The governing boards of two hospitals in Pueblo, Colo., will decide this week whether to fight a decision by the Federal Trade Commission to challenge the hospitals' proposed merger.
The FTC's challenge, authorized on Jan. 31 by a unanimous vote of the agency's five commissioners in Washington, represents the first federal antitrust challenge of a hospital merger or acquisition in a two-hospital town.
A week earlier, the Justice Department cleared a similar hospital merger in Manchester, N.H. (Jan. 31, p. 3).
The FTC's action elicited a strong response from the American Hospital Association, which may seek legislative relief for hospitals rather than continuing to push for improved antitrust guidance from the two federal antitrust agencies. The top executive at one of the Pueblo hospitals is a member of the AHA's board of trustees.
The hospitals are 326-bed St. Mary-Corwin Regional Medical Center and 229-bed Parkview Episcopal Medical Center. They are the only acute-care facilities in Pueblo, a town of about 99,000 located 112 miles south of Denver. The nearest hospitals are in Canon City, 39 miles from Pueblo, and in Colorado Springs, 42 miles from Pueblo.
Cincinnati-based Sisters of Charity Health Care Systems, which owns St. Mary-Corwin, also owns 512-bed Penrose-St. Francis Healthcare System, one of Colorado Springs' two hospitals.
The FTC's action follows a four-month antitrust probe, which involved the submission of volumes of additional documents to the FTC by the hospitals and personal visits by hospital executives with FTC officials in Washington as late as Jan. 24.
The hospitals argued that a merger was necessary because the market couldn't sustain two hospitals. In a position paper submitted to the FTC on Jan. 24 and obtained by MODERN HEALTHCARE, the hospitals documented declining utilization and deteriorating financial situations at both hospitals.
For example, the hospitals said they could lose as much as $6.1 million combined in 1997, although they did acknowledge that they could earn as much as $5 million this year.
The hospitals also argued that a merger could generate between $54 million and $67 million in savings over five years through the elimination of duplicative services and staffs.
Rejecting the arguments, the FTC commissioners on Jan. 31 voted 5-0 to authorize the agency to file a motion for a preliminary injunction in U.S. District Court in Denver that would bar the hospitals from merging. If the agency obtains the injunction, it would have 20 days to file an administrative antitrust complaint against the hospitals with a federal administrative law judge assigned to the FTC.
Mark Whitener, acting deputy director of the FTC's Bureau of Competition in Washington, said the agency found no credible evidence that one of the hospitals would fail without a merger. He also said there was insufficient evidence to show that enough savings would be passed along to consumers to offset the deal's "monopolistic effects."
"There would be a complete elimination of competition," Mr. Whitener said, adding that extending the market to Colorado Springs wouldn't help the hospitals' position because St. Mary-Corwin's parent corporation controls nearly 60% of the staffed beds there.
QualMed, a Pueblo-based investor-owned HMO, also opposed the merger. The plan contracts with both hospitals for services to 10,000 QualMed enrollees.
"We thought that a monopoly not only would have costs up for payers but quality would go down because there would be no competition between the hospitals," said Curt Westen, QualMed's general counsel.
The plan expressed its views in an affidavit submitted to the FTC and during an FTC interview with Malik Hassan, M.D., QualMed's president. Mr. Westen also confirmed that QualMed is interested in purchasing Parkview.
A spokeswoman for the FTC's Denver office, which reviewed the deal, said the agency wouldn't seek an injunction until this week. That would give the hospitals time to scrap their plans before any further legal action is taken.
Michael Pugh, president and chief executive officer of Parkview, and Sally Duffy, president and CEO of St. Mary-Corwin, limited their reactions to a written statement issued by their law firm.
"Both hospitals are surprised and extremely disappointed by the FTC's apparent failure to appreciate the unmet healthcare needs of Pueblo," the statement said. It added that the hospitals have several options: fight the FTC, pursue other forms of collaborative arrangements or intensify the competition between the hospitals.
Meanwhile, the seemingly contradictory results in Pueblo and Manchester created a stage last week for various interests to espouse their views on antitrust and hospital collaboration.
"Today's decision by the Federal Trade Commission sends a chilling message to hospitals trying to reduce duplication of services and serve their communities more cost effectively," said AHA President Richard Davidson.
Despite evidence that the pace of hospital mergers, acquisitions and affiliations has exploded over the past year, the AHA has continued to argue that antitrust fears have chilled hospital collaboration.
To date, the AHA has opted to seek greater clarification from the FTC and Justice Department on how antitrust laws and enforcement policies apply to hospitals. However, at last week's AHA meeting in Washington, Mr. Davidson told attendees that, in light of the Pueblo case, it may be time to seek legislative antitrust relief for hospitals rather than continuing to rely on dialogue with the agencies.
In fact, at an open meeting of the hearing committee of the AHA's board, Mr. Pugh, who's also a member of the association's board, urged the AHA to review its antitrust lobbying strategy.
However, at the board's subsequent closed-door meeting, the trustees took no action to change the association's policy, according to Fredric Entin, the AHA's senior vice president for legal and regulatory affairs. But, he acknowledged that the Pueblo case has pushed the association closer to asking Congress for help.
While the AHA and others point to Pueblo as misguided enforcement policy, some who have had deals challenged by the Justice Department are accusing that agency of going soft.
"I'm mystified how one agency, the FTC, can prosecute this transaction when the Justice Department chooses not to prosecute in Manchester," particularly given the types of mergers that the Justice Department has challenged in the past, said Thomas Campbell, an antitrust attorney with Gardner, Carton & Douglas in Chicago.
Mr. Campbell represents a hospital in Ukiah, Calif., whose acquisition of a second hospital in town was challenged by the FTC. Ukiah's third hospital later closed, giving the remaining hospital a monopoly over acute-care services. The case is pending before the five FTC commissioners. He also represented two of the three hospitals in Rockford, Ill., whose proposed merger was blocked by the Justice Department.
But what may seem to be contradictory decisions to some are simply proof to others that the two agencies make independent decisions based on the specific facts of each case.
The Manchester hospitals are 284-bed Catholic Medical Center and 286-bed Elliot Hospital. Like the hospitals in Pueblo, they're the only hospitals in town, and they're currently profitable.
But the Manchester attorneys, who also served as attorneys for the Pueblo hospitals, were able to convince the Justice Department that the two facilities operated in a much wider geographic market, which included as many as seven hospitals in five towns, including Manchester. One of the hospitals is located about 35 miles east of Manchester in Exeter, N.H.
Justice Department officials, who rarely comment on antitrust decisions, confirmed their reason for clearing the Manchester deal.
"We determined that the geographic market couldn't be limited to Manchester. By far and away that was the key issue," said Steven Sunshine, deputy assistant attorney general in the Justice Department's antitrust division.
Using patient origin information and extensive interviews with key payers in the state, the Justice Department determined that if the two Manchester hospitals used their alleged monopoly to unreasonably raise prices, patients and payers could go to other hospitals in the area, Mr. Sunshine said.
Mr. Sunshine declined to comment on a report circulating in antitrust circles that Justice Department agents in New York who investigated the merger recommended that the government challenge the deal, but the decision to challenge was overruled along the department's chain of command.
However, he did admit, "We collected facts to the very last day, and, as we got more information, the picture became clearer."
Mr. Sunshine said there were no political considerations in reaching the Manchester decision, emphasizing that the decision was made exclusively within the department's antitrust division. In December, executives of the Manchester hospitals pitched their story to first lady Hillary Rodham Clinton (Dec. 20-27, 1993, p. 34).
Financial Ventures Report, a Washington-based legal newsletter, has reported that an initial decision to challenge the deal was overturned at the last minute by Anne Bingaman, assistant attorney general of the Justice Department's antitrust division.
The Clinton administration has endorsed more lenient hospital antitrust policies, and since Ms. Bingaman took over last summer, the agency has issued new guidelines for healthcare providers and cleared the Manchester deal as well as the merger of Des Moines, Iowa's two largest hospitals.