The threat of a bankruptcy filing by 420-bed Summit Medical Center in Oakland, Calf., helped to persuade a federal judge not to block Summit's merger with another hospital in the San Francisco Bay area.
That information was contained in a more detailed ruling issued Jan. 5 by U.S. District Judge Maxine Chesney. The ruling explained her Dec. 27, 1999, decision to reject an antitrust challenge by the California attorney general to the merger of Summit and 555-bed Alta Bates Medical Center, Berkeley, Calif., part of Sacramento, Calif.-based Sutter Health (Jan. 3, p. 3).
In her ruling last week, Chesney said Summit had proved its "failing company" defense.
The rationale behind the defense is that in analyzing competition and injury to a community, a merger is the lesser of evils if the alternative is closing a hospital.
Chesney cited testimony from the head of Summit's audit and finance committee, who said if the deal didn't go through, Summit "would be required to file a petition in bankruptcy."
Attorney General Bill Lockyer filed a lawsuit in August to block the merger, one month after the Federal Trade Commission decided not to challenge the deal.
Sutter completed its merger with Summit on Dec. 27, the same day Chesney issued her initial ruling.
Lockyer filed a notice of appeal of Chesney's order Dec. 30 in the 9th U.S. Circuit Court of Appeals in San Francisco, said Nathan Barankin, a spokesman for Lockyer's office.
He said the attorney general's office was still reviewing Chesney's decision.
Chesney's decision in the high-profile antitrust case followed a four-day trial that wrapped up Nov. 1 in U.S. District Court in San Francisco.
In her written opinion, she called the Balanced Budget Act of 1997 "a major reason" for Summit's declining financial health, because Medicare accounts for more than 53% of the hospital's revenues.
For the fiscal year ended Feb. 28, 1999, Summit lost $10.9 million. As of Aug. 31, 1999, the hospital had lost $5.3 million, according to Chesney's ruling.
In fact, as of Sept. 30, 1999, Summit had $8.9 million in overdue bills and had been placed on "cash-on-delivery" terms by some suppliers because it wasn't paying its bills.
"Summit faces the grave risk of business failure, and given the lack of any alternative purchaser, if the present merger is enjoined, Summit will be unable to continue," Chesney wrote.
Bill Gleeson, Sutter's spokesman, called Chesney's ruling "unequivocal, consistent and strong."
"To us, it really brings closure to this long process, and we take it as a signal of support from the court and are already setting about bringing the two organizations together," Gleeson said.
Under the merger terms, Sutter has committed to spend $450 million on capital improvements during 10 years and assume $100 million of Summit's debt.
But Summit's failing-firm defense wasn't the only factor that helped to persuade Chesney that the merger with Sutter should go through.
Chesney also said California's attorney general failed to prove the merger would lessen competition in the geographic market in which the merged hospitals would compete.
In her ruling, Chesney sided with the hospitals, which offered a more broadly defined geographic market that included hospitals in San Francisco.