In a legal opinion that will shock merging not-for-profit hospitals nationally, the state of New Hampshire said last week that the only two private hospitals in Manchester, N.H., violated state charity laws by consolidating certain services at one site.
Such consolidation strategies are common among merging hospitals as ways to trim operating expenses and to make good on promises to antitrust regulators that the economic benefits of their mergers far outweigh any anti-competitive risks.
But those service changes often don't play well at home, and executives at other emerging health systems would be wise to pay heed to last week's ruling in New Hampshire.
"When an organization begins talking to the community about an alliance or a merger, it would be prudent for them to truly explain what this is going to mean," said David Pearson, a professor of health management and policy at the University of New Hampshire in Durham.
Even the state hospital association gave the attorney general findings tacit approval by saying, in a statement, that the report "serves as a case study for hospital trustees to examine when considering options for their own facilities."
The Manchester hospitals are 262-bed Catholic Medical Center and 243-bed Elliot Hospital. They merged to form Optima Health in 1994. Since then, they've added two hospitals to their growing regional system -- one through a merger and another through a close affiliation.
Optima declined to comment specifically on the attorney general's findings until it had reviewed them in detail. But in a preliminary statement, Patrick Duffy, chairman of Optima's board of trustees, defended the system's consolidation strategy.
"We must ask ourselves if not a merged healthcare system, then what? What's at stake is not merely Optima, but how healthcare will be delivered in the next year, the next decade," he said. "We have honestly taken the steps of merger and consolidation because we honestly still believe that...would allow us to maintain the best system healthcare in this state."
The ruling also is important because it marks the second time in two months that a state has questioned the public benefits of a hospital merger that was cleared by federal antitrust regulators.
Last month, the state of New York filed a federal price-fixing lawsuit against two hospitals in Poughkeepsie, N.Y., that the state accuses of using their joint operating agreement to conspire against managed-care plans. The U.S. Justice Department cleared that mergerlike partnership in 1995 after a five-month investigation.
The department also cleared the Manchester merger that's now under fire. Rejecting a recommendation from field investigators that the agency challenge the merger, then Assistant Attorney General Anne Bingaman cleared the deal in 1994 after a three-month investigation.
At that time, New Hampshire's two U.S. senators and two U.S. representatives sent letters to Bingaman supporting the merger. First lady Hillary Rodham Clinton also paid a visit to the Manchester hospitals a month before the department blessed the deal.
Also supporting the merger at that time was the New Hampshire attorney general's office, which gave the deal its approval, saying, "The cost savings resulting from the efficiencies gained by this merger have the potential to be very significant."
Now, the same state agency says the merger is failing to live up to its promises to the public -- the same public that subsequently pressured the attorney general's office to investigate.
What prompted the community backlash was a decision by Optima in 1995 to shift all acute-care and emergency services to Elliot Hospital from Catholic Medical Center across town over a three-year period. Optima promised state and federal antitrust regulators that, in exchange for a monopoly over acute-care services in Manchester, it would generate as much as $200 million in savings over the first 10 years of the merger.
But, as reflected by a nonbinding referendum held last November, Manchester residents opposed the consolidation by a 2-1 margin (Nov. 10, 1997, p. 24).
The ballot measure and a subsequent petition by Manchester state legislators spurred the attorney general's review of the merger in December.
In a 45-page report, with six volumes of exhibits, the attorney general's office said Optima broke the state's charity laws by moving to eliminate acute-care services at Catholic Medical Center without obtaining probate court approval of a change in mission for the hospital, a charitable institution.
In addition, the state said, Optima stripped both not-for-profit hospitals of their local governance by effectively transferring control to a regional board, an action that violated conditions of the hospitals' charitable missions as well as their promises to the community.
Management of the hospitals assured local residents that Optima would preserve local control and would issue public reports on merger savings. The attorney general said management failed to deliver on either count.
"The intent is to get the charitable organizations talking with the community to resolve this issue quickly and constructively," said Michael DeLucia, director of charitable trusts in the New Hampshire attorney general's office. Ultimately, Optima will have to go to probate court to resolve the charitable trust concerns, he said.
But Optima's single-minded consolidation strategy and the way it has been implemented have put the system at odds with the very community its mission obligates it to serve.
"Optima appears to have developed a corporate culture, led by management and acquiesced in by its trustees, which assumes that the delivery of healthcare is best left exclusively to the sole judgment of management," the attorney general's report said.