By: Christopher Snowbeck, Pittsburgh Post-Gazette

October 8, 2006, Pittsburgh Post-Gazette

Oct. 8--The federal government has had a losing track record in trying to stop hospital mergers on anticompetitive grounds, but experts say that doesn't mean a proposed merger of Mercy Hospital and the University of Pittsburgh Medical Center will easily clear regulatory review.

That's because the Federal Trade Commission apparently is on the verge of a major victory in trying to undo a hospital merger near Chicago. What's more, a plethora of academic studies on hospital mergers now provides strong evidence that, in general, consolidation leads to significantly higher hospital prices to health plans -- a central argument used by FTC in trying to block mergers.

From 1994 to 2000, when there were approximately 900 hospital mergers in the United States, the FTC and state antitrust enforcers lost all seven cases they litigated. But Paul Ginsburg, president of the Center for Studying Health System Change, a health policy group in Washington, D.C., said there's a growing expectation that the FTC will be more successful in the future.

"One reason is that the research literature on hospital mergers is much stronger in support of the FTC position -- that mergers increase prices -- than it was before," said Mr. Ginsburg, who was interviewed extensively for an FTC report published in 2004 in which the commission spelled out its interest in improving health-care competition.

The report noted that in 2002, 31 percent of the $1.6 trillion spent by Americans on health care went to inpatient hospital care and that most studies of the relationship between consolidation and hospital prices have found a link between a high concentration of hospital ownership in a market and increased prices.

"Clearly, the FTC wants to have some success in blocking hospital mergers that are not good for consumers," Mr. Ginsburg said, adding that the UPMC-Mercy proposal "might be an attractive one for them to challenge."

UPMC officials expect to file by the end of this month a notice with the government about its proposed merger with Mercy -- a transaction that would give the Oakland-based health system more than half the hospital market in Allegheny County. FTC investigators then will review for up to 30 days the UPMC application, known as a Hart-Scott-Rodino filing.

In the vast majority of these filings, the 30-day review period simply expires and the merger is allowed to proceed. But in some cases, the government makes a "second request" for information that can delay mergers.

Such a request can lead to FTC challenging a merger in court, or to a settlement agreement whereby the parties divest certain services in order to win government approval for the merger.

UPMC and Mercy officials have said they would like to complete their merger by early next year.

A consensus is emerging among researchers that hospital mergers drive up costs, especially when the hospitals are located near one another. The theory is simple: When hospitals merge into stronger networks, they are able to exercise market power to demand price increases from health plans.

Research suggests that a national wave of hospital mergers during the 1990s raised inpatient prices by at least 5 percent, said William B. Vogt, an associate professor of economics and public policy at Carnegie Mellon University. The prices that health insurers pay hospitals for services can increase by 40 percent or more when merging hospitals are closely located, he added.

Hospitals that merge aren't the only winners in a consolidation -- the higher reimbursements they command from insurers tend to carry over to competing hospitals, too. In one community, insurance reimbursements went up 23 percent for a merged hospital and 17 percent for its competitor, Mr. Vogt said.

"Suppose you're a competitor in the marketplace and your rival raises his price," he said. "That makes it easier for you to raise your price, too."

Of course, consolidation also can produce cost savings, depending on the type of the merger.

If it's two formerly independent hospitals that are joined under one owner but continue each to offer roughly the same services as they did before the merger, the savings won't be all that much, Mr. Vogt said.

But if a merger results in the closure of one of the hospitals or by a significant consolidation of services, the cost savings in the second scenario can be significant -- about 14 percent, he said. Whether those savings in the latter sort of merger, known as a facilities consolidation, are shared with health plans is another matter.

Mergers in the 1990s led to most metropolitan areas becoming highly concentrated, Mr. Vogt said, which typically corresponded with a reduction from six to four competing local hospital systems. He considers Pittsburgh to be "average, or above average, in terms of hospital concentration."

While saying he had no inside information about how the government might view the proposed UPMC-Mercy merger, Mr. Vogt -- who has served as a consultant to the FTC on hospital antitrust matters -- does believe the transaction "likely" will go to a second review.

The UPMC-Mercy proposal comes at an important time for the Federal Trade Commission.

In response to an FTC challenge, an administrative judge ruled in October 2005 that Evanston Northwestern Healthcare Corp., which operates hospitals in two northern suburbs of Chicago, must sell Highland Park Hospital on the city's North Shore. The judge concluded that the merger, which took place in 2000, "substantially lessened competition" and resulted in higher prices for insurers and consumers.

The decision is under appeal, however, and the timing of a final ruling is unclear.

David Dranove, a health researcher with the Kellogg School of Management at Northwestern University, said it's impossible to know what if anything the FTC might do about a proposed UPMC-Mercy merger. But he considers it "an important merger, both for the Pittsburgh community, but also as an example of the type of consolidation that we've been seeing nationwide."

Mr. Dranove said FTC investigators typically look at two things when considering hospital mergers: Will the deal offer benefits to the community, and, on the negative side, will it lead to too much market power?

On the community benefit side, investigators will consider whether the proposed merger will lead to efficiencies that benefit consumers, he said. The theory is that mergers can lead to a reduction in duplicative services and the so-called "medical arms race" that comes as competing hospitals all invest in the latest, greatest and most costly technology.

Investigators also could consider whether the merger is justified by a "failing firm defense," Mr. Dranove said, which means the firm -- Mercy Hospital, in this case -- otherwise would exit the market.

Such a defense is possible if the firm is unable to meet its financial obligations in the near future, the FTC says, and is not able to reorganize successfully under a bankruptcy court proceeding. Also, a merger could be allowed under a failing firm defense if the company shows it has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep the assets in the community but under ownership that poses a less severe danger to competition.

In the case of Mercy, hospital officials said they sought a UPMC merger after officials at Newtown Square, Pa.-based Catholic Health East -- the parent company of Pittsburgh Mercy Health System -- said they could not fund more than $60 million in needed capital improvements at the Uptown hospital.

Sister Margaret Hannan, president of the Sisters of Mercy, has said she sought financial assistance or a merger from one or two other Catholic groups, as well as Highmark Inc., the region's largest insurer, before deciding to pursue a merger with UPMC.

But Jerry J. Fedele, the chief executive officer of the West Penn Allegheny Health System -- the region's second-largest hospital system -- said last month that Mercy officials didn't sufficiently pursue other options.

Mr. Fedele said that in May he contacted the chief executive officer of Catholic Health East to talk about how his system and Mercy could work together. But he said Catholic Health East officials never followed up on the offer.