The two largest hospitals in Erie, Pa., edged closer to completing their controversial merger-proposed in 1996-with the receipt of a final draft consent decree from Pennsylvania Attorney General Mike Fisher.
The agreement would clear the merger of any state antitrust problems in exchange for conditions on the hospitals' post-merger business practices. If accepted by the merging hospitals, the agreement could set an important precedent for balancing provider and payer power through a mandatory arbitration system to resolve disputes over the price of hospital services. The merger still requires federal clearance.
The Federal Trade Commission has opened an investigation into the deal, but agency officials have said they are holding back on their probe until the hospitals' negotiations with the state are completed.
Although still far from a done deal, 477-bed Saint Vincent Health Center and 467-bed Hamot Medical Center reached a milestone last month in obtaining the merger conditions from the state, after 14 months of negotiations.
Both hospitals are studying the complex, 25-page proposal and declined to provide a timetable for action, their spokeswomen said. Neither the hospital nor the attorney general's office would discuss the decree in detail, citing a confidentiality agreement between the parties.
A local newspaper, the Erie Morning News, however, obtained a copy of the decree and reported on its contents last month. According to that report, the attorney general stipulated that the merger would have to save the community at least $275 million by 2007. In addition, the merged system would have to meet annual intermediate saving targets or pay fines equal to the shortfall in any given year.
Starting in July, the hospitals would have to reduce staffed inpatient beds to 700 from more than 800. By July 1, 2003, the system could have no more than 500 staffed beds.
Additional conditions would bar the system from employing more than 25% of the primary-care physicians in Erie County and from giving "most favored nation" pricing to Alliance Health Network, an HMO the hospitals control (May 4, p. 3).
The conditions are similar to those placed on hospitals in Williamsport, Pa., and Harrisburg, Pa., by the state in exchange for antitrust clearance of their near monopoly mergers. The insurance contracting requirements mirror those imposed on the hospitals that merged to form Penn State Geisinger Health System, which owns a large HMO. Those state antitrust settlements also greased the path for federal antitrust clearance from the FTC.
The Erie decree also would establish an elaborate arbitration procedure under which insurers, such as Highmark Blue Cross and Blue Shield, could challenge prices offered by the new system. Highmark has about 75% of the market for health insurance in the Erie area and would be the most likely candidate to trigger the arbitration process if the hospital merger goes through.
"Our role is to achieve the best price we can for our customers," said Michael Weinstein, a spokesman for the Pittsburgh-based insurer. "This condition is one avenue that Highmark Blue Cross and Blue Shield can (take to) do so."
This novel twist presumably would check the pricing power of the potent new system, which would have a near monopoly on acute-care services in Erie and a 70% share of their 11-county primary market. Despite those numbers, the proposed merger has garnered community support.
Even with the progress on the decree, there is no guarantee a deal will be completed. "We're 100% committed to the consolidation, but we won't have a consolidation at any cost," said Karen Kraus Phillips, spokeswoman for Hamot Health Foundation.
In a related matter, the attorney general approved the merger of 115-bed Community General Osteopathic Hospital and 815-bed PinnacleHealth System, both of Harrisburg. Fisher's assent on the deal, which would consolidate all acute-care beds in Harrisburg under PinnacleHealth, paves the way for the transaction to be reviewed by federal antitrust officials.
In fiscal 1997, Community General had healthy net income of $1.9 million on revenues of $50 million in operating revenues. But when the merger was announced in January, George Strohl, Community General's president and chief executive officer, said the previous year's strong financial performance would not be repeated.
Within three years, he predicted, Community General would be reliant on reserves to break even as a result of pending cuts in Medicare reimbursement.
Under the merger, PinnacleHealth agreed to assume Community General's debt, operate it as an inpatient facility for at least three years and continue its osteopathic educational mission.
PinnacleHealth was created in 1995 through the merger of Harrisburg Hospital and Policlinic Medical Center, both of Harrisburg.
As part of an antitrust settlement, the hospitals are required to get state approval for adding Community General to their fold. The hospitals said they would file their federal premerger notification documents with the FTC later this month and expect to complete their consolidation later this summer.