The merger plans of two South Carolina hospitals have sparked the nation's first challenge to a deal approved under a state antitrust exemption law.
The plans also are leading to the state Supreme Court's first review of the use of a controversial South Carolina law that prohibits joint ventures between state agencies and private corporations.
The proposed partners are the private 375-bed Baptist Medical Center and the county-owned 553-bed Richland Memorial Hospital, the two largest acute-care hospitals in Columbia, S.C.
In May, they received a "certificate of public advantage" from the state's Department of Health and Environmental Control that gives them the green light to form a mergerlike partnership.
The hospitals have applied for antitrust clearance from the Federal Trade Commission, as required, but the COPA effectively shields the deal from federal scrutiny. A federal doctrine provides that activities permitted and monitored by a state are exempt from federal review.
Two other deals between hospitals in North Carolina and Montana earlier were completed using similar state laws and faced no direct opposition from the feds.
But on May 23, the last day of a 15-day waiting period following the issuance of the COPA, three Richland County residents petitioned for administrative review of the South Carolina department's decison.
The petition was filed by Julius Murray, a retired Air Force sergeant and former state legislator; George Martin, a retired school administrator; and Charles Brooks, who recently withdrew as a petitioner following a stroke.
In their appeal, the petitioners expressed concerns that county residents would not benefit from a combination of two of Columbia's three acute-care hospitals and their physician practices. The 211-bed Providence Hospital is the only other nonfederal acute-care hospital serving the city.
The petitioners further complained that the new organization's assets, governance structure and executive compensation packages lacked sufficient oversight.
"DHEC ignored some substantial issues in deciding to grant the antitrust exemption," said Jay Bender, an attorney for the petitioners. "Our ultimate goal is to find a way to protect public assets. The COPA is nothing more than a device to circumvent antitrust laws."
The petition is now before an administrative law judge who reviews the decisions of state agencies. From the administrative law court, the case could be appealed to the governing board of the department, then to the circuit court, and finally to the state Supreme Court.
Bender said his clients would like to see the end of state antitrust exemption laws or at least some constraints placed on the Baptist-Richland deal.
"We are going to keep going until the case runs its course or an agreement is reached," Bender said. "The difficulty in reaching any agreement is that the hospitals have an attitude of Manifest Destiny and we're the Indians on the plains."
In response, the department filed a motion to dismiss the petition on the grounds that the petitioners are not directly affected by the deal. A hearing on the issue is set for later this month.
Leon Frishman, director of the department's bureau of health facilities and services development, said "affected persons" are healthcare providers or purchasers or others with an economic interest in the outcome of the deal.
Frishman, who oversaw the COPA process, said the petitioners' concerns about anti-competitive issues already were considered by the department in its review. He said concerns related to issues such as executive compensation involved details not appropriate for the COPA process, which looks at the larger issue of whether the benefits of a deal outweigh its disadvantages.
Bender said he plans to argue that the petitioners are affected because they are healthcare consumers.
The hospitals, meanwhile, are proceeding with their merger plans. Judy Cotchett Smith, a Richland spokeswoman, said they regard the appeal as "a delaying and a nuisance tactic rather than a serious threat."
At the same time, the state Supreme Court is reviewing the deal as a result of a "friendly" lawsuit filed by Edmund Taylor, a retired private physician who served on both hospitals' medical staffs.
The case was argued before the state Supreme Court last month and focused on whether the deal violates a provision in the state constitution that prohibits public and private organizations from combining their assets.
Smith said the hospitals want the issue decided now so a competitor or potential partner can't use it to threaten the alliance later. "We want to challenge and resolve the issue early before any assets are at risk and we have to undo the merger," Smith said.
The same provision could affect a pending deal in Charleston, S.C., as well. A proposed lease arrangement between the 532-bed Medical University of South Carolina and Nashville-based Columbia/HCA Healthcare Corp. has been held up by similar court challenges brought by local competitors.
Smith said Richland is confident "there is only a 5% chance that the court wouldn't rule in our favor." She said although Richland is public, it isn't dependent on public assets. It has received $200,000 or less from the county since 1987 and last year picked up a $20 million charity-care tab on its own, she said. The facility continues to receive Medicaid and Medicare funding, she said.
Going forward, Smith said, the alliance has agreed to pay the county $3.7 million for the life of Richland's lease, for the county's portion of a tax directed to the state Medicaid program and for the remaining debt on bonds issued by the county in the late 1980s to build a cancer center.
The state Supreme Court's decision is expected later this month or in September. Smith said the hospitals plan to complete their merger this fall.