A federal judge argued that community board members will keep not-for-profit hospitals from arbitrarily raising prices when he refused to block a hospital merger in Joplin, Mo.
If upheld by an appellate court, the opinion could represent a significant victory for not-for-profit hospitals. Historically, courts have rejected arguments that not-for-profit status and community leadership will guard against anti-competitive behavior.
U.S. District Judge Dean Whipple in Kansas City, Mo., issued a 32-page opinion June 9 on the merger of 167-bed Freeman Hospital and 96-bed Oak Hill Hospital.
"Arguably, a private nonprofit hospital that is sponsored and directed by the local community is similar to a consumer cooperative," he wrote. "It is highly unlikely that a cooperative will arbitrarily raise prices merely to earn higher profits because the owners of such an organization are also its consumers.
"Similarly, if a nonprofit organization is controlled by the very people who depend on it for service, there is no rational economic incentive for such an organization to raise its prices to the monopoly level even if it has the power to do so."
Eight of the 18 board members of Freeman and Oak Hill own local businesses or are employed by one, while four are retired owners or employees. Five board members are physicians. The remaining member is Freeman President Kelby Krabbenhoft.
Whipple argued that business representatives won't raise prices because, in the end, they'll pay them. Physicians, he wrote, also will try to keep prices low so they don't drive patients to other hospitals and reduce their own patient volume.
His opinion departs sharply from other courts'. In 1991, for example, the 11th U.S. Circuit Court of Appeals in Atlanta called a similar argument by two hospitals "self-serving" (Aug. 5, 1991, p. 3). It ruled that a preliminary injunction should have been issued against a proposed hospital acquisition in Augusta, Ga. The hospitals later called off their deal.
Freeman and Oak Hill merged March 1 after Whipple refused to issue a temporary restraining order against the deal (March 6, p. 8). The 8th U.S. Circuit Court of Appeals in St. Louis, however, told Whipple to hold a hearing on the Federal Trade Commission's request for a preliminary injunction. The appeals court must review his opinion before it becomes final. No action had been taken as of deadline.
Additionally, an administrative hearing hasn't yet been scheduled in the FTC proceedings on its antitrust complaint.
Freeman and Oak Hill are two of three hospitals in Joplin, a city of 42,000 in southwest Missouri. Freeman also owns 67-bed Freeman Neosho (Mo.) Hospital, located about 25 miles southeast of Joplin.
Oak Hill lost $606,000 on operating revenues of $32 million in its fiscal year ended May 31, 1994. The Freeman hospitals, however, are profitable, earning $3.6 million on operating revenues of $74.2 million in their fiscal year ended March 31, 1994.
In ruling that the FTC didn't demonstrate that the merger would hurt competition, Whipple accepted the hospital's definition of their service market as 13 counties in Missouri, Kansas and Oklahoma. Fourteen other hospitals compete in that market. He said the FTC arbitrarily defined its preferred market as 44 ZIP codes in five counties to exclude potential competitors.
Whipple also argued that the FTC isn't likely to prove the merger is anti-competitive in its administrative hearings because third-party payers and other customers haven't objected to it. One payer stated in an affidavit that animosity between Freeman and St. John's Regional Medical Center, Joplin's third hospital, had increased competition.
All three Joplin hospitals once discussed collaboration. Talks collapsed over a dispute about the provision of obstetrics services, and each side accused the other of breaching faith (March 28, 1994, p. 15). The FTC had argued that the talks were evidence of prior anti-competitive behavior.