The decision came in the wake of objections from the Pennsylvania Attorney General's office and the Federal Trade Commission.
Pa. Attorney General Linda Kelly challenged the merger by saying that the sale of surgical institute to the health system would be bad for consumers because it would reduce competition.
Calling the surgical institute the hospital's "only major competition" in the region, Kelly said she felt that "the proposed acquisition would result in substantially higher prices for many kinds of medical procedures. …It would be bad not just for patients but also for employers in the Reading area," she said.
Clint Matthews, CEO of the health system, challenged that notion.
"...the complaint seemed to imply that because these two institutions are strong and healthy, their joining together would have resulted in 'substantially reduced competition in the area' – a conclusion with which we respectfully disagree in light of the many health care institution choices available in our region."
Matthews said despite their disagreement with the attorney general's findings, the health system and surgical center felt "the cost associated with engaging the government in a prolonged legal battle would not be justified."
The Reading Surgical Institute, a private physician-owned hospital, opened at its current Spring Township site in 2007.
If the merger had taken place the institute's 125 nursing and support staff would have become employees of the Reading Health System, while the institute's 27 physicians would have remained independent practitioners on the hospital's medical staff.
The Reading Health System has a staff of 970 doctors and more than $1 billion in cash and investments. It owns and operates the Reading Hospital and Medical Center, a 700-bed facility in West Reading.