Undaunted by its recent failures to stop allegedly anti-competitive hospital mergers, the Federal Trade Commission voted unanimously last week to challenge the proposed merger of the only two private, acute-care hospitals in Poplar Bluff, Mo.
At least superficially, the case looks like a safe venture for the FTC, which has lost its last two hospital merger challenges and hasn't taken one on in more than two years.
The case also is noteworthy because it involves two prominent healthcare systems-Tenet Healthcare Corp., Santa Barbara, Calif., and BJC Health System, St. Louis.
The hospitals are 187-bed Doctors Regional Medical Center and 185-bed Lucy Lee Hospital. Doctors Regional is a for-profit owned by a group of 30 physicians and affiliated with not-for-profit BJC. Lucy Lee is a for-profit owned by Tenet, which competes with BJC's hospitals in the St. Louis market.
BJC's president and chief executive officer, Fred Brown, is chairman-elect of the American Hospital Association's board of trustees. He also chairs the AHA's strategic planning committee, on which Tenet was given the first-ever seat for a for-profit chain (Jan. 26, p. 2).
The Poplar Bluff hospitals, both highly profitable, are the only two private acute-care hospitals in Butler County, located about 150 miles south of St. Louis.
The FTC's antitrust investigation of the hospitals began after Tenet publicly announced its letter of intent to acquire Doctors Regional for an undisclosed amount in April 1997.
The agency plans to file a motion in U.S. District Court in Cape Girardeau, Mo., this week, seeking a temporary restraining order and a preliminary injunction against the merger. It is expected to file a formal administrative antitrust complaint against the hospitals in the next 30 days.
The Missouri attorney general's office, which worked with the FTC on the case, is expected to file its own motion for a preliminary injunction shortly. The two motions likely would be consolidated before the same federal court in Cape Girardeau.
Specifically, the FTC and the state allege a merger of the hospitals would violate Section 7 of the Clayton Act, which bars acquisitions that may substantially lessen competition or create a monopoly.
A merger would let the hospitals "exercise market power and raise prices," said the FTC, which has five commissioners.
"We're talking about the merger of two head-to-head competitors, the only two in the whole area," said Robert Leibenluft, assistant director of the FTC's Bureau of Competition. "Employers and payers have been really benefiting from the competition. The extent of employer opposition (to the deal) is probably the highest I've ever seen."
Employers and payers in the town of 20,000 have opposed the merger in signed declarations, contending it would lead to price increases.
"The basis for this lawsuit is that you can't have two for-profit, financially sound hospitals, competing on price, quality and breadth of services, suddenly merge and deprive consumers of that choice," said Paul Wilson, deputy chief of staff for the Missouri attorney general. "It's competition that makes them efficient."
Tenet will fight the challenge, spokesman Lance Ignon said, because it believes a merger would improve and add services to the area while eliminating unused beds. "We want to make more efficient use of two underutilized hospitals . . . without raising prices," he said. Average daily census for 1997 was 33% at Doctors Regional and just under 50% at Lucy Lee, Ignon said. According to an efficiency study commissioned by Tenet and performed by KPMG Peat Marwick, the merger would result in net cost savings of $24.3 million in its first five years.
Tenet said that earlier this month it promised the FTC and the state it would add tertiary-care services at the hospitals and freeze prices for five years.
It also asserts the market sports stiff competition, with 16 hospitals in a 65-mile radius of Poplar Bluff. A 174-bed Department of Veterans Affairs facility also operates in the city.
The FTC, however, is arguing that the only other hospitals in the eight-county area around Poplar Bluff are "far smaller and do not offer the breadth of services."
Besides employer and payer opposition and a strong geographic market argument, the FTC also has two other factors working in its favor: Both hospitals are for-profit and highly profitable.
In September 1996 the FTC lost its case against the merger of the two largest hospitals in Grand Rapids, Mich., in part, because a federal judge agreed that the community boards of the two not-for-profit organizations would guard against them acting anticompetitively (Sept. 30, 1996, p. 4).
The Poplar Bluff hospitals also can't rely on another common argument made by merging hospitals faced with an antitrust challenge: that at least one of them is failing financially and a merger is the only way to keep it viable.
Doctors Regional's net income nearly quintupled from 1995 to 1996, when it reached $1.3 million on net patient revenues of $40.9 million. Its total profit margin in 1996 was 3.2%, more than four times its 1995 margin of 0.7%, according to HCIA, a Baltimore-based healthcare information company.
Lucy Lee had 1996 net income of $5.3 million on $49.4 million in net patient revenues. Its total profit margin that year was 10.6%, more than twice its 1995 margin of 4.5%, according to HCIA.
Tenet owns seven other hospitals in Missouri, including a 119-bed hospital in neighboring Dunklin County.
The physicians who own Doctors Regional bought the hospital from National Healthcare of Atlanta in 1990 for $17 million plus an undisclosed sum based on the hospital's future performance. About 33% of the hospital is owned by workers through an employee stock ownership plan started in 1995.
Doctors Regional also is affiliated with BJC, which has provided consulting services to the hospital since 1990. The Poplar Bluff facility is a "feeder hospital" for BJC, sending tertiary-care patients to system hospitals for treatment. Two BJC executives sit on the board of Doctors Regional but did not participate in the merger decision. BJC spokeswoman Stephanie Stemmler declined to say what BJC's stance on the merger is.
The FTC, however, has contacted BJC and asked for information about the 13-hospital system's activities in the Poplar Bluff area, Stemmler said.