It's the $64,000 question for hospitals that want to form joint operating agreements: How much integration does it take to make a merger?
The state of New York's price-fixing lawsuit against the only two hospitals in Poughkeepsie could hold an answer that has eluded the industry since the JOA craze began in the early 1990s.
"There's so little case law and enforcement in this area," said David Ettinger, an antitrust attorney with Honigman, Miller, Schwartz & Cohn in Detroit. "There's a lot you can get away with, in theory."
JOAs vary in form and name but usually consist of two or more hospitals that create a "parent company" to jointly manage the facilities involved.
"JOAs have serious flaws in their exposure to antitrust attacks," said Thomas Campbell, an antitrust attorney at Gardner, Carton & Douglas in Chicago. "It's unclear how much (antitrust) protection they're able to rely on."
In the Poughkeepsie case filed last month, New York Attorney General Dennis Vacco charged that Saint Francis and Vassar Brothers hospitals formed a joint operating company without state approval and then used the JOA to cloak the hospitals' anti-competitive behavior. Vacco filed a lawsuit against the hospitals and their joint operating company, Mid-Hudson Health, in U.S. District Court in Manhattan Feb. 10 (Feb. 16, p. 3).
The hospitals argued they are a merged organization. They said the state approved the arrangement in 1992, and federal officials cleared it in 1995.
Under federal and state antitrust laws, a merged organization is a single economic unit incapable of conspiring with itself.
"The issue with JOAs has always been, what is necessary to achieve the functional equivalent of a merger?" said David Marx Jr., an antitrust attorney at McDermott, Will & Emery in Chicago. "Short of a true merger, what does it take?"
Sharing financial risk is almost a must, Marx said, adding that the ideal approach combines financial and clinical integration.
"If it's only financial integration, it's not that much different from a cartel," he said.
The state argues that the hospitals, which still retain their assets and separate governing boards, don't share enough financial risk to be considered a merged organization. Each bills and collects reimbursements for its own services, the suit charges.
The suit further alleges that the hospitals admitted they could not become more financially integrated due to the religious affiliation of Saint Francis and the requirements of the hospitals' respective bonding agencies.
Robert Wild, an attorney for Mid-Hudson, said the hospitals are "significantly" integrated both clinically and financially.
"It's an evolving process," he said. "It doesn't take place on the first day."
Wild said he will file a response to Vacco's complaint within the week.