The two Poughkeepsie, N.Y., hospitals whose 8-year-old joint operating agreement was deemed illegal by a federal judge were more profitable during the life of their agreement than the average for all New York hospitals.
The profit data suggest that the joint operating agreement--which the judge said the hospitals used to illegally fix prices--may have helped the two not-for-profit facilities weather the market storms that affected other hospitals throughout the state.
Those include adjusting to the deregulation of the state's hospital rate-setting system, which took effect in 1997, and the Medicare spending restrictions imposed by the Balanced Budget Act of 1997.
Although the hospitals deny they broke federal antitrust laws, they acknowledge that their partnership--called Mid-Hudson Health--put them in a better competitive position. The facilities are the only two acute-care hospitals in Poughkeepsie.
"Mid-Hudson Health allowed us not to have to focus on competition between the two hospitals and collaborate to build the healthcare system within the community," said Donna McGregor, vice president for finance of 257-bed Vassar Brothers Hospital. "We didn't have to spend marketing dollars competing with each other. We spent that money on technology and services we wouldn't have had the money to offer otherwise."
John Wojciechowski, a spokesman for 317-bed Saint Francis Hospital, Vassar Brothers' partner, agreed, citing his hospital's purchase of a pharmacy robot to reduce patient medication errors and improvements in trauma and radiology services.
"The (agreement) accomplished its purpose," he said.
The hospitals formed their joint operating company in 1992. Mid-Hudson Health's original charter was to coordinate specific clinical services, including magnetic resonance imaging, cardiac catheterization and lithotripsy.
According to health insurers in the market, however, the hospitals strayed from that original intent and began using the company to illegal divide the acute-care market in Poughkeepsie and fix prices for their services.
The state sued the hospitals in federal court in 1998, and last month, U.S. District Judge William Conner in White Plains, N.Y., agreed. In a scathing 41-page ruling, Conner said the hospitals' actions were so egregious that they constituted per se, or automatic, violations of federal antitrust law (April 17, p. 3).
The hospitals have filed a motion asking Connor to reconsider his decision. Connor has scheduled a June 5 hearing to determine remedies in the case, which could include hefty damages and an order to dissolve Mid-Hudson.
Regardless of the outcome of the case, the hospitals--Saint Francis in particular--benefited financially from the arrangement.
In 1992, the first year of their agreement, Vassar Brothers posted a 3.3% total profit, according to data from HCIA/Sachs, a Baltimore-based healthcare information company. That year, Saint Francis suffered a 2.7% overall loss, while the average total profit for New York hospitals statewide was a slim 0.1%.
By 1998, the latest year for which HCIA/Sachs had data, Vassar Brothers enjoyed a nearly 9% total profit and Saint Francis, nearly 5%. Statewide that year, the average was a little more than 1% (See chart, p. 3).
Vassar Brothers made money every year of the joint agreement, most recently earning $4.2 million on total patient revenue of $172.8 million last year.
After losing money from 1992 to 1994, Saint Francis has made money every year since. While the hospital has not released its 1999 earnings, it reported net income of $5.6 million on 1998 total patient revenue of $171.9 million.
Richard Arnould, a economics professor at the University of Illinois in Champaign-Urbana and director of the university's health economics, management and policy program, said the operating agreement may very well have helped the Poughkeepsie hospitals just as similar deals in other industries would.
Arnould said hospitals form the alliances for many reasons, such as saving money through consolidation of functions, offering new services and avoiding duplication of effort. He said without formally merging, they can achieve the same benefits of such a deal.