Expect greater scrutiny of mergers

In a challenging financial climate, hospitals of all sizes are looking for partners. But the quest to increase marketshare by acquiring physician groups or other hospitals is drawing critical analysis from regulators, particularly if a merger results in eliminating a competitor. 

Hospital-based readers will be aware of the U.S. Circuit Court of Appeals ruling in late April, which agreed with the Federal Trade Commission that a 2010 hospital acquisition by Ohio's ProMedica system was illegal.

But another important affiliation to note is the recent agreement between Faxton St. Luke's Healthcare (FSLH) and St. Elizabeth Medical Center (SEMC), the only two hospitals in Utica, N.Y. The affiliation became effective March 6.

The level of regulatory scrutiny this "small city" affiliation shows that hospitals can indeed expect to be watched closely by federal and state regulators if they seek to consolidate or integrate, said Robert G. Hansen, the senior associate dean and professor of business administration at the Tuck School of Business at Dartmouth College.

"If you form an accountable care organization, you can get scrutinized," he commented. "If you do a merger or if you do any kind of an affiliation, you can get scrutinized. As a result of this increased level of review, it's important for CFOs, legal counsel, and hospitals boards to get briefed on antitrust issues. In fact, they should have been getting briefed on these issues for the past few years."

The Utica example

Hospital executives would do well to note of the specifics of the Utica case as a way to successfully orchestrate an affiliation.

In December, New York Attorney General Eric T. Schneiderman reached a settlement with the two general acute care hospitals to permit affiliation under an agreement that he said would not adversely affect competition. Instead the two hospitals, which Schneiderman said were financially troubled, will be able to reduce costs by combining their operations. 

After Schneiderman and the state Department of Health approved the facilities' certificate of need application, the Federal Trade Commission declined to intervene. 

With the affiliation agreement in place, the hard work begins, said Scott H. Perra, president and CEO of the combined entity, called the Mohawk Valley Health System (MVHS). "Now we can share financial and service information, which we could not do during the discussions," he added. "We have a common board, a single senior leadership structure and we are beginning to look at what operational efficiencies we can gain–starting with non-clinical areas. Any clinical integration will come later in cooperation with our medical staffs." 

The aim of the affiliation agreement was not to increase the market power of the combined facilities, Perra contends. 

Under the agreement with Schneiderman, MVHS is prohibited from keeping competing providers out of the market or increasing rates excessively. The hospitals cannot require independent physicians to work exclusively at their facilities, or dictate reimbursement rates to health plans, the agreement says.

MVHS also committed to negotiate in good faith with commercial and government healthcare payers. "If these payers believe that the hospitals are acting unfairly, the settlement gives the payers the right to continue their existing relationships with the hospitals for five years at current prices, subjected to annual increases not to exceed historic levels," the agreement says. Before Schneiderman will end the rate-protection provisions, his office will monitor MVHS' activities to ensure it has implemented certain efficiencies.

The agreement also protects women's reproductive rights, given that the affiliation involves a secular facility (FSLH) and a system governed by the Sisters of St. Francis and the Diocese of Syracuse (SEMC). "It was very important to the sisters, the diocese, and the community that the hospital remain Catholic," Perra said.

The AG's settlement ensures that FSLH will continue the current level of reproductive health services so that independent physicians will have admitting privileges at FSLH and that medical professionals can provide women's health services outside of the hospitals.

"My guess is these many of these [affiliation] cases being challenged are reverberating through the industry," Hansen concluded. "That's why it's important for CFOs and legal teams advising hospitals to understand these issues and perhaps try less intense forms of integration before you go all the way to a merger. Start smaller because then you may get some of the benefits of integration without eliminating a competitor."