, Cumberland, Lebanon and Perry counties.

Judge Jones disagreed, arguing that people from other counties, such as Lancaster, travel to the health systems for treatment, therefore widening their geographic market.

The Third Circuit shot that down in its decision. It said that argument only considers patient flow into Dauphin County. Judge Jones did not take into account the fact that Dauphin County residents rarely travel outside the county for health care.

Also, Hershey Medical Center offers services that might not be available elsewhere, the Third Circuit said.

“The District Court did not consider that Hershey is a leading academic medical center that provides highly complex medical services,” the Third Circuit said. “We are skeptical that patients who travel to Hershey for these complex services would turn to other hospitals in the area.”

Cost falls on insurers, benefit to hospitals minimal

The Third Circuit also pointed out that a merger would raise prices not only for patients, but also for local insurance companies. It referenced comments from insurers in the Harrisburg region who had said they could not drop Hershey Medical Center or PinnacleHealth from their networks without losing members.

“The payers repeatedly said that they could not successfully market a plan in the Harrisburg area without Hershey and Pinnacle,” the third circuit said.

Lastly, the Third Circuit addressed the fact the health systems had to prove that a merger would not have anticompetitive effects, or that those effects would be offset by “extraordinary inefficiencies as a result of the merger.”

Hershey and PinnacleHealth argued that merging would alleviate Hershey Medical Center’s capacity issues and eliminate its need to build a 100-bed tower, which would make operations more efficient and improve patient care.

The Third Circuit found that argument to be “ambiguous” at best, stating in its opinion, “The hospitals’ own efficiencies analysis shows that Hershey needs only 13 additional beds in order to operate at 85 percent capacity, which is a hospital’s optimal occupancy rate.”

Lenay Ruhl

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