PA Attorney General Mike Fisher

By Christopher Guadagnino, Ph.D.

Published November 1997

• React to this article in the Discussion Forum.

Mergers between hospitals and between health insurance companies appear to be so commonplace that physicians seem to have neither the energy nor the recourse to question them, even though such mergers often bring sweeping changes and dislocation to their medical practices and reimbursement.

Recent developments in Pennsylvania, however, may offer physicians unexpected hope: the power of regulatory recourse. State and federal regulators have taken actions that seem to indicate close scrutiny paid to possible anticompetitive effects of health organization mergers in the state. Far from forgone conclusions, those merger efforts could very well run into a wall of regulatory disapproval.

As an example outside the state, Anthem Blue Cross Blue Shield postponed acquisition plans because, as officials of the company said, they were "tired of fighting attorneys general around the country at every turn" regarding the status of its charitable assets, reported the Cincinnati Business Journal. Anthem ended a proposed purchase of New Jersey’s Blue Cross Blue Shield last year and recently postponed talks with the Massachusetts Blue Cross plan.

Three Pennsylvania cases demonstrate the potential for regulatory intervention to slow or thwart the sort of consolidations that often find physicians as anxious spectators rather than engaged advocates.

Erie Hospital Merger Stymied

The two largest hospitals in Erie—Hamot Medical Center and St. Vincent Health Center—announced merger plans a year ago, citing market pressure from nearby institutions in Pittsburgh, Cleveland and Buffalo which they said could lead to loss of patients and eventually of physicians. Physician reaction included trepidation that the deal would create layoffs of employed physicians and a duplicative excess of clinical services at both locations, especially a surplus of specialists such as cardiologists and cardiac surgeons. Some also expressed concern that St. Vincent-owned practices would get favored treatment as that institution assumed dominance. Nearby rural hospitals also face the possible loss of big-ticket patients and revenues to a newly expanded medical center with which it would be impossible to compete technologically.

The deal had antitrust vulnerabilities from the beginning. Unlike hospital mergers in large metropolitan areas, Hamot’s 499 beds, combined with St. Vincent’s 469 beds, would dwarf any hospital in the Erie region and by some estimates control 90 percent of the market. After a considerable public relations campaign effort, including a four-part full-page advertorial in local newspapers, the institutions were able to garner broad-based support of community and business leaders, notes Neil Bohnert, senior vice president of Hospital Council of Western Pennsylvania.

Recently, however, it was leaked that the Pennsylvania Attorney General Mike Fisher’s antitrust division plans to sue to prevent the merger unless three "intractable" conditions are met, according to the Erie Times-News, citing a source close to the negotiations:

• One of the two physical plants must be sold to another potential health provider.

• The hospitals must divest themselves of Alliance Health Network, an HMO created jointly by the two institutions.

• The hospitals must divest themselves of a percentage of employed physicians.

Fisher’s demands of the merger were neither confirmed nor denied by his office or by either of the institutions, but when asked about them, Fisher’s office did fax a copy of the demands that were reported in the Erie newspaper. Fisher indicated that he wants to settle the matter by the end of the year, the Times-News notes. "We will not allow mergers that will eliminate competition because they will drive up health insurance costs for employers," Fisher said at a recent speech to the Pennsylvania Press Club, the Times-News adds.

Although the FTC waives antitrust restrictions if hospitals can prove that a merger would be of significant benefit to a community, it would likely reject the petition if the state attorney general sued to prevent the merger, the Times-News points out.

The conditions impose onerous limitations on the institutions. In an interview with the Times-News, St. Vincent’s Vice Chairman of the Board of Trustees Vernon D. Dobbs said that theoretically, "Hamot and St. Vincent couldn’t divest of one or the other of the hospitals. If they did, the community wouldn’t see the savings a consolidation would bring. To do so would be inconsistent with the collaborative effort." Hamot’s Chairman of the Board Craig McCune said that one physical plant would not be large enough to accommodate patients from both hospitals, the Times-News adds. If true, and if Fisher’s conditions prove to be "intractable," then the merger would effectively be blocked.

Federal obstacles may loom as well. The two institutions filed a requisite merger petition with the Federal Trade Commission in April, after which the federal government had 30 days to respond. The FTC requested more information and, thus far, has collected 1022 file boxes of documents from the two hospitals, according to the Times-News. The FTC’s judgment, expected perhaps by the time this story goes to press, could entail another request for more information, an approval of the merger, or an injunction in local federal court to block the merger. CEOs of both institutions said they have no illusions about the prospects of their requests, according to the Times-News, Hamot’s head John Malone adding, "We recognize it’s an uphill battle relative to how the current antitrust statutes are written."

Hershey-Geisinger Merger Conditions

The merger between Penn State’s Milton S. Hershey Medical Center and the Geisinger Foundation shook the central Pennsylvania region when it was announced nearly one year ago. Without warning, physicians in the Hershey area were faced with the permanent presence of a large and powerful provider and insurer network notorious for its ability to leverage physician contracts favorable to its own interests. "Geisinger has been saying to physicians that if they’re part of their network, they have to take the Geisinger HMO, so they’re really force-feeding participation in the HMO to either owned or affiliated practices," according to an analyst with close ties to the market.

"The deal was hammered out in complete secrecy in a motel room in Pinegrove over a period of months without a peep about it leaked to the senior staff at the [Hershey] medical center or at Geisinger until it was basically a fait accompli," says Dean Leis, M.D., president and director of Beacon Medical Group, a multispecialty group practice in the region, and former medical director at Hershey.

The threat to physicians of the merger, says Leis, is that "Geisinger has historically worked very much like the Borg from Star Trek—you’re either part of the Geisinger system or you’re basically shut out of participation with the system." Leis notes that Hershey has been strongly denying that that would happen in its region.

Perhaps the greatest angst, Leis notes, has been felt by Hershey’s academic physicians, "who are having difficulty continuing to secure grant support and have been given a wake-up call that their clinical practices must support them." A key cause of that dynamic, Leis believes, is the shift to Geisinger of much of Hershey’s management

Although many view the announced merger between Penn State’s Milton S. Hershey Medical Center with the Geisinger Foundation as a done deal, that is not yet the case. Fisher’s Antitrust Section expressed concern that the combined Penn State/Geisinger Health System has a monopoly on tertiary care in 20 counties in central Pennsylvania. In response, it signed an agreement with both entities in late June that withholds final approval of the deal for six months—until December 31—during which time the merged Penn State/Geisinger Health System must negotiate in good faith with all health plans in a 20-county region of central Pennsylvania to provide tertiary care.

"The agreement is intended to put pressure on both parties—both the hospitals and the various health plans," to demonstrate non-exclusionary contract negotiations, says James A. Donahue, III, the state’s chief deputy attorney general, Antitrust Section. "If Geisinger and Hershey abuse their market power after December 31, we’ll have to evaluate that under the antitrust laws. It may be that there’s a cause of action we could bring, or maybe there’s no cause of action," adds Donahue.

Highmark Merger Revisited

The consolidation of Pennsylvania Blue Shield and Blue Cross of Western Pennsylvania into Highmark over a year ago prompted an unprecedented response from then-Attorney General Thomas Corbett, Jr. in the form of comments submitted to the state Insurance Department in May 1996. Corbett’s analysis suggested that both state and federal antitrust thresholds would be violated by the merger, and questioned whether the social mission of the two nonprofit insurers would continue uncompromised.

Physicians were concerned that the merger could reduce competition, further jeopardize the social missions of the merging entities and reduce physician governance within the Highmark corporate structure.

The merged insurers worked out a deal with the attorney general’s office in which they agreed for three years to refrain from: entering into exclusive arrangements with doctors or hospitals, requiring "most favored nations" provisions in hospital contracts and requiring self-ensured employers to have a certain percent of their business with Highmark. The entities also agreed to continue various programs for at least four years, including open enrollment, programs for low income persons, children’s health insurance programs. Highmark also agreed not to convert to a for-profit company during that time.

The agreement carried no enforcement provision beyond the expiration dates, and did not address either passing on efficiencies to consumers or divestiture of charitable assets—should the merged entity convert to for-profit some time in the future.

"The deal worked out with Corbett is inadequate," in part because Highmark is off the hook in three or four years, and the agreement’s provisions will not be easy to renew once they have expired, believes Robert B. Sklaroff, M.D., president of the Pennsylvania Society of Internal Medicine, who has continued attempts to hinder the merger through the courts. "It is hard for one arm of government to go after a company that has abided by its directives," Sklaroff predicts. He notes that Highmark now controls some 85 percent of the health insurance market in western Pennsylvania, according to a federal formula, which threatens patient purchasing power and physician contracting and practice freedoms. Sklaroff seeks full evidentiary hearings to determine whether Highmark’s creation is justified on the basis of law or impact on the marketplace.

Sklaroff, together with the Pennsylvania Society of Internal Medicine (PSIM), the Philadelphia County Medical Society (PCMS) and Raymond J. Lodise, M.D., filed a lawsuit when then-state Insurance Commissioner Linda Kaiser approved the Highmark merger without giving doctors and other concerned parties the opportunity to speak at a hearing held last April.

This past August, the Pennsylvania Commonwealth Court responded by transferring jurisdiction back to the state Insurance Department to conduct a formal administrative proceeding over the consolidation and to determine whether to hold public hearings on the matter. The Insurance Department invited the plaintiffs and any other interested persons who believe that they have a direct interest in the consolidation to file petitions by October 27. According to Acting Insurance Commissioner M. Diane Koken, "After review of the filings, the Department will determine the necessity of holding an evidentiary hearing." If the Department determines that the PCMS and the PSIM have standing in the case, the Court ruling requires the Department to hold public hearings.

"We don’t feel they’re necessary," says Highmark spokesman Brian Hermann. "The mechanism was played out the way it was outlined by the regulators, and we feel that’s adequate. But should hearings result, we’ll certainly have plenty of responses to whatever questions come up. We can certainly rebut the arguments of the doctors," Hermann adds.

Proactive Approach

Physicians can have a say in merger plans of large institutions if they know how the regulatory system works and organize to use it intelligently.

At the federal level, merging entities are required to submit to the FTC a Hart/Scott/Rodino request, which gives the FTC one month to file against it if they think the merger is monopolistic, notes Sklaroff. After that, they have to file a de novo motion based on unfair practices. "That’s what I’m trying to get the U.S. Justice Department to do regarding Highmark," Sklaroff indicates. In the Hamot-St. Vincent case, the FTC said it wanted more information, thereby extending the process—and the opportunity for physicians to give their input.

Physicians, business owners and community leaders all have input during the FTC’s review process. In Erie, they have been visited or contacted by FTC agents and asked how the merger would affect them, some even being asked to sign a transcript of their statements in case the merger ends up in court, notes the Times-News.

Erie County Medical Society Immediate Past President Craig Richman, M.D., was contacted, but did not offer an opinion on behalf of the Society because he felt there was no clear consensus among doctors in the region regarding the merger, according to the Times-News. Richman and other individual physicians did submit written opinions of their own, the Times-News notes; Richman supported the merger if it meant maintaining jobs and the independence of Erie institutions from a takeover by a Columbia HCA, but still had questions whether employed physicians would be laid off and what would become of physician practices whose services would be moved to the other hospital.

Notes incoming Erie County Medical Society President W. Paul Diefenbach, M.D., it is important for physicians to take a more proactive stance rather than remain spectators. Physician consensus is blurred, he believes, because of the limited information provided to them from the hospitals on possible impacts of the merger on their practices. Diefenbach believes the FTC will extend the process by requesting more information, during which time he hopes to poll physician opinion in the medical society and send fresh physician input to both the FTC and the state attorney general.

At the state level, the attorney general’s Antitrust Section determines whether to challenge hospital and insurance company mergers using guidelines drafted by the National Association of Attorneys General, in tandem with merger guidelines provided by the Department of Justice and the Federal Trade Commission, explains Donahue. The guidelines map out a procedure to determine if a merger would result in excessive market concentration, potential adverse competitive effects or barriers to entry by competitors into the market. The guidelines also help assess whether efficiencies claimed by the merging entities could be achieved through other means.

"You can’t make a case solely on economic evidence," Donahue notes. "Different factors come to the forefront in different cases." The Department tempers its assessment of a merged entity’s market concentration with what customers, providers and competitors say about the merger’s expected impacts, Donahue explains. It is possible, for example, for the Department to approve an anticompetitive merger if it is able to demonstrate benefits to consumers that outweigh the monopolistic concerns, or if it is likely to become more efficient and force others in the market to become more efficient, Donahue notes.

The Attorney General’s office did threaten to sue to block a proposed merger a few years ago between Geisinger and Bloomsburg Hospital, Donahue says. In that instance, Geisinger would not only have had a monopoly, but there was almost universal opposition expressed by employers and health insurers, notes Donahue.

The Attorney General’s office has also issued consent decrees for hospital mergers, Donahue explains, which establish a mechanism by which efficiencies will actually be passed down to consumers and stipulate nonexclusivity requirements—such as not giving physicians exclusive privileges at the merged institution and not discriminating against patients who go to primary care physicians outside the institution’s network before being admitted to the institution.

Physicians, especially if unified in consensual voice, could have a significant impact on the outcome of institutional mergers, but only if they choose to participate. "We talk to employers, to payors, we talk to doctors, we talk to other hospitals in the area and nearby to try to put together a picture of how this market is operating and how the merger will change the market," Donahue adds.

Even after a merger is consummated and a consent decree has expired, the Attorney General’s office can be induced to act, should a merged entity abuse its power. "We’re not like a regulatory body, we’re more like a law enforcement agency. We tend more to act on complaints than to continually monitor certain entities," Donahue notes.

Additional consumer influence over insurance issues would be granted by House Bill 1825, introduced by Ivan Itkin (D-Allegheny), which would expand the authority of the Office of Consumer Advocate, an elected position in the state Attorney General’s Office, to insurance matters. The bill, which was referred to the House Committee on Insurance on September 30, would give the Consumer Advocate standing to appear in Insurance Department hearings and in court actions to articulate the impact on consumers of issues such as rate increases and insurance company mergers. Depending on when and whether the bill passes and whether the Insurance Commissioner decides to hold new hearings on the Highmark merger, the Consumer Advocate could conceivably play a role in those hearings.