Experts: NWI hospital merger could face government scrutiny - June 10, 2017

Courtesy of NWI Times

Written by Giles Bruce

Antitrust experts say the possible merger between Franciscan Alliance and Methodist Hospitals likely will face regulatory scrutiny.

Hospitals intending a merger of that size are required to notify the Federal Trade Commission, which in recent years has successfully blocked several such mergers it deemed anti-competitive.

“Does it look like competition in this market is likely to be harmed if the merger happens?” asked Martin Gaynor, professor of economics and health policy at Carnegie Mellon University. “If that’s the case, the antennae go up.”

In March, Franciscan and Methodist announced they had signed a 120-day exclusive letter of intent to discuss a merger. Methodist is seeking a partner to increase its access to capital, ability to recruit providers and positioning for the shift toward population health management, hospital officials say.

Gaynor said the FTC will weigh the competition factor against the hospitals’ alleged reasons for the merger and whether they could happen without the institutions joining forces.

Franciscan and Methodist are the second- and third-largest hospital systems in Lake County, respectively — in terms of revenue, employees and hospital beds — behind Community Healthcare System. Franciscan operates hospitals in Crown Point, Dyer, Hammond and Munster, while Methodist has campuses in Gary and Merrillville. Community’s hospitals are in East Chicago, Hobart and Munster.

“If there are less than three big systems left, you would start to get concerned,” said Bob Town, professor of health economics at the University of Texas. Reduced competition can lead to increased prices and a dip in quality of care, he said.

“The vast majority of mergers pass without an FTC challenge,” noted Jim Landman, director of health care finance policy for the Healthcare Financial Management Association, a nonprofit membership organization for health care financial leaders. “They’re pretty selective in what they take on.”

The Indiana attorney general also has the authority to sue to stop hospital mergers under state antitrust law.

The FTC only seeks to block a small percentage — in the low single digits — of hospital mergers, experts say. But when it challenges a merger, it wins, in recent years at least.

Market control a key factor

In the past year, the FTC successfully stopped mergers between Advocate Healthcare and NorthShore University Health System in the Chicago area, and Penn State Hershey Medical Center and PinnacleHealth in Pennsylvania. The FTC alleged the resulting entities would command more than 60 percent of their local markets.

“They don’t want anyone to get large enough to control the market,” said Joshua Nemzoff, president of Nemzoff & Co., a hospital merger consulting firm. “A hospital would be able to turn around and set rates and fix prices to the detriment of the community.”

The Times used 990 tax forms to estimate the annual revenues in Lake County of the three hospital systems here. The merger would leave Franciscan with an estimated $1.09 billion ($355.82 million of it from Methodist) in annual revenue in the county, or about 52 percent of the market, compared to $1.01 billion for Community, or about 48 percent.

In that case, Nemzoff said, “I think the FTC would look at this as an increase in competition. It would potentially be seen as making No. 2 and No. 3 stronger instead of leaving No. 1 as the big game in town.”

“So I think they will be OK,” he said. “I have seen other deals like this get done.”

Conversely, Christopher Sagers, a law professor at Cleveland State University who specializes in antitrust, said: “That to me sounds like a nightmare. That’s going to suck money out of people’s wallets.”

“This sounds like one the agencies are going to take very seriously,” he said.

Experts note the FTC has a more complex formula for determining market share than The Times’ analysis, incorporating factors such as the services the hospitals provide and their geographic reach. The FTC also might consider the market to include any number of surrounding counties.

In 2012, the FTC successfully stopped a hospital merger in Rockford, Illinois, in part because the new entity would have controlled 37 percent of primary care physician services in that market. Analyzing data provided by the hospitals and the Robert Wood Johnson Foundation, The Times’ estimated that Franciscan would control about 30 percent of that market in Lake County if the merger with Methodist were to go through.