Mega-Medicine : Hospital Merger Plans Raise the question: Is Bigger Better?
If you have to go to the hospital in San Diego, your admission most likely will be handled by one of four big health care networks. If you’re an independent-minded physician who has resisted joining one of these networks, you are probably losing patients fast.
“San Diego County is becoming a health care oligopoly where a limited number of entities are providing the majority of care to the 2.6 million people in this community,” says Jim Lott, chief executive of the Hospital Council of San Diego and Imperial Counties.
Under the “managed competition” proposed by President Clinton, experts predict that care delivery in much of the nation will come to resemble that in San Diego. An estimated 75% of hospital admissions in the county now go through one of the area’s large, growing and fiercely competitive networks of hospitals, clinics and physicians: Scripps-Health, Sharp Health Care, UC San Diego Healthcare Network and Kaiser Permanente.
Even without government reform, the marketplace is driving toward the San Diego model all by itself. Much as mergers in the financial services industry during the 1980s resulted in fewer and bigger banks, consolidation in medical services is doing the same to hospitals, insurers and pharmaceutical companies.
Meanwhile, physicians and hospitals trying to cope with all this change are complaining that federal antitrust laws are getting in the way of their efforts to economize. While the complaint is not new, it takes on added urgency in today’s rapidly evolving climate. Some argue that Clinton’s plan--intended to encourage cooperative ventures among health care providers and thus help control costs--doesn’t always jibe with the Administration’s push for tough enforcement of antitrust laws.
Glenn Melnick, a consultant with the Rand research firm in Santa Monica, calls the Clinton plan “very schizophrenic. Its theme is managed competition, but then it talks about cooperation among providers and relaxing antitrust laws.”
The hospital council’s Lott puts it this way: “The government is running head-on into a philosophical dilemma.”
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The Justice Department and Federal Trade Commission--the federal agencies charged with enforcing antitrust laws to protect consumers--face the daunting regulatory task of trying to sort all this out.
“We’re being stretched to the limit,” says Mark Whitener, acting deputy director of the FTC’s Bureau of Competition.
As the pace of industry deal-making heats up, consumer advocates, health professionals and others are starting to ask whether all this activity helps or hurts consumers.
The answer isn’t black and white.
“It’s a very important issue,” says Linda Lipsen, legislative director for Washington-based Consumers Union. “Our sense is that consumers are losing clout” with some consolidation moves, while “some of the deals will be good” for the public, she says.
Already, providers’ efforts to economize have clashed with antitrust law:
* In Pueblo, Colo., the city’s two hospitals wanted to merge. They argued that one financially strong hospital could serve the community better than two struggling ones, but the FTC opposed the deal, saying it would create a monopoly.
* In Ukiah, Calif., the FTC and Ukiah Valley Medical Center have waged a five-year legal battle over the 1988 consolidation of two hospitals. The dispute, still unresolved, has cost the small hospital about $2.5 million in attorney and consulting fees.
* Near San Francisco, the FTC accused two East Bay pulmonology groups of wielding excessive market power by referring patients to home oxygen suppliers they also owned. Last year, the agency proposed a settlement that would limit the number of doctors within the region who could participate in the ventures.
Health care industry officials say that by banding together, they can eliminate waste and duplication and enhance their services--goals at the heart of the Clinton’s plan.
But critics say bigger isn’t always better, that the emergence of big conglomerates could reduce consumers’ choices, drive up prices instead of trimming them and diminish the physician’s role to the detriment of the patient.
Most agree that consolidation generally is a good thing for the overgrown health care business. But too much consolidation--for example, the merger of the only two hospitals in a town--can be bad for consumers. As doctors, hospitals and other providers scramble to preserve their stakes in the system, industry observers say, some will form ventures that serve mainly their own interests, not the consumers’.
Rand’s Melnick says the industry, particularly in California, has become fiercely competitive, and weaker institutions are in a fight for survival.
“If I’m a hospital or doctor, all this competition is forcing me to cut costs and makes my job harder,” he says. “What’s my response? One is to improve efficiency, but another is to reduce competition. If I can reduce competition, then there’s not so much pressure on cost.”
The American Medical Assn. has been the strongest advocate of changing antitrust law for physician ventures. It contends that doctors are losing much of the clout they once wielded. Physicians trying to form their own health plans--or to form large groups of specialists, such as radiologists--sometimes have been rebuffed by antitrust laws that define such arrangements as price-fixing.
“Our concern is what’s going to happen to the physician-patient relationship and the physician’s role as a patient advocate when, and if, most health care is delivered by large, integrated systems primarily owned and operated by insurers and hospitals,” says Kirk Johnson, AMA general counsel.
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The hospital industry has criticized antitrust laws as being confusingly vague and inconsistently applied by the FTC and Justice Department.
Last month, the American Hospital Assn. lashed out at federal regulators after the FTC said it would block the Pueblo hospital merger. A week earlier, the Justice Department gave the all-clear to a merger in another two-hospital town, Manchester, N.H. Federal regulators said the two cases, though similar on the surface, are quite different, particularly in the size of the markets in which the hospitals compete.
The AHA said the Pueblo ruling was sending “a chilling message to hospitals trying to reduce duplication of services and serve their communities more efficiently.”
Skeptics of the “chilling effect” notion point out that the vast majority of health care mergers are allowed to take place. The FTC’s decision on Pueblo, for example, was only the ninth time since 1987 that the government has challenged a hospital merger, while about 150 such mergers were completed in that period.
“Nobody likes the antitrust laws applied to them; everybody wants to be an island of monopoly in a sea of competition.” says Anne Bingaman, assistant attorney general in the Justice Department’s antitrust division. “The whole idea of managed competition is that there should be someone else to compete with.”
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Hospital executives, however, say the small number of antitrust challenges is misleading. Many deals are scuttled before they get started, they say, because hospitals and their lawyers are worried about running afoul of the law.
“We’re at a time where an enormous amount of change needs to be going on,” says Frederic J. Entin, the AHA’s general counsel. “There’s an unwillingness by hospitals to expose themselves to the expense and delay that an antitrust challenge might mean.”
The Justice Department tried to address industry concerns in September, when it identified six “safety zones” for health care ventures, including hospital mergers. The agency also pledged to respond in writing within 90 days to businesses’ requests for antitrust guidance on a proposed deal.
Since September, the department has received only “eight or nine” requests for advice on health care deals, Bingaman says--far fewer than she expected, given the number of industry complaints.
The clash between medical consolidation and antitrust law is probably most pronounced in the hospital category.
In Pueblo, officials of St. Mary-Corwin Regional Medical Center and Parkview Episcopal Medical Center argued that the two not-for-profit hospitals were struggling financially and would not survive separately. They said that by eliminating duplication of services and staff, they would save at least $50 million over five years, and reduce medical costs in a community where 30% of households have annual incomes of less than $12,500.
The Pueblo hospitals have problems common to the industry, including declining patient volume and competition from outpatient surgery centers. Together they have 524 beds, but their average daily occupancy fell from 258 in January, 1992, to 163 in December, 1993. Both hospitals have pediatric wards but often close them for lack of patients.
By combining, the hospitals contended, they could have improved the quality of care. For example, both hospitals offer heart surgery, but each handles only about 75 such cases annually. Studies have shown higher success rates at hospitals that perform surgeries more frequently, says Sister Sally Duffy, chief executive of St. Mary-Corwin Hospital.
She says the FTC challenge, which forced the hospitals to abandon the merger plan, “will be costly to this community--there’s no doubt in my mind.” The hospitals had hoped to expand preventive health programs--and the community has Colorado’s highest rates of diabetes and teen-age pregnancy, she says.
Parkview CEO Michael Pugh says the FTC decision showed “a complete lack of understanding of health care economics, the way this system really works and the reality of how it is changing.”
But the FTC staff concluded that the merger would raise, not lower, prices and would not necessarily improve care in the community.
“It was going to create a monopoly,” Whitener says, noting that the nearest hospitals outside Pueblo are about 40 miles away.
Hospital monopolies aren’t a problem in San Diego, but some in the community are questioning what consolidation will mean to consumers.
Dr. Rodney Hood, a primary care physician, is concerned that the networks may become large, impersonal institutions that won’t meet the needs of low-income and minority patients. The networks, he says, need to address “the social, financial, racial and cultural barriers that impede access” to care for these groups.
Michael R. Stringer, director of hospitals and clinics at UC San Diego, says such issues should be debated as the networks mature. In an effort to better serve the ethnic market, the UCSD Healthcare Network aligned itself with a group of black, Latino and Asian primary care doctors founded by Hood.
Despite such concerns, a Hospital Council survey in 1991 found that 86% of San Diego area residents were either “pleased” or “very pleased” with the care they were getting, Lott says.
But he noted that the San Diego market has consolidated rapidly since then.
One result has been that more employers attracted to the idea of “one-stop shopping” are offering workers fewer health plans to choose from, Lott says. If employees have only one plan available to them, they may lose the ability to see a favorite doctor if he or she isn’t with that group.
San Diego: Foreshadowing Health Care’s Future?
Four big health-care networks--comprised of physicians, hospitals and clinics--dominate the San Diego market. Together, the groups account for an estimated 75% of all hospital admissions in San Diego County. Analysts say economics and Washington’s plans for health-care reform are forging ever larger health care providers in other communities, as well. The potential advantage is cost-containment. The risks? Patients and doctors already face fewer choices, and limited competition actually could drive prices up.
Kaiser Permanente Patients: 367,000 Physicians: 450 on staff Facilities: One medical center, 15 clinics
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UCSD Healthcare Network Patients: 420,000 Physicians: 1,300 affiliated Facilities: Two university hospitals, three affiliated hospitals, 56 clinics
* Sharp HealthCare Patients: 785,000 Physicians: 2,200 on staff, 1,200 affiliated Facilities: Six hospitals, 18 clinics, eight urgent-care centers, four skilled nursing facilities
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ScrippsHealth Patients: 600,000 outpatient visits; no data on hospital visits Physicians: 1,300 on staff; 650 affiliated Facilities: Six Scripps Memorial hospitals, Scripps Clinic and Research Foundation, nine patient clinics, two convalescent hospitals
Sources: Kaiser Permanente, UC San Diego, Sharp HealthCare, ScrippsHealth
Hospital Industry Mergers
Mergers among U.S. hospitals peaked in 1988. But while final figures are not yet available, they are thought to have increased substantially last year. 1994 also is expected to be a busy year for mergers, as hospital operators cast a wary eye at the Clinton Administration’s health care plans.
Source: American Hospital Assn.
