A novel dance with federal and state antitrust regulators has delayed the merger of two hospitals in North Carolina and may signal a major change in federal antitrust enforcement policy that could make it tougher for hospitals to merge without restrictions.
After months of informal talks with both the North Carolina attorney general's office and the Federal Trade Commission, Moses Cone Health System and Wesley Long Community Hospital got the green light last month from the FTC to complete their proposed merger. The deal would link the only two nonfederal acute-care hospitals in Greensboro, N.C.
The FTC cleared the merger of federal antitrust issues with the apparent understanding that the not-for-profits would reach an antitrust settlement with the state of North Carolina.
While the FTC often coordinates its investigations with states, the Greensboro case may mark the first time the FTC has cleared a hospital merger after instructing the hospitals to cut a state deal to allay the feds' antitrust concerns.
If so, that means merging hospitals with market-share problems may not be able to bypass state officials by having their deals cleared by the feds.
At the federal level, the FTC and U.S. Justice Department historically have challenged hospital deals deemed anti-competitive or have cleared them with no regulatory restrictions. Antitrust agreements with states, on the other hand, typically have placed strict regulatory restrictions on merging hospitals.
The Greensboro hospitals have stepped up their negotiations with the state attorney general's office since the beginning of August and hope to reach an agreement within the next two weeks. They expect to complete the merger Oct. 1.
A spokesman for the North Carolina attorney general's office said the state had no comment on the merger.
It remains unclear whether the FTC will revisit the hospitals' plans if they don't sign a state consent agreement.
But hospital executives were left with the impression that a deal with the state would ensure a blessing by the feds.
"The FTC asked us to use a good-faith effort in reaching an agreement with the state," said Dennis Barry, president and chief executive officer of Moses Cone.
According to Tim Clontz, executive vice president for Wesley Long, the FTC said, without setting any parameters, that it wants the hospitals to work out an agreement with the state.
The arrangement appears unprecedented, antitrust observers said.
"If the FTC told the hospitals to negotiate a good-faith agreement with the state and if they didn't, they'd be back, that would be totally unprecedented in my experience," said Mark Horoschak, a former director of the FTC's healthcare antitrust division and now a partner with Womble Carlyle Sandridge & Rice in Charlotte, N.C. "For the FTC to encourage good-faith negotiations seems like a superfluous request. The state must ultimately determine whether it wants to challenge the deal."
FTC officials said an agreement with the state was suggested by the hospitals as part of their argument for federal clearance, not something the federal agency suggested.
"They informed us that they were making a good-faith effort to work out an agreement with the state," said Robert Leibenluft, head of the FTC's healthcare antitrust division. "We told them that was good for us to know and that it was part of the mix of what we took into consideration."
Leibenluft said the FTC did not condition its clearance of the Greensboro deal on any agreement between the hospitals and the state. He also said the FTC did not suggest that it would reopen its review of the deal if a deal with the state wasn't reached.
Since Moses Cone and Wesley Long announced their merger in September 1996, they have worked to insulate the deal from an antitrust challenge and to avoid cutting any deals with the state.
Moses Cone operates 547-bed Moses H. Cone Memorial Hospital and a 115-bed women's hospital. Wesley Long is a 199-bed acute-care hospital. A consolidation would give the merged hospitals an acute-care monopoly in Greensboro and control of nearly 70% of the staffed beds in Guilford County, N.C. The county's third acute-care facility is 329-bed High Point (N.C.) Regional Hospital.
Both of the merging hospitals are profitable. Moses H. Cone Memorial reported net income of $19.5 million on revenues of $243.8 million in fiscal 1995, according to the latest financial data from SMG Marketing Group, a healthcare marketing and information firm based in Chicago. Wesley Long reported net income of $6.6 million on revenues of $77.8 million for fiscal 1995.
At the time of the merger announcement, the hospitals argued that a consolidation would generate savings through elimination of duplicate services and increased purchasing power. They also pledged to create a community foundation with an initial contribution of $50 million from Wesley Long. And in April, they released results of a study saying their combined organization would save more than $53 million in capital equipment, labor and other routine expenses over its first five years of operation.
In another strategic decision, the hospitals decided to seek antitrust approval directly from the FTC rather than file for antitrust clearance from the state under North Carolina's antitrust exemption law.
The law, passed in 1993 and amended in 1995, extends antitrust immunity to healthcare providers that can prove that the consumer benefits of their business transaction outweigh any anticompetitive risks. Providers that file for and receive "certificates of public advantage" also must agree to restrictions on their behavior and state monitoring requirements to ensure the deals are living up to their promises.
In 1996 two other North Carolina hospitals became the first hospitals in the country to merge under a state antitrust exemption law. They were the only two private acute-care hospitals in Asheville, N.C.
In exchange for antitrust clearance, the Asheville hospitals agreed to limits on their revenues and profits and to restrictions on their business dealings with physicians and payers (Jan. 1, 1996, p. 6).
"After we looked at the situation and the market analysis, we didn't feel that the FTC would find the merger objectionable," said Moses Cone's Barry. "Given our options, we thought it would be better to receive clearance at the federal level."
In addition, Barry said the hospitals began providing information voluntarily to state and federal regulators months before formally filing for antitrust clearance in July.
"This has been a unique experience in that it has been a collaborative effort rather than adversarial and involved both state and federal regulators," Barry added.
In its current negotiations with the state, Barry said the Greensboro hospitals have not been asked to file for a COPA. If some form of an agreement cannot be reached, he said it's up to the FTC and the state whether they want to sue.
"We're optimistic that we can reach an agreement that gives the state the ability to monitor the deal from a public accountability perspective," Barry said.