Even when all the cards are on the table, sometimes it's still hard to tell who has the winning hand.
Number crunchers must be scratching their heads trying to make sense of the financial incentive behind an antitrust lawsuit filed late last month by a local HMO against three merged Pennsylvania hospitals (Sept. 4, p. 2).
The case is noteworthy because it's the first challenge of a hospital merger allowed by a state in exchange for temporary restrictions on the resulting system's business behavior.
The three hospitals merged in 1994 to form 495-bed Susquehanna Health System, based in Williamsport, Pa. The hospitals are Divine Providence Hospital and Williamsport Hospital and Medical Center--the only two acute-care hospitals in Williamsport--and Muncy (Pa.) Valley Hospital. The system controls all of the acute-care services in Williamsport and three of the four hospitals in Lycoming County.
The HMO plaintiff, 150,000-enrollee HealthAmerica of Pennsylvania based in Harrisburg, says the hospitals, along with their 101-member physician group, illegally used their market clout to extort artificially high prices from payers for their services. The HMO has about 12,000 enrollees in the Williamsport-Lycoming market.
The HMO said the hospitals and physicians raised prices after the expiration last year of the five-year agreement requiring the hospitals to generate and report savings from the merger. Among other restrictions, that agreement limited price increases to a set inflationary formula.
Susquehanna President and Chief Executive Officer Donald Creamer said the hospitals have raised prices only four times since 1994: 4.3% in 1996, 6% in 1998, 4% in 1999 and 6% in 2000.
The HMO claims that the hospitals and physicians sought and received a 21% price increase this year, the first year without the restrictions.
In fiscal 1995 the three hospitals earned a combined $7.8 million on revenue of $284.4 million, according to HCIA-Sachs, a Baltimore-based healthcare information company. That represented a profit margin of 2.7%, compared with an average of 4.4% for all Pennsylvania hospitals that year.
In fiscal 1999 the system earned $7 million on total revenue of $312.2 million, according to HCIA-Sachs, for a total profit margin of 2.2%, compared with 1.9% for hospitals statewide.
The state's requirement that the system generate $40 million in savings and pass along 60% to 80% of those savings to local consumers may have suppressed system profitability from 1995 to 1999.
"Had we not consolidated and taken the waste and duplications out of the system, we never would have been able to get the expenses down. And it's a good thing we did, because revenue had fallen," Creamer said.
An economist hired by the state to monitor the hospitals' compliance with the original 1994 agreement said Susquehanna more than met the state-mandated savings goal, according to the state attorney general's office.
By June 30, 1998--a year ahead of schedule--the system generated $105 million in cost savings.
"I audited them every year, and they were never not in compliance with the agreement," said Robert Taylor, the Chapel Hill, N.C., economist retained by the state.
HealthAmerica's profitability fell during that same period.
HealthAmerica earned $6.3 million on total revenue of $420 million in 1999, down from $10.8 million on total revenue of $454 million in 1998, according to the Pennsylvania Department of Insurance. No financial data were available on the performance of the HMO in the Williamsport-Lycoming area.
At deadline, data on the HMO's financial performance prior to the hospitals' merger were unavailable.