In a major victory for the hospital industry against federal antitrust enforcement policies, the Federal Trade Commission has declined to intervene in a proposed merger that will give the two Montana hospitals involved a monopoly over acute-care services.
The key to the win was the hospitals' pursuit of a state antitrust exemption law that insulated them from federal antitrust scrutiny. Assuming the deal closes on July 1 as scheduled, the hospitals will become the first to consummate a merger under such a state law.
At least 18 other states have similar laws on the books. Under such laws, hospitals and other providers can obtain state antitrust clearance for transactions that promise to generate benefits for consumers, such as controlling costs or improving quality or access. They also must agree to certain restrictions on their business practices.
Obtaining state clearance, in theory, also can insulate providers from federal antitrust scrutiny under the so-called state action immunity doctrine. Under the doctrine, which has developed through case law, activities a state permits and then actively supervises or monitors are exempt from federal antitrust laws.
If the FTC, which had been monitoring the deal closely, had challenged the Montana transaction, the lawsuit could have become the first legal test of a state healthcare antitrust exemption law. The challenge never materialized and, consequently, the 20-month legal strategy pursued by the two hospitals could become a road map for other hospitals whose high market-share mergers may raise antitrust concerns.
"This was a long and cumbersome process," said Toby Singer, one of the hospitals' outside antitrust attorneys. "Whether others follow this approach isn't clear. It takes commitment and patience. You have to believe that it's the right thing to do."
The hospitals are 339-bed Montana Deaconess Medical Center and 145-bed Columbus Hospital. They're the only two acute-care facilities in Great Falls, Mont. The closest hospital to the pair is in Helena, Mont., about 90 miles south.
The two hospitals unveiled their proposed merger in November 1994 and were set to file their required pre-merger notification documents with the FTC in January 1995. But their plans quickly changed after the FTC and Justice Department challenged similar deals in three other two-hospital towns: Pueblo, Colo.; Port Huron, Mich.; and Dubuque, Iowa.
Instead of going to federal authorities, the Great Falls hospitals turned to the state Legislature for help.
In early 1995, with the help of the Montana Hospital Association, the two hospitals successfully lobbied for an expansion of Montana's 1993 healthcare antitrust exemption statute to include mergers (May 15, 1995, p. 8). The original state law applied only to unspecified collaborative ventures.
In October 1995, the hospitals applied for their state exemption, called a "certificate of public advantage." After a public hearing in January, the Montana attorney general's office approved the hospitals' COPA in March, with a number of strings attached.
The state agreement would limit hospital price increases by limiting their profit margin to 6%, and it would require the hospitals to generate at least $86 million in cost savings over the first 10 years of the merger.
After unsuccessfully trying to lift some of the price and savings restrictions, the hospitals signed the state agreement on April 30 (May 13, p. 14), and they finally filed their merger documents with the FTC early last month.
Laura Goldhahn-Konen, a spokeswoman for the two hospitals, said the FTC let pass a June 7 deadline for challenging the deal or launching a formal antitrust investigation.
"We were pleased to hear nothing, and we interpreted that as the go ahead," she said. "We are moving forward toward the July 1 completion of the merger."
The FTC doesn't comment on why it lets deals go through, but apparently the agency felt the state restrictions on the Great Falls hospitals were sufficient to pass the state action immunity test. The state agreement simply requires the hospitals to submit annual compliance reports. Earlier this year, two North Carolina hospitals obtained state antitrust clearance for their mergerlike partnership, but they agreed to far more extensive state monitoring requirements (Jan. 1, p. 6).
Attorney Singer declined comment on the state action immunity issue.
Meanwhile, when the hospitals complete their merger, they'll be under new leadership. Kirk Wilson, president and chief executive officer of Montana Deaconess, resigned effective June 17 after being left off the short list of candidates for the top spot at the merged hospitals, Goldhahn-Konen said.
"The CEO search committee is finalizing its work," she said. "There are four finalists."
Daniel Boatman, interim president and CEO at Columbus, didn't apply for the chief executive post at the merged Great Falls hospitals. Boatman, who had been the hospital's executive vice president and chief operating officer, temporarily assumed the hospital's top job after the Jan. 1, 1995, retirement of William Downer Jr.