Will Your Merger Pass the Smell Test?

Whether or not you're contemplating a merger or acquisition of your hospital or health system, at some point, you probably will. Forces at work in healthcare that require big expenditures on technology, labor and acquisitions of allied health providers mean many hospitals and their leaders will go begging for the capital to complete these changes unless they can find a partner.

Let's be honest. Those needs might just put your organization at a disadvantage, perhaps ultimately a fatal one. The need to do something—anything—to immediately increase your scale seems imperative. A merger or acquisition with a deep-pocketed partner might get you out of that hole you're in.

Then again, it might help you unwittingly dig that hole a little deeper. A couple of recent decisions by the Federal Trade Commission to challenge hospital mergers in Ohio and Illinois sank those deals, and all the cash that went along with doing due diligence.  In the case of Promedica Health System and St. Luke's Hospital in Toledo, FTC actions ultimately torpedoed a merger that had already been completed.

Think of the costs. Think of the disruption, think of the opportunities to improve organically. All forever lost. With apologies to Will Rogers, when you find yourself in that hole, maybe it's better to stop digging.

Mergers can be enticing. Many are successful, and have given the parent systems the size, scale, and financial wherewithal to become leaders in taking on risk and transforming clinical care. The good news: Hospital mergers are still rarely challenged, and even more rarely are they overturned.

"Only a small fraction of consolidations are actually challenged," says Cory Capps, PhD, an economist at Bates White Economic Consulting in Washington, DC. "Remember, they're letting 90% of deals go through unchallenged."

That said, the FTC has had some high-profile victories in recent years. The warning from these recent cases: Just be sure you're doing it for the right reasons—which can be almost any—with the exception of dominating your local market.

Capps, an expert on hospital consolidation, was called to testify in the case in which the U.S. District Court for the Northern District of Illinois subsequently enjoined the merger between Rockford Memorial Hospital and St. Anthony Medical Center. He testified that a merger between the two would result in a combined entity that would control 59% of patient admissions in the area for general acute care, and 64% of patient hospital days.

Not good, because that level of control is essentially a monopoly, as no insurer in the area could possibly afford to neglect allowing the combined entity into its network, at almost any price. If the leaders of these two hospitals had thoroughly examined these issues in a weekend retreat, they could have nixed the merger in time for lunch on the first day.

That's another way of saying these mistakes are eminently avoidable.

At this point, you're probably confused, as I was. On one hand, the government seems to be encouraging consolidation through its many new regulatory burdens and its insistence on developing a better way to ensure continuity of care among patients.

All of that requires significant expenditure and retooling of the workforce and work patterns. After all, the legislation of the Affordable Care Act seems to penalize those health facilities that aren't integrated. So isn't consolidation in healthcare good for the continuum of care, and good for patients?

Not always.

"You're asking about a pet peeve of mine," Capps says. "There is a sense in the face of health reform that consolidation can be good, but they forget the fallacy of composition that goes like this: Some consolidation is good, this is consolidation, and therefore this is good. But the preponderance of coordinated care failures are failures of vertical relationships to coordinate effectively."

It's the horizontal mergers that don't require such retooling of work processes and responsibilities to be successful that attract unwanted FTC attention, while vertical consolidation failures can be related to operational performance, he says.

"For instance, primary care has incentives that don't reduce hospitalizations. Or hospitals have a hard time getting physicians to comply with evidence based medicine," he says. "In those cases, you're not talking about problems with competitors but problems with complements."

By contrast, "both hospitals in Rockford own physician groups, so they're really competitors," he says. "They're on the same point on the care continuum and they're a horizontal merger of substitutes because they're serving the same customers and their consolidation might have anticompetitive effects."

He says further that hospital advocates fail to recognize the difference between the two models, and that in reality, the FTC is not thwarting Congress and CMS in their drive to encourage some consolidation in the industry.

"Consolidation in health reform is focused on promoting vertical integration, not horizontal," Capps says. "When people say the FTC is thwarting CMS and Congress, they're ignoring this distinction. Four [FTC challenges] in four years is pretty small overall."

I asked him how hospitals can avoid this costly mistake by learning from the two most recent victories by the FTC.

"Think twice if your experience tells you that your merger partner is an entity that you monitor competitively," he says. "If your patient volume goes down and you think about what that other hospital is doing because you have to meet or beat them, that's probably a pretty close competitor and you're likely to get a second request if you attempt to merge with them. That doesn't mean it's doomed, but you will hoe a tougher row."

Capps encourages hospitals and boards to hire an experienced healthcare antitrust attorney at the beginning of any merger discussions to provide upfront advice as to what the process entails so that if the merger is likely to attract FTC scrutiny, how you'll successfully defend the move.

"Every step you go in this process, the money is sunk," he says. "You need to know what your chances are and what it will cost to succeed, and what it will cost you to fail. The benefits had better be intrinsic to the rationale and planning with the deal, and not what you come up with after the FTC issues you subpoenas."

In the case of these two recent examples, it seems that leaders counted on the fact that 90% of mergers go through without a regulatory hiccup. They hoped, despite the obvious fact that they were merging with a close competitor, that they would be included in that 90% number.

But as the losses that have undoubtedly accrued from the time effort and expense of dealing with the scrutiny have demonstrated by now, it's clearer than ever that in hospital consolidation, hope is not a strategy.