Appealing to the nearly universal aversion to taxes, two Montana hospitals are trying a novel argument to gain support for their proposed merger.
The hospitals contend that the community is, in effect, paying a "two-hospital tax" by supporting extra administrative, clinical and supply costs. And they're comparing the tax with large local school levies that have been rejected by voters.
The hospitals made their pitch in an application filed Oct. 2 for a state "certificate of public advantage" that would exempt them from state antitrust laws and, in theory, from federal antitrust scrutiny as well.
The hospitals are 255-bed Montana Deaconess Medical Center and 139-bed Columbus Hospital. They're the only hospitals in Great Falls, Mont., so a merger would give them a monopoly on acute-care services in the city.
The Federal Trade Commission has been monitoring the deal, which prompted the hospitals to lobby for special state antitrust exemption legislation. The legislation, signed into law in May, extends antitrust protection to hospital mergers. The original law, passed in 1993, applied only to "collaborative ventures" among healthcare providers.
Montana providers can obtain certificates of public advantage exempting them from state antitrust laws if they can prove that the benefits of their deals outweigh any anti-competitive effects. The benefits include lowering costs or improving quality or access.
Providers that obtain such certificates, in theory also may be exempt from federal antitrust scrutiny under the so-called "state action immunity" doctrine. Under the doctrine, activities that are permitted by states and actively monitored by states are exempt from federal antitrust action.
In their exemption application filed with the Montana attorney general's office, the Great Falls hospitals said their merger would meet the new law's test, primarily by lowering the costs of acute-care services in the market.
Because of declining inpatient utilization, Great Falls doesn't need two hospitals, they argue. A merger could generate $10.7 million in annual savings through the elimination of duplicate administrative and clinical services, and supply and other purchases.
The hospitals tugged at the state's purse strings, labeling the $10.7 million an avoidable "two-hospital tax." That's 10 times the amount of recently rejected local school district levies.
"These costs amount to $332 a year for each and every household in Great Falls-more than three times the amount of the average onetime state income tax refund recently announced by Gov. (Marc) Racicot," the hospitals said.
"I don't think every household in Great Falls will be getting a check if the hospitals merge," said Paul Gorsuch, M.D., a local physician who opposes the merger. The hospitals haven't said they would rebate the savings to consumers.
"The end result of this merger will be higher prices and less efficiency," said the neurosurgeon, who's on staff at both hospitals. "I don't believe in benign monopolies."
In their application, the two not-for-profit hospitals also did their best to explain why, despite lower inpatient volume, they posted higher-than-usual profits last year, and why they won't use their monopoly to arbitrarily raise prices.
Montana Deaconess earned $8.2 million, posting a total profit margin of 8.3%. Columbus turned a $6.2 million profit, equal to a 10.4% total profit margin. In 1993, the total profit margin for hospitals nationally was 4.4%, according to the latest data from the American Hospital Association.
The hospitals said their profitability stems from lower utilization, which decreased their operating costs. The hospitals also acknowledged in their application to the state that they've simultaneously been implementing price increases, but they were "forced to.....in order to maintain the operating margins necessary to remain viable."
Gorsuch points to the results as evidence that at least in the past the two hospitals have not passed along savings to consumers through lower prices. Not only did they keep the cost savings, they also raised prices and increased profits, he said.
If they're allowed to merge, the hospitals have promised to freeze prices for a year and then limit them for the next five years to the general inflation rate.
They also told the state that the community board of the merged hospitals would guard against price gouging.
"The consolidated hospital will have no stockholders looking for dividends, no private owners looking for capital appreciation," they said. "It will be managed only by volunteers seeking to meet their families', their neighbors' and the community's healthcare needs."
The boards haven't exercised strong oversight in the past, Gorsuch said, and there's no reason to think they'll do so in the future.
"The CEOs control the hospitals because they control the information flow to the boards," said Gorsuch, who intends to testify at an as-yet-unscheduled public hearing on the hospitals' application.
A decision from the state on the application isn't expected until after Jan. 1, 1996.