Not-for-profit status may become an advantage for hospitals seeking to increase market share through a merger. On July 8, 1997, the Court of Appeals for the Sixth Circuit upheld the District Court's denial of a request by the Federal Trade Commission (FTC) to halt a proposed merger between two not-for-profit hospitals, Butterworth Hospital and Blodgett Memorial Medical Center, both in Grand Rapids, Michigan. The FTC had requested the District Court to enjoin the merger until the agency could determine whether it was in violation of Federal antitrust laws.
The District Court was persuaded that mergers of not-for-profit hospitals do not generally lead to price increases, and may, in fact, lead to price reductions. Moreover, because the Michigan not-for-profit hospitals' boards included community representatives who were purchasers of the hospitals' services, the court found that 'there would be no rational economic Incentive for such an organization to raise its prices.'
Not-for-profit healthcare entities often claim they must operate under more onerous legal restrictions than their for-profit peers and, therefore, are at a relative disadvantage. That perception may change--at least regarding mergers- in the wake of a recent Sixth Circuit Court of Appeal's decision in the case of FTC v. Butterworth Health Corp. (July 8, 1997). The decision unanimously upheld the District Court's denial of a preliminary injunction requested by the Federal Trade Commission (FTC) to halt the proposed merger of Butterworth Hospital and Blodgett Memorial Medical Center, two not-for-profit hospitals in Grand Rapids, Michigan.
Background
The court identified four Grand Rapids hospitals as relevant to its analysis: Butterworth (529 beds), Blodgett (328 beds), St. Mary's Hospital (150 beds), and Metropolitan Hospital (101 beds). Both Butterworth and Blodgett are full-service, tertiary care facilities. St. Mary's offers primary care services and limited secondary and tertiary care services; Metropolitan offers primary care and limited secondary care services.
Because the merger would give the combined Butterworth-Blodgett entity control of up to 65 percent of the general acute care inpatient market and up to 70 percent of the primary care inpatient market, the FTC requested the District Court to enjoin the proposed merger, pending completion of a lengthy FTC administrative proceeding to determine whether the proposed transaction would violate Federal antitrust laws.
The District Court found that the FTC met its initial evidentiary burden to show that the combined entity's market concentration after the merger would be anticompetitive and would violate Section 7 of the Clayton Act, which precludes mergers and acquisitions that substantially reduce competition. Furthermore, the court found that the remaining two hospitals, St. Mary's and Metropolitan, would not be sufficient alternatives to which managed care payers could turn if the merged entity were to raise prices.
Nonetheless, the hospitals were able to convince both the District Court and the Sixth Circuit not to enjoin the merger. Although the FTC showed that the merged entity would have market power, the hospitals were able to show that such power likely would not be exercised to harm consumers and the community.
Factors Supporting the Decision
The District Court's decision turned on several factors. First, the court found that the parties would achieve substantial efficiencies that were largely tied to the capital savings that Blodgett would achieve by realigning its services with those of Butterworth instead of constructing a replacement facility, which Blodgett had determined would have been needed in the immediate future.
Second, the court rejected the FTC's argument that the merger should be enjoined because it could result in price increases to managed care plans. The court found that the discounts previously negotiated by managed care plans actually resulted in cost shifting and increased paces to other payers. Thus, the court was not persuaded that halting the merger for the benefit of managed care plans only (and ultimately giving the plans the potential to secure even lower prices) was necessarily in the best interests of all consumers of health care.
The crux of the court's decision, however, was based on the fact that the merging hospitals were not-for-profit entities. The court was convinced by the hospitals' arguments, based on studies performed in California and Michigan, that mergers of not-for-profit hospitals do not generally result in increased prices and may even result in reduced prices. Thus, the court found that '[not-for-profit] hospitals operate differently in highly concentrated markets than do profit-maximizing firms.' The FTC vigorously disputes this view.
The hospitals also showed the court that their boards were composed of community representatives, many of whom, as employers? were purchasers of the hospitals' services. The court, therefore, concluded that because each hospital was 'controlled by the very people who depend on it for service, there [would be] no rational economic incentive for such an organization to raise its prices... even if it had the right to do so.'
Finally, the court was persuaded of the community benefit of the merger by the hospitals' 'Community Commitment,' a policy statement that was later made binding on the hospitals in the form of a consent decree. The Commitment accomplishes five actions:
* Freezes hospital rates;
* Limits price increases to certain managed care plans and freeze prices to others;
* Limits hospital margins over time to a rolling five-year average of the margins of certain other facilities;
* Triples the hospitals' baseline funding of indigent care; and
* Imposes a permanent community board requirement on the board of directors of the new parent entity that would be created as part of the merger.
Conclusion
Although the not-for-profit status of hospitals involved in a merger was considered a positive factor in the Carillion case (involving a merger in the Roanoke, Virginia, area),(a) the argument that merging not-for-profit hospitals deserve special consideration has been rejected by the Seventh and Eleventh Circuit Courts and by at least one District Court in Iowa.
Yet it is likely that merging not-for-profit hospitals--especially in highly concentrated markets--will attempt to take advantage of the factors found persuasive in the Butterworth case and that, at least in the context of mergers, not-for-profit status may eventually be considered an advantage.
(a.) U.S. v. Carillion Health Systems, 707 F. Supp. 840 (W.D. Va. 1989), aff'd, 892 F.2d 1042 (4th Cir. 1989).
Patrick K. O'Hare, JD, is a partner, McDermott, Will & Emery, Washington, D.C., and a member of HFMA's Washington Metropolitan Chapter.
