Turning conventional economic wisdom on its head, the only two hospitals in Great Falls, Mont., must choose between profits and market share in deciding whether to accept an antitrust settlement with the state of Montana.
Often times, market share and profits go hand in hand.
But, that's not the case in Great Falls, where highly profitable Montana Deaconess Medical Center and Columbus Hospital can gain an acute-care monopoly by limiting their combined total annual profit margin to 6%.
The 6% limit is the central requirement in the state's proposed antitrust settlement with the hospitals. The hospitals are seeking clearance for their merger under the state's healthcare antitrust exemption law.
If the deal is completed, the hospitals could become the first hospitals to complete a full-asset merger under a state antitrust exemption law.
Like similar laws across the country, Montana's 1993 statute allows providers to apply for a "certificate of public advantage" that exempts their transactions from state antitrust laws. Providers can obtain certificates if they can prove the consumer benefits stemming from their transactions outweigh any risk to competition.
The Great Falls hospitals unveiled their merger in November 1994. But, after learning that the Federal Trade Commission was tracking the deal, they successfully lobbied last year for an amendment to the 1993 state exemption statute that extends the law's protection to mergers. The original law covered collaborative ventures but didn't explicitly include mergers.
This, in theory, also would protect the hospitals from the FTC under the so-called "state action immunity" doctrine. Under the doctrine, activities that are permitted by states and actively supervised by states are exempt from federal antitrust scrutiny.
Two hospitals in North Carolina recently used the state's healthcare antitrust exemption law to obtain a monopoly in their market through a merger-like partnership and avoid a federal antitrust challenge (Jan. 1, p. 6).
The Great Falls hospitals filed their exemption application last Oct. 2, and the state attorney general's office held a public hearing on the application Jan. 24. On March 6, the state approved the hospitals' application with certain conditions, which the hospitals must agree to over the next 90 days.
"Our general reaction to the agreement is positive," said Bob McIntyre, chairman of the hospitals' formation committee. The 15-member committee will become the governing board of the merged hospitals if they follow through with the consolidation.
McIntyre said the boards of each hospital will meet March 19 for their first run-through of the agreement. At those meetings, they will set a date for a second set of meetings at which the two boards will decide whether to accept the state's terms, he said. That will occur in late March or early April before the first deadline contained in the proposed 72-page agreement.
The agreement includes three primary conditions the hospitals must meet to address cost, access and quality concerns raised by their consolidation.
Through a complicated formula, the agreement would limit annual price increases for patient-care services. The price limit would be derived from restricting cost increases to a specific inflation index and allowing the merged hospitals to raise prices to generate a total profit margin of no more than 6%.
The index to be used would be the all-hospitals component of the U.S. Labor Department's Producer Price Index. In 1995, that index rose 3.3%.
The 6% profit margin limit would be a windfall for many hospitals, but it represents a big drop for the Great Falls hospitals. According to documents in the case, Montana Deaconess posted a 13% operating profit margin last year, while Columbus enjoyed a 7.8% operating margin.
In fact, the state attorney general discredited a Lewin-VHI report introduced by the hospitals that projected both hospitals would start losing money within five years because the market can't support two hospitals. The state also criticized an Arthur Andersen report for overestimating the amount of economic savings to be generated by a merger of the two hospitals.
To address access concerns, the hospitals must agree to donate a small office building to the local Planned Parenthood organization. The building's rental revenues will help Planned Parenthood maintain abortion services in the area. The hospitals' merger deal requires Montana Deaconess to stop performing abortions. Columbus is a Roman Catholic facility, and the merged hospitals would be owned by Sisters of Providence in Spokane, Wash.
On the monitoring front, the state said it "will monitor and supervise the activities of the (merged hospital) on a continuing basis." But the agreement only requires the hospitals to submit annual compliance reports.
Whether annual reports are enough to satisfy the "active supervision" requirement of the state action immunity doctrine is a legal issue, McIntyre said, and the hospitals' attorneys are reviewing it. Even with state approval, the FTC could challenge the merger.