Do merged hospitals get a lifetime pass from legal challenges because they complied with state consent decrees years ago and passed on savings to consumers?
An amended antitrust lawsuit filed last month by a managed-care plan suggests there is no statute of limitations protecting hospital mergers from legal attacks. The suit alleges that although three Pennsylvania hospitals may have passed on merger-generated savings to consumers as required, since 1999 when the decree expired, they have used their 1994 merger to illegally raise prices.
In fact, the managed-care plan now alleges, the hospitals never merged at all.
The hospitals involved are Providence Health System, parent company of Divine Providence Hospital in Williamsport, Pa., and nearby Muncy Valley Hospital in Muncy; and the North Central Pennsylvania Health System, which owned Williamsport Hospital and Medical Center.
According to an amended complaint filed by Harrisburg, Pa.-based HMO HealthAmerica of Pennsylvania last month, the merger that created the 424-bed Susquehanna Health System never occurred. The HMO alleges that instead the partnership between the founding hospitals functioned as an illegal cartel that has fixed prices, restrained trade and conducted boycotts in violation of federal antitrust laws. Under antitrust law, a merged organization can set prices, one of the chief reasons companies merge. But because a cartel is composed of separate organizations that never merged, its members are prohibited from jointly setting prices.
That's the theory behind the Nov. 2 complaint filed in U.S. District Court in Scranton, Pa., the latest salvo from an increasingly rancorous September 2000 suit alleging the merger between Williamsport's only acute-care hospitals was illegal (Sept. 4, 2000, p. 2). The original three-count complaint alleged that the hospitals' state-blessed merger violated federal antitrust laws that bar unreasonable restraints of trade and anticompetitive acquisitions. Specifically, the lawsuit claimed that Susquehanna required managed-care plans to negotiate physician and hospital services jointly through a single negotiation.
If HealthAmerica prevails in its challenge of the 1994 merger, it could unleash a spate of litigation tackling hospital mergers once thought safe, says William Kopit, a healthcare antitrust lawyer with the Washington office of Epstein, Becker & Green who represents HealthAmerica. At issue is the credibility of cost-saving promises made by hospitals that have gone through similar mergers.
The defendant hospitals were among the first to receive an antitrust exemption from a state in return for pledging to reduce costs over a period of time. The HMO lawsuit questions the actions of the hospital system after the state-imposed restrictions expired.
"There are a lot of nonmerger mergers, or virtual mergers, out there. Just because they initially saved money and passed it on to consumers, that doesn't give them the right to stick it to consumers later. We don't think there is a lifetime pass. "
After Susquehanna was created, the complaint alleges, the hospitals combined the systems' competing physician hospital organizations to create the Central Pennsylvania Provider Network. The complaint alleges that the network contracts with virtually all of the independent physicians in Lycoming County and with the defendant hospitals, and is controlled by the system. The original suit alleged that the hospitals used their monopoly power to extract exorbitant fees from managed-care companies for hospital and physician services. When it was created in 1994, the alliance-owned Susquehanna Physician Services controlled 60% to 65% of the primary-care physicians in Lycoming County.
At the time of the merger the Pennsylvania attorney general noted that the three hospitals controlled 83% of the acute-care market in Lycoming County, but he blessed the arrangement with the mandate of certain community benefits and that $40 million in savings be passed onto consumers by 1999. The U.S. Justice Department halted its investigation and deferred to the state attorney general.
Since then, however, Susquehanna "has successfully demanded significant price increases, from the public and the plaintiffs (HealthAmerica), as well as other managed- care plans," the amended complaint alleges.
HealthAmerica seeks an end to joint negotiations of hospital and physician rates by Susquehanna, independent and exclusive appointments to hospital and Susquehanna boards, divestiture of some primary-care physician practices and a prohibition against Susquehanna's offering preferential terms to self-insured plans.
The new complaint suggests the two hospital systems have kept separate identities, programs, assets and bond covenants and that neither system is responsible for the other's debts. Susquehanna attorneys disputed HealthAmerica's new allegations.
John Miles, a healthcare antitrust lawyer at Ober, Kaler, Grimes & Shriver in Washington who represents the system, says that Susquehanna has merged. "I say this as a matter of antitrust law and principles: It was a merger," he says.
Miles' co-counsel, Mark Mattioli of the Philadelphia office of Post & Schell, says the nonmerger allegation is false. "HealthAmerica is seeking the breakup of the Susquehanna system and is attempting to stifle the proposed health plans to self-insured local employers, which would compete with HealthAmerica," he says. "Sometimes antitrust lawsuits are intended to stifle competition, not promote it. This may be one of those."