A volley of love-of-community rhetoric often characterizes hospital consolidation announcements. In a recent merger, the board chairman of one of the hospitals said, "We will unify in the best interest of our community, and for the good of our fellow man."
But the true catalyst driving hospital consolidation is competition-or fear of competition.
In the "good of our fellow man" example, the official neglected to say that just several weeks earlier Columbia/HCA Healthcare Corp. cut a joint venture deal with the South Carolina hospitals' chief competitor (Jan. 1, p. 22).
Intense competition has manifested itself in a number of Southern markets, where historic Civil War battles took place. Like Union and Confederate regiments lining up against each other, once-competing hospitals have fallen in along ownership lines to form two competing systems: one for-profit, the other not-for-profit.
The trend has its roots in the South, where most for-profit hospitals operate. As the for-profit hospital sector grows, similar scenarios likely will play out across the country. Southern markets offer a glimpse of many hospital markets of the future, where systems with competing ideologies will do battle.
The key question is: Will two financially strong, philosophically opposed and intensely competitive systems do a better job of controlling costs and improving access than a dozen or more independently operating hospitals? Or, as some payers fear, will the two systems, knowing they face no other competition in the market, enjoy their market share and "shadow price" their way to a long and prosperous life?
Shadow pricing is the practice of offering goods or services at prices just below those of the competitor, which has an equal or better market share position. Rather than fostering price competition, the practice allows one to ride the other's coattails to high profits.
Collusion in such markets will be minimized because the competing systems have different ownership structures, argues economist William Lynk, senior vice president at Lexecon, a Chicago-based consulting company. Lynk worked for two hospitals in Joplin, Mo., that successfully defended their merger against an antitrust challenge from the Federal Trade Commission.
"Collusion requires a commonality of purpose, like two competing for-profit sellers that both want to maximize profits," he said. "There's a fundamental discrepancy when you have a for-profit and not-for-profit. By definition, they're not interested in the same thing."
Whereas the for-profit seller wants to maximize profits, the not-for-profit seller has more complicated objectives, such as meeting religious, community or government obligations, Lynk said.
"For-profit hospitals and not-for-profit hospitals have such different agendas that even if they did get together, they wouldn't have much to talk about," Lynk said.
Consequently, in markets where the hospitals have divided themselves into competing for-profit and not-for-profit systems, an intense rivalry should develop that, in theory, will benefit consumers because it should control or even lower prices.
Not so fast, counters economist Monica Noether, vice president of the Boston-based consulting firm Charles River Associates. Noether recently testified on behalf of the U.S. Justice Department in the government's antitrust lawsuit against the proposed mergerlike partnership of the only two hospitals in Dubuque, Iowa. The government has appealed a federal district court decision in favor of the hospitals.
"I've never supported the theory that ownership matters that much," she said. "Not-for-profits face the same kind of competitive and anti-competitive pressures that for-profits do."
Like for-profits returning profits to their parent corporation or shareholders, many not-for-profits must turn over a portion of their earnings to their corporate offices or religious sponsors, said Noether, who worked for the FTC before going into private practice.
Despite the increased risk of collusion, most payers might prefer to deal with two strong, efficient provider networks rather than four weak, inefficient ones, Noether said. In the two-system scenario, payers may find it more cost efficient from a contract negotiation standpoint to deal with two networks rather than a host of competing providers, she said. And payers still would be able to play one system off the other for the best deal.
"Payers feel that having at least two competitors is important because it gives them the leverage to get a discount," Noether said. "When there's one system in a market, there's no credible threat (from a payer) to move its business elsewhere."
The following market profiles track the hospital migration in three cities toward competing for-profit and not-for-profit systems. The cities are Charleston, S.C.; Richmond, Va.; and New Orleans. Just two years ago, each city sported more than a half-dozen independently competing hospitals. Now, with the exception of one or two holdouts, each market has developed distinct systems along ownership lines.
It's too early in each market's evolution to determine whether the polarization lowered or controlled prices. But like Union and Confederate soldiers both claiming to be on the side of goodness and light, the battling hospital camps are both claiming to be acting in the best interest of consumers.