A key study used to defend the controversial merger of two Grand Rapids, Mich., hospitals is under heavy attack by economists.
The study asserts that, unlike for-profit hospitals, not-for-profits don't raise prices when they gain control of a market. Cited in federal court in the Grand Rapids case, the study also was used in testimony before Congress last month as advocates of the not-for-profit hospital sector argued for different treatment of not-for-profits under federal antitrust law (Sept. 29, p. 8).
Three unpublished papers dispute the conclusions of William Lynk, senior economist at the Chicago-based economic consulting firm Lexecon. Lynk's research and expert testimony on behalf of the Grand Rapids hospitals helped persuade a federal judge to approve their merger last year.
A University of Chicago professor who edited Lynk's pioneering article on not-for-profit hospital pricing is a principal at the same consulting firm as Lynk. The article appeared in the October 1995 issue of the Journal of Law and Economics, published by the University of Chicago Press.
Editors of the journal could not be reached last week. However, University of Chicago Law School Dean Douglas Baird, who appoints the editors, said he does not believe there was a conflict of interest.
Under political pressure and after losing two rounds in court, the FTC dropped its legal challenge of the merger last month (See story, p. 14).
Lynk's testimony was a key factor in the hospitals' defense that as not-for-profits they would act in the community's best interest and not gouge consumers, despite controlling as much as 70% of inpatient services in Michigan's second-largest city.
In court, Lynk testified that not-for-profit hospitals don't raise prices when they accumulate market power but in fact charge less. His conclusions were based in part on his study of 1989 prices charged by California hospitals. The study was documented in the journal article.
U.S. District Judge David McKeague quoted Lynk's article in his September 1996 opinion. The opinion cites Lynk's findings numerous times and called them "undisputed."
Robert Leibenluft, head of the FTC's healthcare antitrust division, said Lynk's published work "gave the judge something to hang his hat on.
"Without it, it would have been harder for the judge to come to the same conclusion," Leibenluft said.
The hospitals' lead attorney, William Kopit, said the hospitals wouldn't have won the case without Lynk, but he downplayed the significance of the journal article, saying Lynk's review of pricing data from two Michigan health plans was more important to the judge.
Several economists conducting research on the impact of healthcare mergers on pricing found fault with Lynk's methodologies.
David Dranove, chairman of the department of management and strategy at Northwestern University's Kellogg Graduate School of Management, was asked to review Lynk's article anonymously before it was published.
Dranove said in an interview that he found it "seriously flawed" and expressed his reservations in a report to the editor who sent him the article, Dennis Carlton. Dranove said a revised version was never returned to him for comments, which is unusual for academic journals.
"I was very surprised when I saw it appear in print," Dranove said.
Carlton is a professor at the University of Chicago Graduate School of Business and executive vice president of Lexecon. He did not return calls last week, and other journal editors familiar with the article could not be reached.
Baird said normally no single editor determines what is published and multiple anonymous reviewers are used.
"If being a colleague of someone meant you couldn't edit an article they wrote, no one could publish in the Journal of Law and Economics," Baird said.
Leibenluft said he didn't know that a Lexecon executive had edited Lynk's article. He said the issue might have been raised if the case had proceeded to an administrative hearing.
The hospitals said they spent about $4 million to defend their merger; the amount paid to Lexecon could not be determined last week. Lynk said Lexecon charges $250 to $300 per hour for his consulting services.
Recently Dranove re-evaluated Lynk's research at the FTC's request, using data from both 1989 and 1994 and attempting to control for factors such as quality of care and severity of illness. His conclusion was the opposite of Lynk's: not-for-profit mergers lead to higher prices, not lower ones.
Likewise, economists at the FTC and at Rand Corp., a Santa Monica, Calif.-based research firm, have submitted their own articles that dispute Lynk's findings.
The Rand researchers studied 10 years of California hospital pricing data and found a "clear pattern" of not-for-profit hospitals elevating prices, just like for-profits.
"As time goes on, they are more likely to raise prices in markets where they obtain market power," said Glenn Melnick, a healthcare finance professor at the University of Southern California and resident consultant at Rand.
He said not-for-profits' community service mission "gives them all the more reason to want to raise prices for patients who can afford to pay."
Lynk said he's seen only an early draft of the Rand study and acknowledged that it may call into question his finding that not-for-profit hospital prices decrease when market concentration increases.
But Lynk said it's no surprise that other researchers are exploring the issue and coming to different conclusions.
"It's always possible with an actual real-world economic study to identify factors that may have been at work but weren't necessarily (addressed) in the study," he said.
At the time of the Grand Rapids trial, there was no published data to contradict Lynk's study. The FTC expects that won't be the case next time around.