Hospitals are disconnected from economic reality. That disconnection occurred when the healthcare system changed its core values from community service to power and money.
Hospitals have justified that change by saying every community wants and demands quality healthcare at any cost. In reality, a community should have only the healthcare system it can afford. Hospitals don't pump wealth into a community; they survive on the wealth of the community.
The way hospitals operate defies market forces. What other U.S. industry could get away with what happened in my community? Two businesses that provide identical products wanted to jointly provide their products to the community. They said that together they could produce a better product at a better price. They wanted permission to create a monopoly.
The two businesses-Saint Vincent Health Center (a 453-bed, $180 million acute-care hospital) and Hamot Medical Center (a 423-bed, $173 million acute-care hospital), both located in Erie, Pa.-asked for that permission on Nov. 13, 1996. They told a surprised community that their respective boards of trustees and administrators had agreed to consolidate the two hospitals.
From then on, John Malone, chief executive officer of Hamot, and Sister Catherine Manning, CEO of Saint Vincent, were virtually inseparable in lobbying for unified support in our metropolitan area of about 280,000 people. Both hospitals said community solidarity was essential to their consolidation's success. They told us repeatedly that consolidation was essential to reduce costs, ensure quality care, provide greater access and maintain local control.
Without consolidation, they said, healthcare costs would keep increasing so dramatically that our community could not sustain both hospitals. That would transform our overcapacity into undercapacity, threatening the delivery of and access to quality healthcare.
If the two hospitals could not be economically sustained, they reasoned, it would be best for the community if the current system was intelligently and comprehensively reduced.
The business community initially withheld its support. We believed that two competing hospitals were better than one large hospital controlling a monopoly. Monopolies are counter to the interests of consumers. Competition in a free-market economy always produces the best product at the best price.
When we analyzed the two hospitals, we saw that the competition model wasn't working. The hospitals were mirror images competing for the same patients, and the population wasn't growing; it was declining. One way they competed was by continually adding to their operations. One developed a state-of-the-art open-heart-surgery center; then the other did the same thing. The massive buildup of two expensive systems exceeded the community's needs and ability to pay.
Similar situations are playing out across the country, resulting in a $1 trillion healthcare system that accounts for 14% of the gross domestic product and is characterized by runaway inflation.
In the end, the Erie business community agreed to support the consolidation, because competition was not working. We thought as long as enough checks and balances were in place, a controlled monopoly might work.
We adopted former President Reagan's "trust but verify" policy, asking for an independent third party to review the hospitals' promises about savings and quality.
The hospitals agreed to provide the documentation for an independent audit. Business groups were going to pay for the audit, which was designed to help the hospitals manage their goals under consolidation.
We also wanted a contract between the consolidated organization and the primary insurance carrier in northwest Pennsylvania to ensure that savings would be returned to those who paid the premiums. Both hospitals agreed.
With business' support, the hospitals now faced only two obstacles: a consent decree from Pennsylvania Attorney General Mike Fisher and approval from the Federal Trade Commission. Although the hospitals made it clear from the beginning that chances for the consolidation were 50-50 at best, both were clearly committed to the consolidation, pending government approval.
So no one was prepared when one of the hospitals pulled out at the 11th hour, arguing that the conditions of the consent decree were unacceptable. After two long years and an estimated cost of $9 million, the hospitals announced the end of their consolidation at a joint press conference. Malone said Fisher's consent decree was difficult but appropriate and achievable. Manning, however, said the conditions were unacceptable to Saint Vincent.
The community has yet to learn the content of the consent decree or get a reasonable explanation for what happened.
Business believes the hospitals' initial arguments were correct. That is, the community can't support an overbuilt health system operating in a limited market area with a declining and aging population. Capacity must be reduced.
The chances that even one of the hospitals will respond intelligently to this reality are virtually nonexistent. Both have resumed aggressive marketing campaigns and fully intend to compete as individual, distinct hospitals. So much for the commitment to control costs.
Possibly one or both hospitals will join a large integrated delivery system. So much for the commitment to retain local control.
I suspect the experience in Erie will be repeated elsewhere. Attorneys general are becoming more sophisticated in developing consent decrees that hold hospitals fully accountable for their stated obligations to control costs and ensure quality and access. In other words, the value of consolidation must be greater than its cost. How many consolidation proposals will pass that test?
The one in Erie obviously didn't. Why did one hospital decide at the last minute that the cost was greater than the value for which it had argued so passionately?
The relationship between hospitals and economic reality in Erie, Pa., is alive but not well.
Pontillo is president of the Manufacturer's Association of Northwest Pennsylvania, Erie.