Hospital mergers could become more complex
In changing local scene, Illinois ruling raises questions
from the Cincinnati Business Courier – August 24, 2007
by James Ritchie
Greater Cincinnati’s hospital leaders are poised to enter a new round of mergers when the Health Alliance breakup is complete.
But that might be more complicated than they have hoped. A ruling in an Illinois case this month raises questions about how easy it will be to get future mergers approved, what their benefits would be and how much regulatory trouble they could bring.
The Federal Trade Commission found that the 2000 merger of Evanston Northwestern Healthcare and Highland Park Hospital led to anticompetitive price increases for insurers. The agency said Aug. 6 that it would force them, as a remedy, to contract separately for their reimbursement from payers.
“That pulls the rug out from under one of the biggest motivations to be a system,” said consultant James Unland, president of the Chicago-based Heath Capital Group.
When the Health Alliance, the Tri-State’s largest hospital group, was formed in 1995, it was part of a wave of such consolidations in a tight reimbursement environment. Hospitals had hoped to gain bargaining clout by banding together.
The Alliance is now negotiating details of the departure of two of its members, Christ Hospital and the St. Luke hospitals. St. Luke and its Northern Kentucky competitor, St. Elizabeth Medical Center, have announced plans to merge.
And either the Health Alliance or one of its remaining members, Jewish Health System, has been exploring an affiliation with Dayton-based Premier Health Partners, which includes Middletown Regional Hospital, Good Samaritan Hospital in Dayton and Miami Valley Hospital, court papers indicate. The Health Alliance has refused to comment on the possibility of a merger.
Matt Klein, an attorney working for St. Elizabeth on the merger with St. Luke, said he’s been following the Evanston case. What’s not clear to him is whether the antitrust offense lies in having the ability to raise prices or in exercising that ability.
He thinks hospitals will still try mergers where they make sense. Bargaining power isn’t the only advantage to such arrangements; efficiencies can be found in administrative overhead and clinical functions. Borrowing power also can be increased.
“The unanswered question is, if there’s a consolidation and if in view of the FTC it would allow participants to have market power, would they bless the transaction?” said Klein, with law firm Deters, Benzinger & LaVelle. “That’s the quandary people are in.”
Efficiencies still to be gained
But systems will be careful.
“If you have the power to raise prices, you’d best not use it,” he said. “That’s the lesson: Thou shalt not throw thy weight around.”
Karla Webb, spokeswoman for St. Elizabeth, said her hospital will proceed with the St. Luke merger.
The Evanston decision, she said, “has more implications for how the merged organization acts after a merger, rather than if a merger would happen.”
“This ruling does not threaten our goals for the merger,” Webb said, “since it deals with a situation where prices were raised significantly (which is not our goal).”
Dr. Richard Laib, chairman of the St. Luke board, said in an e-mail that St. Luke leaders “have been aware of the Evanston case for quite some time from a variety of different perspectives.” He would say little more.
St. Elizabeth and St. Luke are the only hospitals in Northern Kentucky.
Unland, the health care consultant, said a case like that of Evanston Northwestern, in the Chicago suburbs, could happen anywhere. He anticipates a slowdown in hospital merger activity nationally.
“Not only that, the investment banking/hospital financing community is eventually going to be looking at this to see its impact on capital access,” Unland said. “If the FTC moves on a second hospital system, that will raise even more red flags, and I do expect them to.”
Have a pro-consumer story
Evanston Northwestern Healthcare is considering a federal court appeal. The Aug. 6 ruling itself came on appeal of an FTC administrative law judge’s 2005 decision that the two-hospital system had to divest itself of Highland Park.
David Balto, a former FTC policy director, said that if he were a hospital leader working on a merger, “I would make sure first and foremost that I had a pro-consumer story – showing how efficient use of resources would lead to lower costs and higher quality of care.”
He doesn’t hear any death knell for consolidation in an industry with a pressing need to control costs.
“What this case shows is that the commission is going to focus a lot of attention on hospital mergers and that the opinions of managed care are going to matter a considerable amount in the evaluation of whether a merger is anticompetitive,” said Balto, who is in private law practice in Washington, D.C. “I think the commission will be sensitive to the efficiencies of mergers.”« Back to news