A precedent-setting antitrust case challenging the merger of two dominant Long Island hospital systems is in the hands of a judge who served on the board of a nearby hospital.
A New York native, U.S. District Judge Arthur Spatt was on the board at 429-bed South Nassau Communities Hospital, Oceanside, N.Y., for 13 years before resigning in January.
Having a home-town judge could bode well for Long Island Jewish Medical Center, New Hyde Park, N.Y., and North Shore Health System, Manhasset, N.Y., as they try to fend off the U.S. Justice Department's lawsuit against them.
In two other notable hospital antitrust cases, merging facilities in Joplin, Mo., and Dubuque, Iowa, garnered favorable rulings from federal judges loyal to their locales (Dec. 11, 1995, p. 14). In the Dubuque case, for example, the judge was a native who had spent his entire legal career in Iowa and was born at one of the hospitals involved in the case.
Spatt, 71, has deep roots in the New York City area. According to published biographies of the jurist, Spatt was born in Brooklyn and studied at Ohio State University before graduating from Brooklyn Law School in 1949.
After that, Spatt spent more than 28 years working in private practice in New York City, before climbing the judicial ladder. He was appointed to the federal bench in New York by President Bush in 1989.
What Spatt's local ties will mean for Long Island Jewish and North Shore remains to be seen.
Lawyers for the government and the hospitals are expected to wrap up their cases this week in a hearing before Spatt in U.S. District Court in Uniondale, N.Y., on the Justice Department's request for a preliminary injunction against the proposed merger. The hospitals don't expect a decision before next month.
They wound up in Spatt's courtroom because the Justice Department sued in June to stop the merger of the two systems, which collectively operate 12 hospitals (June 16, p. 2).
The government charged that the two want to join to keep managed-care plans and others from forcing them to lower their prices. Combining the two systems would create a healthcare network with $2.5 billion in annual revenues.
The combined system would compete against Spatt's former hospital, according to the testimony of system executives.
The lawsuit is noteworthy because the government for the first time is trying to draw competitive boundaries in a crowded urban market rather than a more isolated market where competitive boundaries are more easily defined.
The start of the hearing last week in Spatt's Long Island courtroom had all the makings of a grand judicial event. Blue suits crowded the courtroom, and both sides wheeled in dozens of boxes of paperwork.
On their side, the hospitals have an army of high-powered attorneys, including James Rill, former assistant attorney general in the Justice Department's antitrust division. Rill wasn't spotted in court during the first two days of the hearing.
A half-dozen other lawyers crowded around the defense table, with many more sitting in the audience. Leading the defense were William Bradford Reynolds of Collier, Shannon, Rill & Scott in Washington and Anthony D'Auria of Winston & Strawn in New York City.
The Justice Department had four attorneys at the table, led by Steven Kramer and Mark Botti, and others seated behind them.
The mood of the hospital officials in court was light, although this meeting with the government was something they had hoped to avoid.
The case centers around where product and geographic markets should be drawn.
The hospitals, not surprisingly, are arguing that their merger wouldn't be anti-competitive because they compete in a wide geographic market in which inpatient acute-care and tertiary services are provided at 42 other hospitals from Manhattan to Queens, Nassau and Suffolk counties.
One of the hospitals often brought up in court was 518-bed Winthrop-University Hospital in Mineola, N.Y. Last year, Winthrop joined with South Nassau, where Spatt served as a board member, to form a new parent company, although it didn't involve a merger of assets.
The government, meanwhile, is arguing that the hospital systems compete in a much smaller market, contending that Long Island Jewish and North Shore University Hospital at Manhasset are the only relevant hospitals in a product market limited to Queens and Nassau counties.
The government argues that those hospitals are the only ones capable of anchoring managed-care plans because other facilities don't provide the same level of service or are simply too far away.
On its 48-acre campus, Long Island Jewish operates three facilities under a single license: a main acute-care and tertiary facility, a children's hospital and a psychiatric hospital.
Although a merger would combine the two systems, the attention in court is focused on 705-bed North Shore University Hospital at Manhasset, the largest of North Shore's nine hospitals, which is about two miles from Long Island Jewish.
Unless competition remains between the two, the government says, prices will inevitably increase in New York's newly deregulated hospital market. That means insurers would be forced to accept whatever prices a merged organization charged to keep the pre-eminent hospitals in their networks or risk losing enrollees.
But the hospitals' attorneys have argued that the restrictive "anchor-hospital" theory of the government doesn't exist, and that the government is ignoring precedent set in other antitrust cases by employing the theory.
"The government has been searching for a candidate to try it out on," said Reynolds, a hospital attorney, in his opening statements last week. "This merger raises no antitrust concerns."
Long Island Jewish and North Shore are touting the merger as a way for them to survive in today's healthcare market.
According to hospital officials, Long Island Jewish earned $8.7 million on
$557 million in total revenues in 1996. The North Shore system lost $1 million on total revenues of $1.6 billion that year.
They contend raising prices isn't an issue. Earlier this month, the hospitals signed an agreement with New York's attorney general, pledging to freeze rates at current levels for two years if the deal is consummated. The attorney general has given a thumbs-up to the proposed merger.
But that's not good enough for the government. In a prepared statement, Joel Klein, assistant attorney general in charge of the Justice Department's antitrust division, said, "This agreement doesn't cure the competitive ills of this deal."
To prove its case, the government has lined up nine witnesses, including insurers, labor union representatives and a government economist.
The government's early witnesses painted the hospital systems as tough negotiators that need to remain competitive if insurers are to wrangle the best prices.
"I'm concerned that with the state of deregulation, the only governor left on the cost of healthcare is competition," said Connie Poirier, vice president of contracting at New York-based Empire Blue Cross Blue Shield. "I absolutely believe this (merger) eliminates competition."
Although Poirier delivered tough testimony for the government, the hospitals have a trump card that could make her testimony moot.
One of the dozen witnesses the hospitals' attorneys planned to call was Michael Stocker, M.D., Poirier's boss and Empire's chief executive officer. Stocker even wrote a letter in May to Klein at the Justice Department hailing the merger.
"We would like to go on record as saying that we are not concerned about the proposed merger and do not believe that the merger will impede our ability to develop a managed-care network or provide managed-care products to our customers," Stocker wrote.
But Robert Channing Wheeler, CEO of Northeast operations for Minneapolis-based United HealthCare Corp., testified that a combination of the two would be "very formidable."
The hospitals' attorneys tried to discount the concerns expressed by insurers about price increases.
During the first two days of the hearing, the hospitals' attorneys grilled the government's witnesses about their lack of surveys and other demographic proof.
The government's case also seemed to take a hit when Spatt refused to accept testimony from witnesses when they related what they heard from other people about the need to have Long Island Jewish and North Shore in managed-care plans.
That meant for quick questioning of one of the government's witnesses, Kirk Olsen, an employee services manager for United Parcel Service in New York. While Olsen talked about the attractiveness of having both Long Island Jewish and North Shore Manhasset in a hospital network, he admitted in cross examination that he had no direct responsibility for choosing what hospitals are included in the company's managed-care plans.
While Spatt let Olsen offer his opinion, the judge said, "The weight of the opinion is another matter in an antitrust case."
But what the government says it does have in its arsenal are internal documents from the hospital systems that betray the real motivation behind the merger.
The government says the proposed merger means there is no longer the threat of going "down the street" to the competition.