Federal judges, not often regarded as a trusting breed, apparently have a lot of faith when it comes to not-for-profit hospital boards.
The recent decision approving the merger of two not-for-profit hospitals in Grand Rapids, Mich., is the latest example of a federal jurist relying on the conscience of hospital trustees to avoid antitrust violations.
In fact, the judge gave the green light to the merger of Blodgett Memorial Medical Center and Butterworth Health System in Grand Rapids despite finding that the government largely had made its case against the deal (Sept. 30, p. 4).
It marked the third time in the past 16 months that a federal district court judge has thrown out a federal antitrust challenge of a not-for-profit hospital merger. And in each case, it was faith in the hospitals' community-minded board and not-for-profit mission that appeared to sway the judge in favor of approving the deal.
It seems judges have become the consolidation-hungry hospital industry's best friends. Consequently, hospitals whose deals are threatened by federal antitrust investigators may be more tempted to take their chances in federal court rather than scrapping their plans under pressure from the Federal Trade Commission or U.S. Justice Department.
"It will induce hospitals to go forward with more risk-laden mergers," said Mark Horoschak, an antitrust attorney with Womble Carlyle Sandridge & Rice in Charlotte, N.C.
Horoschak, former head of the FTC's healthcare antitrust division, also said the ruling may spur some hospitals to risk federal antitrust intervention and bypass antitrust settlements with states. In several recent cases, merging hospitals have opted to accept regulatory restrictions on their business practices in exchange for state antitrust clearance.
In throwing out the FTC's challenge of the proposed merger of two of the three hospitals in Joplin, Mo., U.S. District Judge Dean Whipple compared the board of a not-for-profit hospital to a consumer cooperative whose members wouldn't raise prices they would have to pay (See graphic). The FTC subsequently dropped the case.
In the Dubuque, Iowa, hospital merger case, U.S. District Judge Michael Melloy, a Dubuque native who was born at one of the hospitals, said there was nothing inherent about a hospital's not-for-profit status that would guard against price gouging. But in throwing out the Justice Department's case against the merger-like partnership of Dubuque's only two hospitals, Melloy credited the hospitals' board with having only the best intentions in pursuing a consolidation.
The Justice Department has appealed the decision to the 8th U.S. Circuit Court of Appeals in St. Louis.
In the Grand Rapids case, U.S. District Judge David McKeague in Lansing, Mich., late last month said the FTC successfully made its case that the deal would violate Section 7 of the Clayton Act. The law bars mergers and acquisitions that may reduce competition or create a monopoly.
The judge also agreed with the government's position on the hospitals' product and service market. He agreed with the government that the hospitals' resulting high market share likely wouldn't be diluted by the entry of new hospital competitors into the market. And he withheld judgment on the hospitals' claims of economic efficiencies resulting from the merger, calling them (and the FTC's contradictory evidence) "self-serving assertions."
But in his 44-page opinion, McKeague said there is no evidence the merged hospitals would use their newly acquired market power to arbitrarily raise prices and engage in other anti-competitive behavior (Sept. 30, p. 4). The hospitals wouldn't try to maximize profits, Mc-Keague said, because they are not-for-profit institutions whose boards of community, consumer and business leaders, and their constituencies, pay the bills.
McKeague dismissed the FTC's argument that the boards of the two merging hospitals didn't stop their respective facilities from maximizing profits before the consolidation plan was drafted and that there was no reason to think they would do so after the merger.
"The fact that healthy profit margins were realized even as the hospitals maintained below-average prices indicates not exercise of market power, but responsible stewardship," McKeague wrote.
Weighing heavily in his decision, as indicated in the opinion, was statistical evidence introduced by the hospitals' economist that found a correlation between increased not-for-profit hospital market share and lower prices.
"That evidence was crucial in the case," said antitrust attorney John Cusack with Gardner, Carton & Douglas in Chicago. Cusack, who was not involved in the case, is a crusader against for-profit hospital chains. "It (the price evidence) rebutted the assumption that higher market share leads to higher prices and showed that not-for-profits are different."
McKeague also said the boards of the hospitals would be acting responsibly if, absent a merger, they proceeded with their costly capital expenditure plans. He said Blodgett almost certainly would go ahead with its plans to build a $187 million replacement hospital away from its confining downtown Grand Rapids location. Butterworth, in turn, would move ahead with its $74 million renovation.
"The medical arms race would thus continue, at great expense to defendants and ultimately to consumers," McKeague said. But rather than chastising the hospitals' boards, he said they would be acting appropriately out of their fiduciary responsibilities.
"These judges are judging their fellow community members who are in the same social strata," said one antitrust attorney who asked not to be identified. "It does result in judges being more inclined to give their peers the benefit of the doubt regarding their motivations and good intentions."
In his decision, McKeague mentioned four times that he took a personal tour of the two Grand Rapids hospitals on May 30-a development that clearly worked in the hospitals' favor.
"He asked for the tour. It's not that common for a judge to do that," said the hospitals' antitrust attorney, William Kopit of Epstein, Becker & Green in Washington. "It turned out to be a positive thing for us."
According to Kopit, the personal visit confirmed the hospitals' claims about the need to spend more than $250 million on capital improvements in order to compete successfully in the market and that a merger would allow them to avoid $100 million of that cost.
"The tour of both defendants' hospital facilities was instructive," McKeague wrote. "While both hospitals are presently well-maintained, there is no question that the physical limitations of the Blodgett site significantly hinder Blodgett's ability to continue to successfully compete with Butterworth."
Another federal judge, who resides in Grand Rapids, chaired a special commission that recommended Blodgett consider a merger rather than build a replacement hospital. Kopit said he "had no idea" whether that had any impact on the case (See story, this page).
"We did talk about the commission in our testimony," Kopit said. "It's what prompted the board chairmen to call each other."