Hershey-Pinnacle merger: Not gonna happen?


Hershey Medical Center and PinnacleHealth will likely call off their proposed merger.


In December 2015, the Federal Trade Commission and “the Pennsylvania Attorney General’s Office originally sought an injunction against the merger.” (CPBJ)


On Sept. 27, the U.S. Third Circuit Court of Appeals in Philadelphia ruled “to allow a preliminary injunction to stand. The injunction prevents Hershey Medical Center and PinnacleHealth from merging until a Federal Trade Commission administrative law judge rules.”


According to CPBJ, chances of the companies winning in front of an FTC judge are very low.


So why did FTC seek to prevent the merger? Because they feared it would lead to reduced competition, higher healthcare costs and lower quality of care. Microeconomics students will be delighted to see the FTC’s use of the Herfindahl-Hirschman
Index in their analysis (in bold below).


In their injunction petition (pdf), FTC notes:


The Merger is likely to substantially lessen competition for healthcare services in Harrisburg, Pennsylvania, and its surrounding communities, leading to increased healthcare costs and reduced quality of care for over 500,000 local residents and patients.


2. Today, Hershey owns and operates one GAC hospital in the Harrisburg area, while Pinnacle operates three GAC hospitals.  Hershey and Pinnacle operate the only three hospitals located in Dauphin County.  Both Hershey and Pinnacle are high-quality health systems that, with limited exceptions, offer an overlapping range of GAC inpatient hospital services (“GAC services”)….


3.  Hershey and Pinnacle are close competitors for GAC services in the Harrisburg area.  Hershey and Pinnacle vigorously compete on price, quality of care, and services provided, both for inclusion in commercial health plan networks and to attract patients from one another.  The rivalry between Hershey and Pinnacle has benefited local patients with lower healthcare.costs and increased quality of care.  The Merger would eliminate this significant head-to-head competition between Hershey and Pinnacle and its related benefits.


4. The Merger would substantially lessen competition in the market for GAC services sold to commercial health plans in an area roughly equivalent to a four-county region comprised of the Harrisburg Metropolitan Statistical Area (Dauphin, Cumberland, and Perry Counties) plus Lebanon County (the “Harrisburg Area”).


5.  The only significant competitor of the Defendants in the Harrisburg Area is Holy Spirit Hospital (“Holy Spirit”), which is a smaller community hospital located in easte1n Cumberland County that offers a more limited range of services than Hershey or Pinnacle.  There are two other hospitals located on the outskirts of the Harrisburg Area.  They are even smaller community hospitals that offer a more limited range of services than Holy Spirit and a much more limited range of services than the Defendants. Neither of these hospitals meaningfully constrains Hershey or Pinnacle.


6.  Post-Merger, the combined entity will account for approximately 64% of all GAC services in the Harrisburg Area.  Using the Herfindahl-Hirschman Index (“HHI”) to measure market concentration, the post-Merger HHI would be approximately 4,500 with an increase of approximately 2,000 points.  This high market share and corresponding high concentration level render the Merger presumptively unlawful under the relevant case law and likely to increase market power-by a wide margin-under the 20 l 0 U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines (“Merger Guidelines”).


7.  The Merger would substantially increase the combined entity’s bargaining leverage in negotiations with commercial health plans.  The combined entity would be able to exercise market power by raising prices and reducing quality and services, ultimately harming Harrisburg Area residents and patients.


8.  Entry or expansion by other providers of the relevant services is unlikely to occur, much less in a manner that is timely, likely or sufficient to deter or mitigate the loss of price and non-price competition in the near future.


9.  Finally, the Defendants’ efficiency claims are overstated, speculative, unverifiable, not merger-specific, or result from an anticompetitive reduction in output, quality, or services, and are largely non-cognizable.  Any cognizable efficiency claims are insufficient to offset the substantial competitive harm the Merger is likely to cause.


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