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Mergers Make a Comeback

Lola Butcher, for HealthLeaders Magazine, March 12, 2008
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It may not be the 1990s all over again, but hospital consolidation is picking up.

After competing for the same patients for more than 100 years, the two hospitals serving Muskegon, MI, recently agreed to join forces to face the future.

Mercy General Health Partners--itself the result of a decade-old consolidation of two other hospitals--and independent Hackley Hospital have each had about 50 percent of the market, says Roger Spoelman, Mercy General's president and CEO. But their consolidation--announced in September and expected to be finalized by April--is not exactly a merger of equals because Mercy General is a unit of Catholic healthcare giant Trinity Health. The new entity will have 434 licensed beds.

"The day is coming when it is going to be exceedingly difficult for smaller and medium-size, and even some larger, independent hospitals to continue to operate efficiently in their communities as standalone hospitals," Spoelman says.

Thus, the two hospitals' merger is perhaps emblematic of an industry consolidation wave that has been a long time coming and may accelerate in the near future.

"We have both competed pretty successfully with each other, but with all of our focus on each other, neither of us really served the areas around the Muskegon area all that well," Spoelman says. "We look at this as a great opportunity to pool our resources and serve smaller hospitals that don't have the highly developed specialty services that we have."

Their merger plan was announced just weeks after the Federal Trade Commission reached an agreement with Evanston Northwestern Healthcare for its handling of a 2000 merger that created a three-hospital system along Chicago's North Shore. Although the FTC ruled that Evanston Northwestern's merger with Highland Park Hospital was anticompetitive, the hospital reached a deal with the feds that did not require the seven-year-old merger to be unwound. Despite the uncertainty, time and expense ENH experienced, the case was too unusual to have a chilling effect on other hospital mergers, says antitrust lawyer David Marx, a partner in McDermott Will & Emery's Chicago office.

The ENH case is unusual because the FTC challenged the merger so long after it had been consummated. That gave an FTC economist the chance to see that, after the merger, ENH increased its average net price per case for all patients by 30 percent-and to find both pre- and post-merger comments from hospital officials about their ability to hike prices because of their newfound market clout.

"It is not discouraging anybody from doing what they think they need to do to be competitive in the marketplace, and that includes consolidations and collaborative ventures where appropriate," Marx says.

An administrative law judge had ruled in favor of the FTC in 2005, ordering Evanston Northwestern to divest Highland Park. But ENH appealed, and the FTC's settlement agreement allows the merger to stand. But the settlement does require ENH to establish a separate team to negotiate commercial insurance rates for Highland Park independent of EHN's other two hospitals if a payer requests.

Robert Town, associate professor of health economics at the University of Minnesota, agrees with Marx that the settlement actually constitutes a win for ENH because it is unlikely to reduce the market power created through the merger. But he thinks the case does have implications for the hospital industry.

"That case is important in that it re-establishes that antitrust law actually applies to hospitals," he says. "There was a long period of time where the enforcement agencies were having difficulty in bringing successful cases against hospitals."

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