PHILADELPHIA -- The U.S. Court of Appeals for the
Third Circuit handed the Federal Trade Commission and the Pennsylvania attorney general a major victory when it overturned a U.S. district court order denying the FTC
and AG’s request to stop a merger between the Penn State Hershey
Medical Center and Pinnacle Health System.
Stephen Calkins, a professor at Wayne State University Law
School and former general counsel of the FTC from 1995 to 1997, said the Third
Circuit directed the U.S. District Court for the Middle District of
Pennsylvania to grant an injunction against the merger. He said that means the
merger is preliminarily enjoined, and the FTC will conduct an administrative
Calkins said the defendants may request rehearing before the
full panel of Third Circuit judges and/or they may ask the Supreme Court to
consider the merger, “but neither is likely.”
“The defendants said earlier that they would call off the
merger if they lost,” Calkins told the Pennsylvania
The court of appeals said the district
court made three errors when it denied the request for an injunction against
the merger, Calkins said.
“The most outrageous was to give substantial weight to deals
with insurance companies to protect them for a period of time,” he said. “The
court of appeals correctly said that such deals should be given no weight at
Calkins said it was also very important that the district court
had, as a practical matter, relied on a discredited test -- the Elzinga-Hogarty
test -- and gave excessive weight to the fact that Penn State Hershey drew a
substantial number of patients from far away.
Calkins said the appeals court highlighted an amicus brief
filed by 36 economics professors, including Ken Elzinga, that showed the errors
of applying the Elzinga-Hogarty test in a hospital merger case.
The appeals court said the district court was wrong in
giving significant weight to patient flow data. The Third Circuit said
this data was misleading when used to back up a hospital merger.
The Third Circuit also ruled that the district court should
not have focused on patients’ expected responses to increased prices. Instead,
the appeals court said the focus should be on the likely response of insurers
to the merger, calling those issues the “commercial realities” of the market.
The appeals court also said the district court erred in
relying on private agreements between the hospitals and insurers involved in
“The district court issued what I called, at the time, an
appalling decision,” Calkins said. “The Third Circuit recognized this and corrected
For its part, the FTC also was happy with the ruling.
“The FTC is very pleased with today’s ruling from the Third
Circuit Court of Appeals, which found that we have a likelihood of success on
the merits,” Debbie Feinstein, director of the FTC’s Bureau of Competition,
said in a statement. “We look forward to proving our case.”
The Third Circuit ruling on the Penn State Hershey/Pinnacle
merger comes in the wake of an unsuccessful run by the FTC in its efforts to
block hospital mergers.
On June 14, the FTC also lost a bid to stop a merger between
two hospitals in Chicago. That merger was put on hold to allow a government
appeal to proceed.