Under a unique antitrust settlement, the state of Pennsylvania essentially has sold the new Susquehanna Regional Healthcare Alliance a near monopoly over acute-care services in Lycoming County, Pa., for $40 million.
That's how much the three-hospital system has promised to save during the first five years of operations in exchange for the state not pursuing an antitrust case against the providers.
What makes the settlement unique isn't the fact that the hospitals promised to save money. It's the fact that the promise was codified as part of a settlement filed in federal court.
"I call it the `put up or shut up' provision," said Jeff Miles, an antitrust attorney with the Washington office of Ober, Kaler, Grimes & Shriver. He represented the hospitals in the case.
Mr. Miles said the provision addresses the concern that some hospitals abandon their plans for big savings, which were offered in exchange for antitrust clearance, as soon as law enforcement officials turn their backs.
The hospitals involved are 260-bed Williamsport (Pa.) Hospital and Medical Center, 180-bed Divine Providence Hospital in Williamsport and 51-bed Muncy (Pa.) Valley Hospital.
Providence Health System is the parent corporation for both Divine Providence and Muncy Valley. North Central Pennsylvania Health System is the parent of Williamsport Hospital.
Under the hospitals' affiliation plan announced last September, the two parent corporations would form a new not-for-profit corporation called the Susquehanna Regional Healthcare Alliance. Although the parents and their respective hospitals would retain their own assets, the alliance through a common governing board would control all three hospitals, and they would compete with other hospitals as one organization.
The hospitals said they pursued the alliance to better coordinate healthcare delivery in the market, reduce costs and improve quality. A study by outside consultants said the consolidation would generate at least $40 million in economic efficiencies over five years. The savings would come from the consolidation of services, bed and staff reductions, and the avoidance of planned capital expenditures.
"The alliance will provide us with the opportunity to consolidate duplicate services between our healthcare systems and focus our attention on delivering a single comprehensive continuum of healthcare to the many communities we serve," said Kirby Smith, executive vice president of Providence Health System and chief operating officer of the new alliance.
The alliance also would control 100% of the inpatient staffed beds in Williamsport, a city of 33,000 located about 90 miles north of Harrisburg, Pa. It also would control more than 90% of the staffed beds in Lycoming County, which has one other hospital, 52-bed Jersey Shore (Pa.) Hospital.
And, the three hospitals in the alliance already are profitable. Divine Providence and Muncy Valley combined earned about $3.2 million on total revenues of about $65 million, according to figures from HCIA, a Baltimore-based healthcare investment research firm. Williamsport Hospital, meanwhile, earned $2 million on total revenues of $73 million.
Recognizing the antitrust implications of the deal, the hospitals voluntarily notified the U.S. Justice Department of their plans last fall, and the department's antitrust division began an investigation, Mr. Miles said. But federal investigators deferred to the Pennsylvania attorney general's office, which later became interested in the case.
The hospitals and the state worked out a deal, and last month, the state simultaneously filed an antitrust complaint and settlement with the U.S. District Court in Harrisburg.
In the complaint, the state said the transaction would violate Section 7 of the Clayton Act, which bars acquisitions that may reduce competition.
"Increased concentration will enhance the ability of the merged entities to increase prices and decrease quality of service with little fear that such increase in prices and decrease in quality of service will be defeated by fringe competitors," the state said in the complaint.
To safeguard the community's interest, the state placed a number of conditions on the new alliance.
Most noteworthy, the settlement requires the alliance to achieve at least $40 million in "net cost savings" by June 30, 1999. And, at least 60% of the savings in the first year and at least 80% of the savings in each of the following four years must be passed along to consumers or payers. The savings would be passed to consumers through no-cost or low-cost healthcare services. Savings to payers would come from lower prices or limits on price hikes.
If the alliance doesn't save at least $40 million, it must pay the state the difference between $40 million and what was actually saved. The state would use the money to help fund community health programs.
The state also placed several other restrictions on the alliance:
The alliance can't enter into any contracts with managed-care plans or physicians that would bar the plans or physicians from contracting with other payers or providers.
The alliance can't employ more than 40% of the physicians in the county in certain specialties.
The settlement ensures that the alliance will not use its market power to "unfairly disadvantage its competitors," said state said.
That's fine, but the settlement limits the alliance's good behavior to Lycoming County, said Lou Ditzel, president of Jersey Shore Hospital, the county's fourth hospital. Jersey Shore is located on the far western edge of the county and draws its patients from a different geographic market.
He said he hopes the new alliance stays within its market and doesn't become "predatory."