ProMedica executives say the Federal Trade Commission is holding onto a dated mindset that is stifling progress at a time when other federal officials have embraced high-flying ideas about collaboration and efficiency.
Assertive or antiquated?
ProMedica vows to appeal loss against FTC as questions loom over whether mergers lead to efficiencies or clout
The Ohio system lost that argument in the first round of what they promise will be an extended fight over whether ProMedica should be allowed to keep a struggling suburban hospital acquired in 2010.
An administrative law judge issued a 200-page opinion ordering the system to divest St. Luke's Hospital, Maumee, Ohio, which it acquired in a deal that closed Aug. 31, 2010. ProMedica plans to appeal to the U.S. 6th Circuit Court of Appeals in Cincinnati if the four-member FTC upholds the administrative judge's ruling on appeal, a process that lasted two years the last time a hospital pursued it.
The FTC administrative law judge in the ProMedica case concluded that while the deleterious finances at St. Luke's would likely require higher prices to keep the hospital afloat, that didn't justify an explicit search for a buyer who commanded high prices and clout with insurers, according to attorneys who have read the unreleased opinion.
Evidence at trial included a 2009 e-mail from St. Luke's President and CEO Dan Wakeman noting ProMedica's “incredible access to outstanding pricing on managed-care agreements.”
Those words would come to haunt St. Luke's and ProMedica.
Legal experts say hospital executives caught discussing higher prices and bargaining clout before a merger are likely destined for legal trouble later on—even in cases such as St. Luke's where below-competitive pricing is directly causing a provider's financial distress.
“The idea is, mergers create no problem if the point of the merger is to create efficiencies,” said Jeff Miles, a principal in the Health Law Group at Ober Kaler in Washington and a former FTC trial attorney. “But if the purpose of the merger is to increase price because of increased clout, that merger is going to run into some difficulty.”
The St. Luke's situation is similar to the oft-cited Evanston (Ill.) Northwestern Healthcare Corp. case, in which the system was forced to establish separate price-negotiation procedures for its hospitals after evidence showed that prices not only rose after a merger, but CEOs of both entities explicitly cited bargaining clout and a lessening of competition as motivations for the deal.
Insurers have long correlated market concentrations of large health systems with higher consumer prices, saying that integrated multihospital systems have the power to demand top dollar simply because they know health plan members will demand access.
In reviewing the purchase of St. Luke's, the FTC concluded that the acquisition gave ProMedica 60% of the market for acute-hospital care in Lucas County. During a related district-court case on a preliminary injunction to halt the merger's integration, one insurance company official testified that ProMedica had already requested a rate increase of 22% to bring St. Luke's rates in line with the rest of the market.
ProMedica Chief Legal Officer and General Counsel Jeffrey Kuhn said trial evidence shows that ProMedica and St. Luke's do not have the power to increase hospital rates beyond competitive levels.
But in an interview, ProMedica President and CEO Randy Oostra described a deeper dispute with the FTC's overall approach to the case and others like it.
Oostra said the federal regulators' stance on hospital-merger activity conflicts with the oft-repeated goals of healthcare reform to expand access, improve efficiency and take unnecessary cost out of the system.
“We have an unsustainable model, which we all agree on,” Oostra said. “And yet we're being told: You have to play by the same rules that have existed for many, many years and, oh, by the way, we're not open to anything unique, creative, or anything we'll try differently. All we want you to do is dissolve and go away, and if one of you goes out of business or if you spend hundreds of millions of dollars competing, that's OK.”
FTC officials declined to be interviewed for this article. However, FTC Chairman Jon Leibowitz testified about the commission's regulatory efforts in healthcare during Dec. 7 comments to the House Subcommittee on Intellectual Property, Competition and the Internet:
“The cost of healthcare is a real problem for all Americans, and the Commission seeks to address this national problem by using all the tools Congress gave to us, and by devoting significant resources so that competition will enable market participants to deliver on the promises of cost-containment and continued excellence and innovation,” Leibowitz said. He also said “the FTC has redoubled its efforts to prevent hospital mergers that may leave insufficient local options for in-patient hospital services.”
Jane Willis, a partner in antitrust and healthcare law at Ropes & Gray in Boston, said the rapid pace of consolidation in the industry has spurred more so-called “second requests” for information following the filing of Hart-Scott-Rodino notices of proposed mergers.
“They are very active,” Willis said. “They are definitely issuing them in the context of hospital mergers. And this success, from their perspective, in the ProMedica merger, will probably embolden them.”
Industry observers say healthcare executives are watching the developments very closely, which may cause them to think twice before initiating mergers knowing that million-dollar court battles with the FTC could be looming. The agency filed three such challenges to hospital mergers this year.
Oostra said the FTC's from-a-distance analyses of mergers like ProMedica's disregard the sentiments of players in affected communities who themselves have a keen interest in efficiency—because they also pay the employers' and employees' premiums.
ProMedica and St. Luke's argued during the FTC administrative trial this summer that St. Luke's was at the brink of insolvency before the joinder, defaulting on debt, losing $30 million on hospital operations, and staring down a $45 million pension liability. Meanwhile, ProMedica had purchased 130 acres of land near St. Luke's with plans to build a competing hospital.
The FTC “would be fine if St. Luke's went out of business. They would be fine if we spent $100-plus million to build a competing hospital five minutes away from them,” Oostra said. “They would be fine on a lot of things like that. However, what we would say is, no, we don't think that's right for our community, and who better to know than our local trustees?”
The FTC's post-trial brief in the administrative law case included a withering attack on ProMedica's claims that the merger would prevent waste and improve care:
“Respondent's ‘efficiency' claims are not cognizable,” FTC attorneys wrote. “They are not merger-specific. They are vague. They are speculative. They are not supported by the evidence in this proceeding and, even if they were, are insufficient to overcome the significant anti-competitive effects of the acquisition.”
Chief Administrative Law Judge D. Michael Chappell agreed, concluding that the merger was illegal and that rates were likely to rise beyond what would have been needed to sustain the hospital as a competitive player in the market for acute-care hospital services.
The written opinion did not become public last week because both sides and third parties mentioned in the ruling are given a chance to request redactions of business strategies and confidential information before its release. However, Modern Healthcare interviewed attorneys who had read the unredacted document.
The decision comes amid what some observers see as a ramping-up of FTC antitrust scrutiny in hospital mergers.
Kuhn and an outside attorney for ProMedica who has read the decision said in separate interviews that Chappell disagreed with the FTC on several critical facts in the St. Luke's case. For example, the ProMedica attorneys said, Chappell disagreed with the FTC's definition of product markets—a central question in any antitrust analysis.
While Chappell agreed with the FTC's charges of anti-competitive price activity in the acute-care market, the administrative judge disagreed with the separate allegation that the deal would also increase the market power of St. Luke's in obstetrics and found the FTC had failed to meet its burden in defining a relevant product market for OB services.
In the end, though, ProMedica's vow of a circuit-court appeal of the case may be exactly with the FTC is hoping for.
Chul Pak formerly worked as assistant director of the FTC division that investigates hospital mergers before becoming a partner in the antitrust practice at Wilson Sonsini Goodrich & Rosati in New York. Pak said the division has long sought to change the case law at the circuit-court level that led to seven consecutive defeats in hospital-merger challenges for the FTC between 1997 and 2007.
The FTC's string of defeats ended with the Evanston case, but Pak said Evanston was only one of several retrospective reviews in which the department decided to examine the post-transaction effects of mergers on prices and see if the real-world effects contradicted judges' analysis of cases.
“The (FTC) chairman felt the court had conducted hospital merger analysis incorrectly, so the whole point was to get back into court more and change the analysis,” Pak said. “It was a strong mandate, and I think it is continuing now. There is no shift in policy or in emphasis. It is a continuation of a very aggressive enforcement policy against hospital mergers.”
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