To avoid a federal antitrust challenge of their merger, the two largest hospitals in Lubbock, Texas, cut a secret deal with the Federal Trade Commission that likely will force the hospitals to relinquish control of some contractual ties with primary-care doctors.
On June 10, the FTC gave "early clearance" to the deal, which means the agency cleared the transaction of any antitrust problems within 30 days after the hospitals filed their required pre-merger notification documents.
But has learned that the agency investigated the transaction for nearly a year before reaching a behind-the-scenes settlement with the hospitals, allowing their deal to go through.
The merger will unite Lubbock Methodist Hospital System, including its flagship 669-bed Methodist Hospital, with 410-bed St. Mary of the Plains Hospital.
After the deal, which is expected to close this fall, the merged system will control two of the five acute-care hospitals in Lubbock and nearly 70% of the 1,558 staffed beds there.
The hospitals announced their merger in January 1996 and signed a definitive merger agreement in July 1996, hospital executives said. The FTC's investigation of the transaction began shortly after that, they said.
"(FTC officials) asked if we would consider a voluntary approach as opposed to an investigation that occurs after your Hart-Scott-Rodino filing," said Jerry Beane, a Dallas attorney that represented St. Mary's. "We did it before we filed papers instead of after."
Beane said the FTC first contacted the hospitals while they were filling out their pre-merger papers.
Under a tacit agreement with the FTC, the hospitals are now amending their July 1996 merger agreement to reflect the deal cut with the agency. All parties involved are quiet about specifics of what that settlement involves, but they confirmed the deal will affect the hospitals' contractual arrangements with primary-care physicians in the Lubbock market.
"The amendment met with the government's approval with regard to primary-care physicians," said Eddie Owens, a St. Mary's spokesman. "It took a whole lot longer than they ever imagined because the FTC got hung up on our contracts with primary-care physicians."
Whether the hospitals will have to dissolve or sell certain contracts remains unclear, although the agreement is likely to involve many of the 125 physicians that are part of St. Mary Medical Group. That group is affiliated with St. Mary of the Plains Hospital and includes mostly primary-care physicians.
The Methodist system is affiliated with Methodist Medical Group, which consists mostly of specialists.
The hospitals' dominance of the acute-care market in Lubbock wasn't a concern of FTC investigators, hospital executives said.
FTC officials denied they were circumventing standard FTC procedures with their handling of the Lubbock investigation. In this case, there's no public antitrust settlement between the FTC and the hospitals, and the transaction was recorded as receiving early antitrust clearance.
"There's no change in FTC enforcement policy," said John Wiegand, the lead FTC attorney investigating the Lubbock deal. "We closed the investigation because it would not result in the availability to raise prices. It's nothing at all unusual."
In a statement released after the FTC gave early antitrust clearance to the deal, the hospitals said, "Resolution of the antitrust investigation took longer than anticipated, but it gave hospital officials the opportunity to consider other merger questions in the meantime. Chief among these questions were those related to facility usage and human resources."