A much-heralded "hospital without walls" concept that allowed two New York hospitals to coordinate services to cut costs and help their community was nothing more than an elaborate price-fixing and market allocation scam, according to the state of New York.
The case could become a national legal test of hospital partnerships that stop just short of a full-asset merger.
New York Attorney General Dennis Vacco filed suit against the two hospitals last week in U.S. District Court in Manhattan, charging them with violating various state and federal antitrust laws, including Section 1 of the Sherman Act. That law bars conspiracies that unreasonably restrain trade.
The hospitals are 317-bed Saint Francis and 257-bed Vassar Brothers, the only acute-care facilities in Poughkeepsie, N.Y.
The facilities claim they have a perfect defense: They say both the state of New York and the U.S. Justice Department previously cleared the hospitals of any antitrust problems and consider them merged facilities.
Under federal and state antitrust laws, merged companies are considered a single economic unit incapable of conspiring with itself.
The court will decide whether hospital joint operating agreements have the same legal standing as full-asset mergers or whether they represent shell companies through which competing hospitals can engage in anti-competitive behavior.
In such arrangements, which have become commonplace, two or more hospitals form a joint operating company to run their facilities as if they were merged. However, the participants keep their historic ownership status and assets independent.
The Poughkeepsie hospitals don't deny that they use their 6-year-old joint operating company, Mid-Hudson Health, to jointly set prices.
"We are setting the prices together, that's true," said Ronald Mullahey, president and chief executive officer of Vassar Brothers. "We look for one Mid-Hudson price."
However, Mullahey added that the hospitals did not break any laws, because federal and state governments approved the integration.
Initially, the two hospitals used Mid-Hudson to coordinate a handful of specific clinical services. But those functions subsequently expanded to include planning, budgeting and pursuing service contracts, and the hospitals sought federal antitrust clearance as de facto merger partners.
The Poughkeepsie hospitals were among the first in the nation to enter a joint operating agreement. At that time, industry pundits praised the hospital-without-walls concept as a way of uniting mixed-ownership hospitals to cut costs by eliminating duplicative services (March 7, 1994, p. 24).
After a five-month investigation, the Justice Department cleared the hospitals' proposed mergerlike partnership in May 1995. The New York health department followed suit in December 1995, the hospitals said.
"We consider ourselves merged," Mullahey said.
But in its lawsuit the New York attorney general's office said the hospitals didn't disclose their intent to "merge" in their original certificate-of-need application to the health department in 1992 and didn't amend their CON approval to expand Mid-Hudson to include other activity.
"Everything that we were doing and everything that we were contemplating, including fiscal and clinical integration, was all laid out," Mullahey said. "None of this was being hidden."
The state says Saint Francis and Vassar Brothers have legal clearance to jointly operate only MRI, cardiac catheterization and lithotripsy services. It says the hospitals' subsequent agreement not to compete on other services represents an illegal allocation of a market between competitors.
The state also says the hospitals have used their joint operating company, now controlled by a 23-member board, to fix prices illegally.
Starting in 1996, the hospitals used the company to refuse to negotiate individually with payers, forcing them to go through Mid-Hudson, the state said. Not only have the hospitals refused to negotiate with payers, but they've demanded higher prices for their services, according to the state.
"They have insisted to some managed-care companies that they be paid full charges or at least inpatient rates with a small discount," according to the complaint. "The defendants are attempting to exact from third-party purchasers inpatient rates substantially higher than those they could obtain in a competitive negotiation."
The complaint identified Mohawk Valley Physician's Health Plan in Schenectady, N.Y., as one payer that expressed concern to the state health department.
Plan executives declined to comment on the state's lawsuit against the Poughkeepsie hospitals, but they confirmed that the plan does have contracts with both hospitals through Mid-Hudson.
Mohawk is no stranger to antitrust allegations and the federal court system. In 1988 a group of radiologists sued the plan in federal court, accusing it of conspiring to restrain their trade by awarding an exclusive contract for radiology services to another group of physicians. A federal judge dismissed the case a year later.
Chris McKenna, a spokesman for the attorney general, confirmed that the attorney general's office launched an investigation several months ago after receiving complaints from some HMOs that they were "concerned about the practicing policies of the hospitals." McKenna declined to identify the HMOs.
The state wants a court order barring the Poughkeepsie hospitals from jointly setting prices or allocating services not covered under their original CON approval. It also wants at least $1 million in civil damages. The hospitals have 20 days to respond to the suit.
The case also is significant nationally because it's believed to be the first time a state has challenged the actions of merged hospitals that were given the green light from the feds.
Since the hospital merger and acquisition boom started in 1992, the feds have challenged only a handful of hospital deals, routinely clearing dozens of high-market-share and monopoly hospital mergers.
Hospitals have successfully argued to the Justice Department and the Federal Trade Commission -- and to federal judges who have reviewed such deals -- that the benefits of their consolidations to consumers far outweigh any anti-competitive risks. Not-for-profit hospitals in particular have argued that their community-based boards would prevent them from exploiting their market power.
Both hospitals in Poughkeepsie are not-for-profits.
Saint Francis had net profits of $2 million on total revenues of $87.2 million in 1995, according to American Hospital Directory, a Louisville, Ky.-based healthcare information company. Vassar Brothers had net profits of $3.7 million on total revenues of $83.9 million for the same period, the directory said.
A similar partnership between three hospitals about 20 miles north of Poughkeepsie has sparked an antitrust probe by the FTC (See story, p. 24).