FTC News

WASHINGTON — Obama administration officials have been roaming the country, talking up their vision of a future in which doctors and hospitals team up to provide better care at lower cost. But a starkly different picture is unfolding this summer in a courtroom here, where lawyers from the Federal Trade Commission have been challenging a hospital merger in Toledo, Ohio.

The lawyers have put the transaction under a virtual microscope, taking hundreds of hours of testimony intended to show that the merger would stifle competition and drive up health care costs. In the process, they are scrutinizing details of the Toledo health care market that might seem more appropriate for investigation by state legislators or county commissioners.

Executives from the ProMedica Health System of Toledo and St. Luke’s Hospital in Maumee, a suburb, say their merger, which was consummated last August, will allow them to collaborate and provide care that is “more efficient and cost-effective” — an overarching goal of the new health care law espoused in scores of speeches by President Obama and administration officials.

The trial here, before the chief administrative law judge of the Federal Trade Commission, has implications far beyond Toledo. It illustrates the risks that arise when competing health care providers try to collaborate, as they are racing to do all over the country, in part because of incentives built into the new health law.

Federal officials are seeing a wave of mergers, consolidations and joint ventures in the health care industry. More and more hospitals are buying up medical practices that competed with one another. Groups of doctors, with the same or different specialties, are merging their practices.

Patricia M. Wagner of Epstein Becker Green, one of the nation’s largest health care law firms, estimates that “50 percent to 60 percent of physicians and hospitals are exploring ways” to team up. The health care law encourages such alliances and joint ventures but provides no exemption from antitrust law, which bans mergers that may substantially “lessen competition.”

Matthew J. Reilly, a senior lawyer at the trade commission, and his team of 14 lawyers have been hammering away at the Ohio merger for more than two months. Armed with thousands of confidential e-mails and dozens of depositions, Mr. Reilly said the merger would increase ProMedica’s market share and “bargaining leverage,” so it could force health insurance plans to pay higher rates to St. Luke’s and to ProMedica’s other hospitals.

St. Luke’s chose to join ProMedica even though it concluded that the affiliation could “stick it to employers, that is, to continue forcing high rates on employers and insurance companies,” according to an internal document unearthed by the commission.

“Soon after the acquisition was consummated,” Mr. Reilly said, “ProMedica approached certain health plans to obtain higher reimbursement rates.” The higher rates, he said, are typically passed on to consumers in the form of higher premiums, co-payments and other costs.

Numerous witnesses, including insurance executives and employers, have testified that Toledo has some of the highest health care costs in Ohio. In addition, they say that ProMedica’s rates are among the highest in the Toledo area, while St. Luke’s is a low-cost, high-quality provider. The government’s goal is to undo the merger and restore the competition that existed when St. Luke’s was independent.

In March, a federal district judge in Toledo issued a preliminary injunction blocking ProMedica and St. Luke’s from continuing to carry out their consolidation until the trade commission could hold a full administrative trial on the merits of the case. The judge, David A. Katz, said the injunction was needed because otherwise ProMedica would be free to carry out “its plans to increase hospital rates, terminate employees at St. Luke’s and eliminate important clinical services” there.

ProMedica, which has 11 hospitals in Ohio and Michigan and annual revenue of $1.7 billion, has described itself to a credit rating agency as having “market dominance” in the Toledo area. It owns and operates one of the largest commercial health plans in Lucas County, which includes Toledo, and is the largest employer of doctors there. For all these reasons, ProMedica says, it is “uniquely positioned for health care reform.”

Randy Oostra, the president of ProMedica, said the merger would benefit patients in many ways. “We could coordinate care,” Mr. Oostra said. “We could improve quality at St. Luke’s by adopting electronic health records and using clinical protocols to standardize the delivery of care. But the F.T.C. has stopped us in our tracks.”

ProMedica said it came to the rescue of St. Luke’s by promising to invest $35 million in the hospital, which it said was losing money and could not have survived on its own. One problem, Mr. Oostra said, was that prices charged to commercially insured patients at St. Luke’s were too low — “substantially below market rates” and, he said, below the cost of providing services.

The trade commission says it is investigating at least a dozen cases in which competing groups of doctors are linking up with one another or with hospitals under a single corporate umbrella.

“Such arrangements have the potential to generate cost savings and quality benefits for patients,” said Richard A. Feinstein, director of the Bureau of Competition at the F.T.C. “However, in some cases, the arrangements can create highly concentrated markets that may harm consumers through higher prices or lower quality of care.”

A study issued last week by the Center for Studying Health System Change, a nonpartisan research institute, said hospital employment of doctors was growing rapidly, “driven largely by hospitals’ quest to increase market share and revenue.”

The commission expressed “serious concerns” about plans by a hospital in Spokane, Wash., to acquire two competing groups of cardiologists. And it has challenged the merger of two hospitals in Albany, Ga.

For all practical purposes, the commission said, the Georgia transaction is “a merger to monopoly” because the hospitals, Phoebe Putney Health System and Palmyra Park, are the only two competing hospitals in the Albany area.

The Toledo case focuses on the market for inpatient hospital care and inpatient obstetrical services in Lucas County, where ProMedica has four hospitals, including St. Luke’s.

The government says the merger will enhance ProMedica’s dominant position in the county, increasing its share of the market for general inpatient hospital services to 58 percent, from 47 percent, and raising its share of inpatient obstetrical services to 80 percent, from 71 percent.

Jeffrey C. Kuhn, general counsel for ProMedica, insisted that his hospitals could not simply sharply increase prices. “If ProMedica charges too much,” Mr. Kuhn said, “health plans and employers can shift to other hospitals in the area, which have excess capacity.”