Two North Carolina hospitals may have gotten far more than they bargained for when they sought state protection from federal antitrust investigators.
In exchange for immunizing their merger-like partnership from state antitrust action, the state unexpectedly slapped the hospitals with an extensive set of regulatory requirements and conditions that they must meet, including limits on the hospitals' profitability.
That puts Memorial Mission Hospital and St. Joseph's Hospital, both of Asheville, N.C., in an awkward position: They voluntarily pursued the deal with the state, arguing that the transaction's benefits outweighed any anti-competitive risks and were worth being monitored by the state. Consequently, it would be difficult to back out of the deal despite the onerous conditions state regulators placed upon them.
In a public statement, the hospitals put a positive spin on the proposed agreement, calling it "a major and historic step." But they neglected to say whether they intended to sign the agreement, and they declined to release a copy of the proposed agreement, which is a publicly available document.
MODERN HEALTHCARE subsequently obtained a copy of the 43-page proposed agreement, called a Certificate of Public Advantage, or COPA.
The North Carolina attorney general's office granted the hospitals' COPA application on Dec. 6, and the hospitals had 15 business days, or until Dec. 29, to sign the agreement.
At press time, the executives of the two hospitals had yet to ink the deal and, in fact, said they were not aware of a specific deadline to sign the agreement. They said they've asked the state to clarify portions of the agreement.
"We have some concerns, and we've asked for clarification," said J. Lewis Daniels, St. Joseph's president and chief executive officer. "Until we get a response, I don't want to speculate on acceptance."
The conditions are many. Profits and revenues would be limited, and the hospitals must generate their promised $74.2 million in economic savings over five years or pay the difference to the state. Also, their business dealings with physicians and payers would be restricted (See chart).
The state would monitor the hospitals' progress in meeting its goals through quarterly and annual reports and state inspection of hospital records. The agreement also would give the state the authority to convene a special meeting of the hospitals' new board to address any concerns it has.
John McArthur, chief counsel in the state attorney general's office, acknowledged that the conditions are more extensive than those outlined in the 1993 exemption statute.
"This is the first one we've done," he said. "And we felt like we needed to get a good information base."
Robert Burgin, president and CEO of Memorial Mission, wouldn't say whether the requirements were more than the hospitals anticipated.
"We didn't know what to expect. It's their document, not ours," he said.
Daniels added: "Just like anyone else, less regulation is preferred to more regulation."
A new report from Washington state concludes that the cost of regulating providers under that state's antitrust exemption law may not be worth the benefits derived from the law (See story, p. 12).
The Asheville executives wouldn't comment on whether they might take a pass on the state deal. They insisted that there "absolutely" was still enough flexibility under the state agreement to manage the hospitals effectively.
The proposed state agreement comes nearly two years after the two hospitals announced their proposed partnership. Although the hospitals would maintain separate assets and ownership, they would be governed by a common 17-member board, which would control all of their operations.
The hospitals are the only acute-care facilities in Asheville, and the deal has been under antitrust review by the Justice Department since July 1994.
To insulate them from federal antitrust scrutiny, the hospitals successfully lobbied this year for an expansion of the 1993 statute that gave healthcare joint ventures antitrust immunity if they provided specific benefits, such as lowering costs or improving quality. The amended law extended the same protection to hospital mergers and partnerships (June 12, 1995, p. 20).
In theory, the amended state law would protect the hospitals from the Justice Department under the "state action immunity" doctrine. Under that doctrine, activities permitted and monitored by a state are exempt from federal scrutiny.