CONNECTICUT HOSPITAL CONSOLIDATION AND CONVERSION IN THE ERA OF HEALTH CARE REFORM:

A COMPREHENSIVE REVIEW OF THE ECONOMIC DETERMINANTS AND SOCIAL IMPACT OF HOSPITAL MARKET STRATEGIES IN CONNECTICUT

By,

Jeremy Mand, M.P.H.

COMMIMMISSIONED BY THE UNIVERSAL HEALTH CARE FOUNDATION OF CONNECTICUT

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TABLE OF CONTENTS

OVERVIEW OF CURRENT EVENTS 3

A. CONSOLIDATIONS 3

B. CONVERSIONS 6

DRIVING FORCES BEHIND CURRENT MARKET ACTIVITY 9

A. HISTORICAL CAUSES 9

B. REIMBURSEMENT 10

C. ACCESS TO CAPITAL 12

D. THE AFFORDABLE CARE ACT 13

E. OTHER PUBLIC POLICIES 14

IMPACT OF HOSPITAL CONSOLIDATION 15

A. IMPACT ON PRICE 15

B. IMPACT ON QUALITY OF CARE 17

C. IMPACT ON COST SAVINGS 20

D. IMPACT ON ACCESS TO CARE 22

E. LEGAL RAMIFICATIONS 23

FOR-PROFIT VS. NON-PROFIT HOSPITALS 26

A. LEGAL PROCESS FOR CONVERSIONS IN CONNECTICUT 27

B. DRIVERS OF PRIVATIZATION 28

C. THE CASE FOR ALLOWING FOR-PROFIT HOSPITALS 31

D. THE CASE AGAINST ALLOWING FOR-PROFIT HOSPITALS 33

REVIEW AND GENERAL CONCULSIONS 32

A. REVIEW OF FINDINGS AND GENERAL CONCLUSIONS 35

B. POLICY RECOMMENDATIONS 36

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I. Overview of Current Events

From the early 1970s through the year 2000, the Connecticut hospital system1 remained unusually steady relative

to other markets with respect to each individual hospital’s strategic market position. The state hospital industry

during this time period could be characterized as stable, with very few closings, a limited number of mergers

between individual hospitals and/or larger hospital organizations, limited affiliations between hospitals and

physician groups or other service providers (e.g. independent physician organizations; private practices), and a

nearly non-existent market penetration of for-profit hospital entities (Sager, 2014).

A. Consolidation

In recent months and years, especially since the financial crisis of 2007-2009 and the passage of the Patient

Protection and Affordable Care Act (ACA) in 2010, the Connecticut hospital system has and continues to

experience fundamental changes in its organizational form and the structure of its healthcare providers. Between

2009 and 2013 there were thirteen attempts and seven successful hospital consolidations and/or partnerships, a

substantial increase from the four that occurred in the previous decade. (Kaylin, 2014) (Connecticut Hospital

Association, 2013) Of the 29 acute care hospitals providing critical health care services in the state, 16 are now

currently part of a larger hospital parent company with the capacity to negotiate reimbursement prices for all of

its facilities.

The 16 network-affiliated hospitals are now divided into four systems: Eastern Connecticut Health Network

which includes Manchester Memorial Hospital and Rockville General Hospital as well as a number of urgent

care facilities, specialty practices, and affiliated laboratories (Eastern Connecticut Health Network); Western

Connecticut Health Network which was formed in 2010 and includes Danbury Hospital, New Milford

Hospital, and the recently acquired Norwalk Hospital, as well as an affiliation with Western Connecticut Medical

Group and a number of urgent care sites (Western Connecticut Health Network); Yale-New Haven Health

System, by far the largest hospital system in the state as measured by total number of beds, which includes Yale-

New Haven Hospital, Bridgeport Hospital, Greenwich Hospital, and the recently acquired Saint Raphael’s

Hospital (O'Leary, Merger of Yale-New Haven Hospital, Saint Raphael's signed; DeStefano lauds nuns for

decades of aid, 2012) as well as the Northeast Medical Group (Yale-New Haven Health System); and Hartford

Healthcare which includes Hartford Hospital, the Hospital of Central Connecticut, Mid-State Medical Center,

Windham Hospital, the recently acquired Backus Hospital (Backus Hospital, 2013) and Norwich Hospital in

1 Connecticut Hospital System can be defined as active acute-care hospitals serving residents of the state of Connecticut

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addition to affiliations with Hartford Medical Group and a number of other diagnostic and ambulatory care

centers (Hartford Healthcare).

Of the remaining 13 acute-care hospitals in Connecticut, some are affiliated with out-of-state hospital networks.

For example, Stamford Hospital is affiliated with New York-Presbyterian Health System (New York-

Presbyterian Health System) and St. Vincent’s Medical Center is a member hospital of Ascension Health, the

nation’s largest Catholic non-profit hospital network (Ascension Health). Other independent hospitals are

currently pursuing partnerships with for-profit entities or are planning to build their own network.

Financially, Connecticut’s hospitals have performed adequately in recent years, well enough that they have not

needed to consolidate previously, but as we will discuss further, events are unfolding that can justify their

concerns and legitimize – from their view - future changes in their business models. As noted in Figure 1 below,

excess revenues over expenses2, a measure of profitability, has varied from hospital to hospital, with some

hospitals such as Yale-New Haven and Bridgeport hospitals’ showing tremendous growth, while other facilities

such as Charlotte-Hungerford struggling mightily. While – on its face –financial sustainability appears randomly

assigned between small and large small hospitals and hospital systems, and between affiliated and non-affiliated

hospitals (e.g. Manchester Memorial Hospital, a member of Eastern Connecticut Health Network saw their

annual profitability decline by 49.7 percent whereas Bristol Hospital, a non-affiliated community hospital saw

their profitability increase by 42.5 percent) if you look to Figure 2, you can see that in the aggregate those

hospitals that are part of a larger network affiliation have realized significantly greater growth in profitability

than those hospitals that are not. Overall, hospital profitability for affiliated systems grew by 24.4 percent,

supported mostly by the state’s largest hospitals – such Yale-New Haven Hospital, Hartford Hospital, and St.

Vincent’s Medical Center. Hospitals not affiliated with larger health networks saw their profitability increase by

only 15.6 percent over the same time period.

2 The amount (in $) of total revenues that exceeds (or fails to exceed) total expenses

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Figure 1:

Figure 2

Hospital executives of these non-affiliated community hospitals that have struggled financially have pleaded that

they’re in desperate need of capital to upgrade their facilities, invest in health information technology, and keep

up with their competitors. They claim, that because of their small margin for errors, “reducing waste may be

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particularly important…compared with larger hospitals because they typically have less capital resources,

meaning less room for error in meeting new quality and cost demands” (Rodak, 2012).

The claims that they have limited capital appears to be valid as each of the five major hospitals up for acquisition

had less than $25 million in cash reserves on its books as of FY 2013. (Connecticut Department of Public Health,

2014) Given their finances and their financial performance relative to affiliated networks, it is easy to understand

why consolidation is a viable solution for an independent hospital’s financial well-being and why it is being

pursued.

However, the larger national trend in consolidation may be just as much psychological as economic in nature.

According to Dr. John Chessare, President and CEO of Greater Baltimore Medical Center HealthCare, he

doesn’t see any future for community hospitals. He asserts “there’s a fantastic future for community health

systems. If small standalone hospitals are only doing what hospitals have done historically, I don’t see much of a

future for that. But I see a phenomenal future for health systems with a strong community hospital that breaks

the mold [of patient care].” Further echoing that point is Tim Bateman, executive director of the Community

Hospital Network, who notes “the physical hospital will matter less in the future than the cumulative assets that

the hospital entity brings to the table in the form of engaged, informed and committed medical staff and

professionals” (Rodak, 2012). On Wall Street, analysts report that community hospitals that are not moving to

shake up their business models in this current environment are “signing [their] own death certificate.” (Turpin,

2014)

b. Conversions

With all the major restructuring of non-profit hospitals occurring within the state, it should also be pointed out

that a major focus of this paper – along with consolidation – is the efforts of several small community hospitals

and poorer performing health networks to sell their assets to the large, national, for-profit healthcare chains. In

2013, Eastern Connecticut Health System, Bristol Hospital Health Group, and Waterbury Hospital each signed

letters of intent to be acquired by Vanguard Health System, a for-profit multi-region hospital chain with a

presence in states such as Arizona, Illinois, Massachusetts, Michigan and Texas. Vanguard was later acquired by

another for-profit entity, Tenet Healthcare, further highlighting the local and national trend in consolidations (of

hospitals) and conversions (to for-profit entities). The potential acquisition of Eastern Connecticut Health by

Tenet Healthcare includes a partnership with the non-profit Yale-New Haven Health System that Eastern

Connecticut Health Network says “should achieve cost and operational savings, one that would be better

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prepared for coming changes in health care reform…The Vanguard network would also provide capital to invest

in the Eastern Connecticut network's facilities” (Dowling, 2013).

The word from hospitals expecting to be acquired by Tenet Healthcare is that the for-profit system will provide

the struggling hospitals in Waterbury, Bristol and of Eastern Connecticut Healthcare with capital to invest in

technology and facility improvements they cannot currently afford (O'Leary, Connecticut Hospital Care Posed

for Big Changes, 2013). Gayle Capozallo, Executive Vice President and Chief Strategy Officer of Yale-New

Haven Health System, said in testimony regarding Connecticut SB 460 and HB 5571, that the partnership

between Yale-New Haven and Tenet Healthcare is “about preserving – and ultimately expanding – access to care

for patients in local communities…Tenet will bring the capital necessary to financially stabilize these hospitals,

address their existing liabilities and invest in their organizations in a way that no one else, including Yale-New

Haven can.”

In reviewing each of these hospitals’ financial statements, it does appear that Capozallo is correct about the

hospitals’ need for capital. In recent years, the smaller community hospitals up for acquisition have by-and-large

worked with little margin for error. Though hospital administrators have commendably kept operating expenses

steady while negotiating modestly higher revenue to improve their patient care margins3, they remain in poor

financial position to invest in upgrading their facilities and/or expand services if there is demand for such

actions.

Before Tenet Healthcare Corporation can acquire any of these hospitals, however, there are legal roadblocks that

need to be addressed by state policymakers. “Legislation that would have provided a governance structure to

allow for-profit hospitals to operate…was introduced and adopted on the last night of the legislative session in

May (2013).” However, the legislation was vetoed by Gov. Dannel Malloy who argued that more discussion

about the operation of for-profit hospitals in the state is warranted (O'Leary, Connecticut Hospital Care Posed for

Big Changes, 2013). Federal and state law prohibits the corporate practice of medicine, which means that

hospitals owned by corporations, generally, cannot directly employ physicians. However, a Connecticut statute

that was adopted in 2009 that would have allowed for the creation of medical foundations between formerly

competing entities (e.g. Yale-New Haven and Eastern Connecticut Heath Network) will require amendments

before Tenet can legally acquire any hospital assets (O'Leary, Connecticut Hospital Care Posed for Big Changes,

2013). Trip Pilgrim, senior vice president and chief development officer of Tenet Healthcare, noted that the

company is working with the CT Attorney General’s office on an interim arrangement that would allow Yale-

3 The percent of revenue above expenses derived from patient care

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New Haven Hospital System to create another medical foundation that Tenet could join “as a way for it to hire

physicians” (O'Leary, Connecticut Hospital Care Posed for Big Changes, 2013).

After the initial legislation was blocked, on June 3rd, 2014 Gov. Malloy signed S.B. 35, An Act Concerning

Notice of Acquisitions, Joint Ventures, Affiliations of Group Medical Practices and Hospital Admissions,

Medical Foundations and Certificates of Need. The law requires “parties to certain transactions that change the

business or corporate structure of a medical group to notify the attorney general…and requires the attorney

general to use information submitted to him as part of an antitrust investigation” (Connecticut Legislature, 2014).

The current transactions are currently under a Certificate of Need review in which the Commissioner of Public

Health must conclude that the community affected will be assured of “continued access to high quality,

affordable care after accounting for any proposed change impacting hospital staffing and that a commitment has

been made to provide care to the uninsured and underinsured.” (Eastern Connecticut Health Network, 2014)The

timeline for approval of these transactions can run anywhere from 9 to 12 months and it is estimated that the

conversion of non-profit entities such as Eastern Connecticut Health Network could be approved somewhere

between March and June of 2015 (CT Office of the Attorney General, 2014).

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II. Driving Forces Behind Current Market Activity

There is significant concern among consumer groups, anti-trust enforcement agencies, and policymakers that the

proliferation of hospital mergers and increased consolidation of healthcare providers and systems will lead to

higher prices and subsequently greater spending. While there is strong and legitimate reason for Connecticut

hospitals’ desire to consolidate and/or merge with other health systems, the concern is that as larger health

systems increase their market share, they will be able to extract higher prices from payers. There currently is

considerable discussion and hypothesis among policymakers, hospital organizations, and payers – including

employer groups – about what exactly are the driving forces behind the local and national trend in hospital

consolidation. Several of the major arguments put forth as reasons for consolidation are as follows:

A. Historical Causes

While recent activities highlight the accelerating nature of these mergers and partnerships – after all the number

of mergers and acquisitions has doubled since 2009 (Tsai & Jha, 2014) – the trend in consolidation was born

long before health care reform.

For some, the consolidation trend began with the proliferation of health insurance during the 1990s. During this

time period, Managed Care Organizations (MCOs) used their bargaining power to exclude costly providers, hold

down costs through draconian utilization review efforts. In response to the cost-containment strategies

introduced by MCOs, hospitals began to consolidate. “Coping with managed care was a key issue for hospital

leaders. One of hospitals’ main responses to the growth of managed care was consolidation. Hospitals correctly

perceived that by merging with others in the same community, they would increase their leverage with health

plans. The U.S. Federal Trade Commission (FTC) challenged some of these mergers as anticompetitive, but the

hospitals prevailed in court in every case during this period” (Ginsburg, 2005). When conflict between insurers

and hospitals over price went public, hospitals had a big advantage – “they weren’t evil pencil-pushers trying to

deny care; rather, they were your friendly medical provider, always eager to provide it” (Salam, 2014).

Additionally, there was also fear from non-profit hospital leaders from for-profit hospital acquisitions, such as

those seen during Columbia/HCA phenomenon4 of the 1990s, which led to the belief that if they did not combine

with other health systems to create a stronger bargaining position, that their hospitals would undoubtedly be

doomed (Ginsburg, 2005).

4 Columbia/HCA was a for-profit multi-state hospital chain that aggressively bought hospitals throughout the United States during the 1990s, and was eventually found guilty of fraudulently billing Medicare

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The largely agreed upon characterization of the hospital market today is that “larger, geographically dominant

systems command larger fees while smaller, unaffiliated facilities are eventually trampled by insurers and

systems fighting over unit cost” (Turpin, 2014). And this has generally been true since the late 1990s. Following

the revolt against managed care5 (Baker & Salisbury, 1997), health insurance companies began giving

preferential reimbursement to larger hospitals considered critical to their policy-holders while “smaller,

independent hospitals, specialists and primary care providers experienced steeper cuts in reimbursement,

precipitating insolvencies, fire sales, retirements and sales of private practices” (Turpin, 2014) .

More recently, the Great Recession has also created difficulties for community hospitals’ efforts to remain both

financially solvent and independent. “The recession created an explosion of bad debt for many hospitals as

people lost their jobs, with patients migrating to state Medicaid rolls or being unable to pay at all. As a result,

about one-third of hospitals experienced negative operating margins in 2008” (Grauman, Harris, & Martin,

2010).

B. Reimbursement

Reimbursement considerations are consistently touted as one leading cause for market consolidation. Across the

nation, there is great uncertainty among healthcare executives about the amount and form of reimbursement (e.g.

FFS or Global Capitation) and how the weight of the multitude of regulations and programs within the

Affordable Care Act (ACA) will affect reimbursement, expenses, and operations. These uncertainties have many

hospital executives concluding that continued growth in revenues is unlikely. For example, Eileen Sheil,

corporate communications director of the world-renowned Cleveland Clinic, stated that their decision in 2013 to

reduce expenses by 6 percent was simply because they believed they “are going to be reimbursed less.” (Turpin,

2014)

Hospitals are already receiving lower Medicare payments from the federal government (Livio, 2013) and, as

alluded to earlier, changes are being made to how some hospitals are paid – instead of the traditional fee-for-

service model, payments are now incentivizing caregivers to keep patients healthy and out of the hospital.

According to Barnabas Health of New Jersey CEO Barry Ostrowsky, “revenue pressure” is a key reason that his

hospital is looking to expand its reach. Ostrowsky says that pressures such as cuts in reimbursement for hospital

readmissions and errors will be alleviated through consolidation. He expects Barnabas to “save millions on

billing, purchasing, and other administrative costs” through consolidation (Livio, 2013).

5 The phenomenon in the late 1990s where managed care companies were heavily criticized for their cost-control practices

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Moody’s Investor Service Outlook echoes Mr. Ostrowsky’s sentiment regarding revenue pressure. In their 2012

outlook – which revised its not-for-profit hospital industry outlook to negative (from stable) in 2008 and reports

in 2012 that the outlook is expected to remain negative for the foreseeable future – “hospitals are faced with an

unprecedented threat to revenues…we expect revenue growth to continue to be weak and not able to keep pace

with normal spending inflation” (Guerin-Calvert & Maki, Hospital Realignment: Mergers Offer Significant

Patient and Community Benefits, 2014).

In Connecticut, the reimbursement issue is further inflamed by the Connecticut Legislature’s decision to reduce

funding for Medicaid by about $6 billion during FYs 2014 and 2015. (Kaiser Health News, 2013)

Peter Karl, President and CEO of Eastern Connecticut Health Network, spoke about the effect of lower

reimbursements. He noted that “The Affordable Care Act is designed to provide insurance to (the uninsured) and

hospitals, as an industry, accepted that they would accept lower payments as more of their patients now have

some form of insurance.” However in Connecticut, unlike other parts of the country says Karl, residents are

relatively well insured so there is not the same benefit of more revenue (from previously uninsured patients) for

hospitals in the state. Kevin Gage of Stamford Hospital concurred, noting that hospitals’ uncompensated care

pool has not significantly decreased as a result of the ACA. (Gage, 2014) Karl noted that because Connecticut

hospitals were unlikely to reap those benefits, he projected that community hospitals’ in the State would have

had to reduce their expenses by 15 to 20 percent if structural changes were not made (CT Office of the Attorney

General, 2014). Karl also acknowledged the payment reforms that are shifting risk onto providers are also

incentivizing reforms to the delivery of care, further stressing the need for integrated, population-based health

systems that require investments in care coordination and information technology which lends itself toward

consolidation movement.

Furthering the arguments of reimbursement-induced consolidation, along with Medicare and Medicaid’s efforts

to purchase value-based healthcare, commercial payers have also jumped on the bandwagon and started to

change their payment methodologies as well. (Wood, 2013) This phenomena was confirmed by Gage, who noted

that consumer driven health plans that push the burden of first dollar coverage onto the patient have diminished

utilization rates for his hospital, and likely other hospitals in the state. (Gage, 2014)

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C. Access to Capital

Struggling community hospitals who have consistently performed poorly in financial measures have also turned

to consolidation as a means to access capital for facility improvements that weren’t previously available to them.

This need for capital is also related to revenue concerns previously addressed because greater revenue usually

means more money to spend on capital projects.

For many years, low-cost capital allowed hospitals to grow their organizations to maintain competitiveness

within the marketplace, attract new physicians, and fund compliance with regulations. Today, because of

numerous economic factors - including those mentioned earlier such as volume reductions and more

government-funded care (which pays less than cost) - hospital boards are concerned about the “long-term

viability of their institutions and…their ability to weather the (financial and regulatory) storm alone” (Grauman,

Harris, & Martin, 2010). The reduction in capital projects was reported to be as high as 43 percent in 2009 by

McGraw Hill Construction, and the American Society of Healthcare Engineering reported that 42 percent of

hospital projects in 2009 were canceled or delayed because of higher cost of capital.

These capital projects, advocates argue, can be used to fund facility improvements, product line development, IT

improvement, or physician alignment strategies, and the pressure to implement these improvements is a major

reason hospitals are seeking a merger partner or acquisition. (Grauman, Harris, & Martin, 2010) Further,

“hospitals that are struggling financially typically receive lower bond ratings and, thus, are less credit-worthy,

which limits their ability to access capital. These hospitals can quickly fall into a downward spiral — without

adequate access to capital, they are unable to make necessary investments for the future, and their financial

health continues to plummet. Unless hospitals short-circuit the downward spiral by improving their access to

capital, they will continue to fall behind and may never regain their footing” (Morrisey, Heifetz, & Singer, 2012)

There are several examples nationwide of hospital consolidation strictly for the need to access capital. For

example, in New Jersey, Hackensack University Health Network said their decision to affiliate themselves with

LHP Hospital Group of Texas and purchase Mountainside Hospital gave the facility access to capital that

allowed for the opening of a wound care center and the creation of additional orthopedic services (Livio, 2013).

In Detroit, the potential merger of Beaumont Health System, Oakwood Healthcare Inc. and Botsford Health Care

into a new $3.8 billion health corporation could give each affordable access to capital that “none of the systems

could achieve on their own” (Greene, 2014). According to Jim McTevia, a healthcare consultant, the merger

“makes sense from an access-to-capital standpoint, because the larger the institution, the greater the cash flow

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and the greater ability to service debt.” McTevia goes on to explain that hospitals “have to have access to capital

because there is so much uncertainty in the future with an aging population and declining reimbursement.”

(Greene, 2014)

D. Affordable Care Act

To some, federal government policies (especially those included within the ACA) have encouraged the creation

of larger hospital systems and networks as the new model of healthcare. In the big picture, it is easy to see their

argument as the numbers do bear a strong correlation (there were 105 mergers reported in 2012 alone, up from

50 to 60 annually in the pre-ACA, pre-recession years) (Dafny, Hospital Industry Consolidation - Still More to

Come?, 2014).

According to the CT Hospital Association, the ACA requires hospitals to find new strategies to reduce cost of

care by operating as efficiently as possible while improving the quality care provided, and expanding capacity to

handle all the newly insured patients – not a particularly easy task. Built into the ACA, they say, are economic

incentives that encourage hospitals to treat patients in the most appropriate setting (often outside of hospital) and

reimburse providers for quality rather than quantity. To achieve these goals and respond appropriately to the

economic incentives, hospitals’ argue that “integrated healthcare systems and networks enable them to better

control costs, realize administrative efficiencies, and take advantages of economies of scale. Clinical and quality

improvements can then be translated across a larger patient population” (Connecticut Hospital Association,

2013).

It is true that the federal government has encouraged integration and to a certain degree is sending the message

that bigger is better. Accountable Care Organizations (ACOs) are one of the main ways the ACA seeks to reduce

health care costs. It incentivizes healthcare organizations to form networks that coordinate patient care and

become eligible for bonuses when they deliver care efficiently (Gold, 2014). The theory is that the bigger the

hospital network is, the more effective and cost-effective they will be through their scaled efforts to coordinate

care, leverage health information technology to improve clinical decision-making, and reduce inefficiencies and

redundancies allowing for fewer expenses and improved health outcomes (Tsai & Jha, 2014).

ACOs were such a big component of the ACA, in part, because Congress is trying to make “providers jointly

responsible for the health of their patients, giving them financial incentives to cooperate and save money by

avoiding unnecessary tests and procedures.” This is especially important with such a large number of baby-

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boomers scheduled to retire over the next several years and entitlement costs expected to balloon proportionally

(Gold, 2014).

Further highlighting the ACA’s not so tacit encouragement of consolidation through the formation of ACO’s is

the Federal Trade Commission’s “Statement of Antitrust Enforcement Policy Regarding Accountable Care

Organizations Participating in Medicare Shared Savings Program.” The policy statement confirms that ACA

encourages physicians, hospitals, and other health care providers to integrate delivery systems and relaxed

regulations regarding the antitrust review of healthcare organizations applying for ACO status, with the goal of

allowing more ACOs to be formed as quickly as possible (Department of Justice: Antitrust Division, 2011).

However, in a New York Times article published in mid-September, 2014, Deborah Feinstein, director of the

Bureau of Competition at the Federal Trade Commission argues that the ACA – while encouraging cost-

containing techniques through integration – does not give hospitals the authority to bypass antitrust laws. Ms.

Feinstein said “(she doesn’t) think there’s a contradiction between the goals of health care reform and the goals

of antitrust” (Pear, 2014).

E. Other Public Policies

Along with national economic trends and industry specific pressures discussed earlier, there are also several

State and Federal policies relating to reimbursement that are driving Connecticut hospital mergers. According to

Bruce Cummings, President and CEO of Lawrence and Memorial Hospital, the largest acute care facility in

Southeastern Connecticut:

“The key drivers behind mergers and acquisitions in CT are: cuts in Medicare reimbursement; the gross receipts tax proposed by Governor Malloy and approved by the Legislature which is taking over $300 million from CT hospitals ($500 million according to Peter Karl, CEO of Eastern Connecticut Health Network) and redirecting it into the State's General Fund; federal sequestration (2% in Medicare cuts); CMS/Medicare changing the criteria for what constitutes an "inpatient admission", resulting in large increases in patients who are now classified as "observation status" and billed as outpatients (for which hospitals received only a fraction of what would have been previously considered an acute inpatient admission) yet the same amount of work/resources are involved; and, last but not least, declines in volume. Add it all up and hospitals are having to take radical steps to keep the doors open: cuts in programs, cuts in staff, and/or merging with a larger entity” (Cummings, 2014).

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III. Impact of Hospital Consolidation

Hospital consolidation in the United States is not a new or recent phenomenon. In fact today over two-thirds of

all US hospitals and over 80 percent of all hospital beds are part of a larger health system, alliance, or network

(Weil T. , 2010). However, while the impact varies from state-to-state, region-to-region, and depend greatly on a

number of different variables that must be analyzed and considered, the general conclusion among researchers is

that mergers generally cause prices to rise with negative impacts on access and quality. (Dafny, Hospital Industry

Consolidation - Still More to Come?, 2014) These conclusions are very concerning considering that hospital

merger and acquisition activity has increased nearly 50 percent since 2009, reaching its highest point in the last

10 years (PwC, 2013).

Looking to the future, the impact of hospital consolidation may or may not follow these same historical

shortcomings. With such transactions now being accompanied by investments in new technology, formation of

Accountable Care Organizations (ACOs), greater emphasis on payment reform which focuses healthcare

purchasing on quality not quantity, and strong national incentives to lower costs, the outcome of mergers may be

different than what they have been historically, or they may continue to cause out of control price increases. In

this section, the focus will be on the historical research on hospital consolidation and the possibility that future

mergers might not have the same negative impact.

A. Impact on Price

Supporters of consolidation argue that mergers offer the opportunity to lower price by achieving economies of

scale allowing for shared savings through improved efficiency and subsequently lower costs for all. However,

almost all retrospective studies suggest that hospital consolidation results in concentration of market power and a

rise in the price of care. In the United States, “the major findings relating to potential economies of scale as a

result of mergers are disappointing. Where there is less and less competition between hospitals for patients, the

cost of health care appears to rise” (Weil T. , 2010).

According to Avik Roy, Senior Fellow for Policy Research at the Manhattan Institute and former health policy

advisor to Presidential nominee Mitt Romney, since 1997 (after the revolt against managed care) inpatient

spending has grown considerably due to hospital consolidation. An earlier wave of consolidations beginning in

the late 1990s were so dramatic that market activity relating to mergers and acquisitions were nine times greater

by the end of the decade than at the start. As a result, market concentration - as measured by the Herfindahl-

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Hirschman Index (HHI)6 - rose from 1,576 in 1990 to 2,323 by 2003.7 “The change is equivalent to a reduction

from six to four competing local hospital systems” (Vogt & Town, 2006). According to Roy, “hospitals had a lot

more market power, and were able to dictate rates to payers” as a result of these consolidations. Roy notes that

consolidation, specifically, “has a dramatic effect on prices.” Further, not only do mergers affect the prices of

care at merging facilities, competitors in the same geographic marketplace also raise their prices (by up to 40%)

to keep pace with their competitors (Roy, 2012). In comparing hospitals in concentrated markets and those in

more competitive markets, Roy noted that the higher prices generally result only in greater contribution margins

(more profit) for these health systems – not a greater ability to cover higher fixed costs to meet (supposedly)

greater demand (Roy, 2012). This premise is further supported by comments from Reiham Salam, a contributor

for the National Review, who agrees with Roy, saying “the high reimbursement rates that flow from bargaining

power helps to subsidize bloat: more or more generously-compensated staff than is strictly necessary,

underutilized facilities, and a lack of spending discipline across the organization, among other things” (Salam,

2014).

Dr. Leemore Dafny, a professor at Northwestern University, provides further evidence of Roy’s assertion that

consolidation strongly relates to dramatic price increases. She found that “hospitals raise prices by about 40

percent after the merger of nearby rivals and that the primary drivers of higher health care costs are prices”

(Dafny, Esitmation and Identification of Merger Effects: An Application to Hospital Mergers, 2009).

The Synthesis Project, an initiative of the Robert Wood Johnson Foundation to produce briefs and reports that

synthesize research findings on perennial health policy questions, compiled five major studies published between

2007 and 2010 on hospital consolidation. The studies generally found that there is a strong positive correlation

between market consolidation and price growth (Gaynor & Town, The impact of hospital consolidation - Update,

2012).

6 HHI: A commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting

numbers. The HHI number can range from close to zero to 10,0007 According to the U.S. antitrust enforcement agencies, a market with HHI greater than 1,800 is considered highly concentrated.

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The effects on price however are somewhat dependent on the type of methodology used to study consolidation

impacts. There are three types of approaches to hospital price competition research: (1) structure-conduct-

performance approach; (2) the event study approach; (3) the simulation approach. Each methodology has

produced different results. “For example, simulation studies have produced estimated changes in price as high as

53 percent…event study approach estimates a 10-40 percent increase, while the structure-conduct-performance

approach yields lower estimates of 4-5 percent (Vogt & Town, 2006).

Before drawing conclusions on correlation between merger-and-price, researchers must note the importance of

understanding the context of the merger, the method of study, and acknowledge the shortcomings of any analysis

in making any broad policy recommendations. According to Dr. Dafny, structural demand models (i.e. structure-

conduct performance approach) provide the greatest ability to extrapolate the impact of future mergers on prices

because they controls for selection bias. Their main shortcoming is the fact that “these models require extensive

assumptions about consumer demand and firm objectives, do not fully incorporate rivals’ reactions to actions

taken by merging parties, and are computationally intensive and challenging to implement” (Dafny, Esitmation

and Identification of Merger Effects: An Application to Hospital Mergers, 2009).

B. Impact on Quality of Care

With regard to quality of care, it is generally perceived by the public and some policy-makers that larger hospital

systems – especially those with teaching programs – result in better health outcomes. Other experts believe,

however, that is a misconception. Some research suggests that consolidations “tend to decrease rather than

increase quality of care” because as market power grows “it becomes less critical for the organization to enhance

its quality edge as a strategy to increase market share” (Weil T. , 2010).

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Dr. Avik Roy says that while consolidation advocates vehemently argue that integrated mergers will result in

higher quality of care, historical studies on the matter suggest mix results: “Some studies say it decreases quality,

some studies say it increases quality, some studies say it has no effect.” He concludes that there is no conclusive

evidence that concentrated hospital markets result in greater outcomes (Roy, 2012).

Judging quality of care involves looking at a wide range of process and outcome measures over a long period of

time to attain verifiable statistical differences in specific health outcomes. This is a long and arduous process that

few have undertaken. With that said, Mutter et al. (2011), writing for the International Journal of the Economics

of Business in February 2011, and citing two defining studies on the impact of consolidations on quality,

concludes that the two variables are not completely independent. The first study, by Ho and Hamilton (2000),

found that “hospital consolidations have no impact on inpatient mortality for AMI or stroke patients…but do

increase the probability of 90-day readmission for AMI patients” indicating that the impact of consolidations

vary but do have an effect on outcomes – at least on certain measures. The other longitudinal study, by Cuellar

and Gertler (2005), reported “no significant changes in [composite measures of quality] among hospitals that

joined systems, relative to hospitals that did not, except that consolidating hospitals reduced the rate of

potentially overused procedures by 1.2 percent among managed-care patients.” Mutter et al., after completing

their own study of 42 within-market consolidations in 16 states during the years of 1999 and 2000, concludes

that any effect of hospital consolidations on quality appears “to be small and to vary according to the institution’s

role in the transaction” (Mutter & al, 2011).

Looking at the issue through the lenses of market competition (as opposed to consolidation) many researchers

have cited evidence that increased competition in healthcare markets results in enhanced quality of care, however

it depended primarily on what the market is most sensitive to – quality or price. “If hospitals can compete on

both price and quality, then when they face tougher competition they will choose to compete by whichever

means is most effective. If buyers are considerably more responsive to price than quality (for example, if price is

easier to measure), then enhanced competition can lead to lower prices, but also less attention to quality. On the

other hand, if quality is particularly salient, then tougher competition can enhance quality” (Gaynor & Town,

The impact of hospital consolidation - Update, 2012).

Generally, the most comprehensive studies showed limited differences in outcomes between consolidated and

non-consolidated hospital systems but concluded that competition did in fact improve health outcomes in a

number of different geographic locations and hospital settings as shown in the chart below. (Gaynor & Town,

The impact of hospital consolidation - Update, 2012)

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Before reaching any conclusions about the evidence of the positive impact of competition as denoted in the chart

above – as provided by Gaynor & Town, and noted by Mutter et al. - it should be emphasized that there have

been relatively few comprehensive studies of the correlation between hospital market concentration and quality

of care provided. This lack of study has hindered anti-trust authorities efforts to evaluate hospital’s claims of

improvement in quality. “Unless and until economists and health services researchers can produce simple

predictive models of the impact of competition on objectively verifiable dimensions of health care quality, courts

will largely be feeling their way in the dark” as it relates to anti-trust cases (Mutter & al, 2011).

An encouraging development, cogent to the topic of consolidation and quality, is the government sponsored

ACO Pioneer Program.8 There were 32 health systems that consolidated to form an ACO and participate in the

program by July 2013, and the results on quality were quite impressive. “All 32 of the accountable care 8 Pioneer Program: The Pioneer ACO Model is a CMS Innovation Center initiative designed to support organizations with experience operating as Accountable Care Organizations (ACOs) or in similar arrangements in providing more coordinated care to beneficiaries at a lower cost to Medicare. The Pioneer ACO Model will test the impact of different payment arrangements in helping these organizations achieve the goals of providing better care to patients, and reducing Medicare costs.

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organizations in the program improved patient care and patient satisfaction against benchmarks, according to

results shared” (Beck, 2013).

C. Impact on Cost Savings

Going hand-in-hand with price reduction and improved quality, consolidation proponents often tout cost

containment as a central argument in favor of mergers. “Prior to a merger, hospital executives, like in other

industries, often claim that costs will decrease after the merger due to gains in economic efficiency.” While

hospital systems tout the benefits in cost savings, health insurers are not nearly as supportive and there is strong

evidence supporting their skepticism. For example:

“In 2010, Catholic Health Services of Long Island acquired 203-bed New Island Hospital in Bethpage and renamed it St. Joseph’s Hospital, the same year the North Shore-Long Island Jewish Health System acquired New York City’s Lenox Hill Hospital. Rate changes followed both mergers. Catholic Health Services realigned rates to match those charged at CHS’s Mercy Medical Center, while rates at Lenox Hill have increased roughly 50 percent since the North Shore-LIJ merger” (Solnik, 2013).

According to John Caby, Vice President of Provider Engagement and Network Management at Empire

BlueCross BlueShield, “Predictions of lower costs wrought by greater efficiencies just don’t universally pan

out…bigger systems have more bargaining-table power, typically resulting in higher costs for insurers and the

insured” (Solnik, 2013).

Says Robert Zirkelbach, spokesman for America’s Health Insurance Plans, a Washington-based insurance trade

group, “Hospital systems use their negotiating clout to demand higher prices for services that result in higher

cost for consumers and employers” (Solnik, 2013).

While the research supports the premise that prices will rise through the acquisition of more market power, there

is differing evidence on the potential for cost savings as a result of consolidation. According to one study, cost

savings can be significant if the transaction results in reductions in fixed costs through the closing of excess

facilities. In another study, researchers found that of the “two types of merges: consolidations in which the two

merging hospitals continued to operate in two separate facilities, and those in which one facility was closed.

There was no significant reduction in expenses when both facilities were maintained but when one facility was

shut, amalgamation resulted in a 14% savings” (Weil T. , 2010).

In order to study the impact of mergers on cost, researchers say that outcome variables (such as overall expenses)

must be compared to a control group (i.e. merging hospitals unit costs must be compared to a non-merging

hospitals unit cost in a similarly situated market environment). Studying and verifying impact on cost is difficult

since it is often not clear whether savings (if achieved) were realized because of the merger or whether they

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could have been realized anyway; in addition there are other challenges related to data validity. In discussing the

challenges of assessing whether cost savings were achieved, researcher Teresa Harrison outlines the problem of

studying the matter:

“The American Hospital Association (AHA) identifies a merger when hospital A and hospital B consolidate to form hospital C, and similarly denotes an acquisition if hospital A merges into hospital B. For these operational consolidations, only a single entity is reported after the merger event, providing only one set of post merger outputs, but two sets of pre-merger outputs. Using a traditional difference-in-difference specification, the researchers must either (1) divide the post-merger output into two separate merging entities or (2) combine the pre-merger output into entity. In this case, the potential scale economies from the merger are incorporated into the estimation because the pre-merging output levels are aggregated. The economies of scale from the merger therefore cannot be explicitly identified” (Harrison, 2011).

However, while Harrison does outline these challenges, in her own study, she does provide for methodologies

that can successfully judge whether economies of scale and associated cost-reductions can be achieved.

According to Harrison’s study, “the average potential cost savings from a merger are positive and statistically

different from zero.” She concludes “economies of scale can be exploited to reduce costs from their pre-merger

values…with savings reaching 2 percent of pre-merger costs.” Simply put, Harrison’s research confirms the

existence of economies of scale and thus the potential for cost savings. Unfortunately for proponents, she also

found that those gained efficiencies have declined over time. She postulates that because actual cost savings

were greater than potential cost savings in the first year after a merger and less than potential savings in the

following years that hospitals’ realization of initial savings were only due to changing outputs (e.g. differences in

health service lines before and after; settings of care; volume of care) rather than gains in operational

efficiencies. Her conclusion is that the potential for savings as a byproduct of mergers are there, but evidence of

hospitals taking advantage of those potential savings aren’t – they indicate that mergers that reduced costs in the

short-run are due to other factors (Harrison, 2011).

While the Harrison study highlights that historically, hospitals haven’t taken advantage of potential savings –

perhaps because the market power achieved didn’t pressure them to be more cost conscious, there are programs

that give some hope that consolidation in the future could achieve these goals. As noted earlier, the ACO Pioneer

program which is also very committed to cost control in addition to quality has shown some success as it relates

to cost control. “18 of the 32 (participating health systems) managed to lower costs for the Medicare patients

they treated—a major goal of the effort” (Beck, 2013).

Some are arguing that in today’s environment the potential for cost savings could be more easily realized with

new technology and a greater focus on patient management across a larger continuum of care. Hospitals are now

trying to do work that payers used to do such as “handling actuarial work, building networks, monitoring quality,

and managing utilization and claims.” Stephen Rosenthal, an executive affiliated with the prestigious Montefiore

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Hospital System in Bronx, NY, noted the differences in achievable cost savings from consolidation now

compared with the late 1990s. In the late '90s he states, consolidation was simply a response to the rise of

managed care - specifically the practice of cutting reimbursement rates as a blunt way to control costs.

Montefiore executives, he said, thought they could do better if it were allowed to take on some risk. "Given the

market constraints at the time, the payers—both government and private insurance—were so dramatically cutting

rates that on a transaction basis it would be difficult to go forward and survive," he says. "If they gave us full

responsibility for the patient, we theorized, overall we would save money in the system and could use the dollars

saved to sustain the infrastructure" (Betbeze, 2013).

According to Rosenthal, Montefiore bears financial risk through its Integrated Provider Association (IPA). The

IPA provides the infrastructure support that an integrated delivery system needs to manage a population. “(They)

do all the data analytics and the contracting between insurance companies, the government, and providers, and

establish network opportunities…(as well as developing) strategies so the sickest patients get truly managed

care.” Before jumping on the bandwagon of consolidation, Rosenthal warns that “it’s critical that (an

organization) joins together in real cultural and behavioral changes with a provider population. When managing

a population, you’re looking holistically.” He adds that the exchange of clinical data and claims data from

insurance companies and the ability to proactively identify the right individuals to apply the right interventions at

the right time is a major challenge (Betbeze, 2013).

Montefiore has been the most successful ACO in the country to date. Earlier this year it announced that “Data

showed monthly Medicare spending per beneficiary among Montefiore ACO participants represented a savings

of $104 compared to monthly spending per beneficiary among a local market comparison group.” According to

the Montefiore, “savings were achieved through increased patient engagement, care coordination and

preventative, patient-centered care provided wherever needed – in the hospital, in doctors' offices, by phone and

at home. Innovative nurse-driven interventions supported patient outcomes and experience” (Montefiore Medical

Center, 2014).

C. Impact on Access

As it relates to access for underserved populations, since mergers tend to increase hospital prices, employer-

based and individual health plans are forced to raise premiums to support those increased costs, and as a result –

prior to the ACA – forced many individuals out of the insurance market (Weil T. , 2010).

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The matter of price and access are directly linked because lower income individuals and socio-economic

minorities are much more price-sensitive than higher income demographic groups (Town, Wholey, Feldman,

Roger, & Burns, 2007). The higher the price of health insurance, the less inclined patients will be to purchase

insurance.

On the other hand, according to a study published by the Center for Healthcare Economics and Policy, mergers

benefit patients and enhances access to care. A key benefit of consolidation has been that hospitals that might

have otherwise been forced to discontinue an unprofitable service, downsizing staff, or even close would now

remain open and viable because of the improved access to capital and greater revenue (Guerin-Calvert & Maki,

Center For Healthcare Economics and Policy, 2014).

D. Legal Ramifications

From a legal standpoint, there are statutes, specifically within Section 1 Sherman Anti-Trust Act and Section 7 of

the Clayton Act, for preventing high levels of concentration of hospital markets. Consolidation can and often

does lead to increased market power, which results from a rising market share, even if entities are non-profits.

“Mergers have been considered illegal if they resulted in market power increases great enough to allow non-

transitory increases in hospital prices” (Spang, Bazzoli, & Arnould, 2001). The judicial tests most often used for

judging the legality of a merger is either the Rule-of-reason analysis9 which assumes that a merger is not illegal

on its face, but could be considered unnecessary and thus illegal depending on the predicted impact of the

merger. The test is to balance the “welfare-enhancing effects of consolidation, such as increased efficiency, with

the welfare-reducing effects, such as the potential to control prices” (Spang, Bazzoli, & Arnould, 2001). The

other test most often used is the Illegal per se test which deems a merger illegal if it is conclusively presumed

that the transaction would cause “an unreasonable restrain on trade and thus anti-competitive.” Such illegal acts

include price fixing, geographic market division, and group boycotting. The legal test for proving a merger

illegal per se is to:

1. Show the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output.

2. Show that the practice is not one designed to increase economic efficiency and render markets more, rather than less, competitive

3. Carefully examine market conditions; and

9 The rule of reason is a legal doctrine used to interpret the Sherman Antitrust Act, one of the cornerstones of United States antitrust law. While some actions like price-fixing are considered illegal   per se , other actions, such as possession of a monopoly, must be analyzed under the rule of reason and are only considered illegal when their effect is to unreasonably restrain trade

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4. Absent good evidence of competitiveness behavior, avoid broadening per se treatment to new or innovative business relationships (Green, Block, & Haper, 2013).

According to the FTC, the greatest antitrust concern arises with proposed mergers between direct competitors,

these are known as horizontal mergers.10 (Federal Trade Commission, 2014) Section 7 of the Clayton Act

prohibits mergers if “in any line of commerce or in any activity affecting commerce in any section of the

country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a

monopoly” (U.S. Department of Justice and the Federal Trade Commission, 2010).

According to the FTC and DOJ, most merger analysis is inherently predictive, “requiring an assessment of what

will likely happen if a merger proceeds as compared to what will likely happen if it does not.” The guidelines

state that a merger is illegal if its’ effect enhances market power by “(encouraging) one or more firms to raise

price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive

constraints or incentives.” In evaluating how mergers’ change hospital behavior, the FTC and DOJ focus on how

it “affects conduct that would be most profitable for the firm” (Federal Trade Commission, 2014).

Until recently, courts had increasingly accepted cost savings as a sufficient basis for allowing a merger.

However, the FTC has recently begun to aggressively prosecute mergers – “The agency is riding high with wins

in three litigated hospital mergers in the last two years.” They successfully prevented mergers in Albany,

Georgia; Toledo, Ohio; and Rockford, Illinois. The victories, according to Melinda Hatton, Senior Vice

President and General Counsel of the American Hospital Association – as reported by the New York Times – is

a “chilling effect” on hospital mergers (Pear, 2014).

What should be considerably worrisome however, in this day and age for government regulators and healthcare

consumers is the sheer complexity of preventing and/or dissolving a merger. “Attempts to prevent hospital

mergers are simultaneously the most visible and the least successful aspect of public antitrust enforcement.”

While there are robust anti-trust laws to prevent horizontal mergers (Hammer & Sage, 2003), regulators, in order

to undertake such a task, must devote substantial time and resources to evaluate transactions in addition to

satisfying legal standards for challenging them; economic experts must study large volumes of claims data and

determine through complex statistical methodologies – the extent to which merging hospitals compete and

whether price increases are likely if hospitals were to merge. The difficulty of breaking up merging parties after

the fact so worried Congress that the Hart-Scott-Rodino Act requiring merging parties to notify agencies in

advance of a mergers was passed into law because of the “difficult and potentially ineffective “unscrambling of

10 A Merger occurring between companies in the same industry, within the same space, and offering the same good or service

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the eggs” once an anticompetitive merger has been completed (Federal Trade Commission, 2014). Further

complicating the matter is the unquantifiable benefits that merging hospitals provide – through the

aforementioned improved efficiencies achieved through population management. Given the ambiguity of the

effects of such mergers, efforts to halt or block mergers by regulators are very unlikely to occur without

sufficient tools to study impact and clear legal limits.

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IV. For Profit v. Non-Profit Hospitals

With the very real possibility of 5 non-profit community hospitals being acquired by the for-profit company

Tenet Healthcare in the near future, it is important to discuss the differences between for-profits and non-profit

hospitals, the conversion process and potential impact that such an operational change would have on residents

of Connecticut.

Hospitals, whether for-profit, non-profit, or government-owned, operate under different legal rules depending on

their ownership. For example, for-profits may distribute accounting profits to shareholders, while government

and nonprofit hospitals benefit from income and property tax exemptions (Horowitz, 2005). By definition, a

nonprofit hospital is one that exists to serve the healthcare needs of the community. Nonprofits are often

mission-driven and rooted in culturally rich values; they are uniquely responsible to the community they are

settled in. Often, nonprofit hospitals are “safety net” providers, where they take on a substantial responsibility to

serving the uninsured, Medicaid enrollees, and vulnerable populations facing a variety of barriers to healthcare

access. “All nonprofit hospitals must adhere to a number of regulatory statutes at the federal and state levels in

order to maintain exempt from federal, state, and county taxation – this relationship improves healthcare access

to the underinsured and uninsured while relieving nonprofit hospitals from substantial tax liability” (Bales,

Tiberio, & Tesch, 2014).

Some of the federal regulations nonprofits must follow, for example, include the following:

Community Health Needs Assessment

Federal Designations Designed to Assist Rural Safety Net Hospitals

Excess Benefit Regulations

Commercial Reasonableness

Stark Law

Anti-Kickback Statutes

EMTALA (Bales, Tiberio, & Tesch, 2014)

While hospitals might have different ownership, they should theoretically treat patients with the same mix of

needs, after all they contract with the same insurers and government payers, operate under the same health

regulations, and employ staff with the same training and ethical obligations (Horowitz, 2005). This however

does not always end up being the case.

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A. Overview of Process for Conversions

The process in Connecticut for converting a non-profit hospital to a for-profit entity requires an extensive

regulatory review by the State Attorney General and the Commissioner of the Department of Public Health. The

Certificate of Need (CON) approval process for hospital conversions is governed by Connecticut Law and

contains standards that the Attorney General and the Commissioner of Public Health must apply in rendering a

decision for each application. (CT Office of the Attorney General, 2014) According to Connecticut State Law,

“no nonprofit hospital shall enter into an agreement to transfer a material amount of its assets or operations or a

change in control of operations to a person that is organized or operated for profit without first having received

approval of the agreement by the commissioner and the Attorney General (of the state of Connecticut).” The

Statute goes on to grant the CT Attorney General the power to deny an application as “not being in the public

interest” if an application does not meet the statutory requirements for governing non-profit entities; if the

applicant fails to exercise due diligence in deciding to “transfer assets, the selection of a purchaser, obtaining a

fairness evaluation, or in negotiating the terms and the conditions of the transfer” it must be denied. The

application must also disclose whether there is any conflict of interest or if the non-profit hospital will not

receive fair market value for its assets (CT Office of the Attorney General, 2014).

The Commissioner of Public Health also has standards that an applicant must pass before receiving approval of

such a transaction. The applicant must display that the community affected will be assured of “continued access

to high quality, affordable care after accounting for any proposed change impacting hospital staffing and that a

commitment has been made to provide care to the uninsured and underinsured” or else the Commissioner is

required to deny any application. (CT Office of the Attorney General, 2014)

“Because nonprofit hospitals are charitable organizations, they must legally protect their charitable assets in for-

profit conversion transactions.” In other words, when a non-profit converts to a for-profit entity – its once-

philanthropic assets donated to the hospital must not be liquidated into the reserves of shareholders. This has led

to the formation of health conversion foundations, endowed with assets generated by the conversion and charged

with funding only health-related activities for the benefit of the community. (Bales, Tiberio, & Tesch, 2014)

While the process for the conversion of non-profit entities to for-profit companies is regulated and reasonably

transparent, the impact of such transactions is debatable. The impact will be discussed further in in sections C

and D.

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B. Drivers of Privatization of Hospitals

The primary difference between for-profit and non-profit hospitals is the distribution of accounting profit. “The

latter do not distribute profits to equity holders and enjoy some competitive advantages, including tax

exemptions and the ability to receive private donations” (Sloan, 2000). According to Thomas P. Weil, Ph.D., a

leading researcher on the issue, privatization of hospitals most frequently involves poorly positioned facilities in

need of “additional capital for the replacement of plant and equipment; improved management systems to reduce

the number of their non-direct patient care employees; and, an aggressive physician recruitment effort” (Weil T.

P., 2011). Other researchers have cited other financial and operational hardships as reasons for conversions such

as “burdensome debt service; unfunded pension liability; reduced payer reimbursement; lack of physician loyalty

and inability to successfully recruit new physicians; loss of market position, unfavorable community reputation;

and exclusion from managed care contracts” as major drivers for conversions (Bales, Tiberio, & Tesch, 2014).

The dilemma presented by privatization, according to Dr. Weil, is that if not for private investment, a number of

institutions may shut down resulting in the loss of good paying jobs and diminishing access to care in some

communities. On the other hand, some may say that closures are a good thing as it will lower national health care

expenditures. It is important that communities in those hospitals’ service areas have a say since they are the ones

that may lose access to critical care facilities (Weil T. P., 2011).

According to Peter Karl, CEO of ECHN, besides access to capital that he argues will protect accessibility and

affordability of care, as well as quality and safety, another benefit of aligning with Tenet health is their

“extensive expertise with risk-based contracting” (Eastern Connecticut Health Network, 2014).

Overall, 20 percent of community hospitals in the United States are investor-owned. These hospitals are,

generally, fiscally sound and their parent organizations, usually traded publicly on the New York Stock

Exchange, have shown little hesitation in pursuing further acquisitions (Weil T. P., 2011). Over the last decade,

not-for-profits have achieved an annual 4 to 5 percent excess of income compared to expenses in order to

accumulate the required cash needed to renovate and expand facilities. In Connecticut, the 5 non-profits up for

auction have achieved razor-thin excess incomes, well below the 5% goal, which partly explains the desire and

arguments by these institutions for financial assistance and access to capital. As noted earlier, it is important to

determine which facilities are vital and which are not as there are many cases where privatization “has served

patients and their communities well, while in other localities, their rejuvenation has simply resulted in additional

health care expenditures” (Weil T. P., 2011).

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Weil argues that the privatization in the United States (as well as in England and Germany) is due to an

oversupply of hospitals and hospital beds that results in many institutions becoming “poorly positioned and

fiscally vulnerable.” As a general rule of thumb, the least competitive institutions frequently: experience the

longest average length of stay; the need for huge sums of cash for recapitalization of plant and equipment;

project weak financial outlooks; employ an excess number of workers; always seem to be searching for

additional, qualified physicians for their medical staffs; and, over the past decade generally see their market

share shrinking. According to Weil, these vulnerabilities end up forcing institutions into responding in one of the

following ways in order to survive: (a) allowing themselves to be acquired by another nearby health system; (b)

merged as a “smaller of two” with another nearby hospital; (c) shut down; or (d) acquisition by an investor-

owned hospital management corporation.

Whether or not it is good public policy to allow conversions to go through will depend largely on three

questions: 1) Are the hospitals being acquired essential to the community they serve? 2) If they are financially

troubled, but essential, is there another way to keep them open? 3) If they are acquired, will changes in the

financial incentives for these hospitals affect access to care in the community, and if so, how?

With regard to how essential hospitals discussed are to the Connecticut communities in question, the evidence

suggests that some non-profit hospitals considering changing their tax status and selling their assets to Tenet

healthcare may have an excess supply of beds, a concern pointed out by Weil earlier. As evidenced in Figure 3

below, hospitals considering changing their tax status have an average occupancy nearly 15% lower than the

other non-profit hospitals operating in the state.

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Figure 3

*In figure 3, for-profits include Essent-Sharon Hospital and the four non-profits applying to sell their assets to the for-profit company Tenet Healthcare.

Furthermore, while state average occupancy rate of 66.6% is in line with national averages (U.S. Occupancy

rates averaged 67.8% in 2009) the average occupancy for those considering changing their status have steadily

decreased from 2009 to 2012 (Center for Disease Control, 2011). Though a 57% occupancy rate is typical for a

for-profit hospital according to the AHA, that number is misleading as it is buffeted by the strong occupancy

rates shown by 393-bed Waterbury Hospital and the 379-bed St. Mary’s hospital – Rockville and Manchester

Hospitals had occupancy rates as low as 30% and 44%, respectively, in 2012.

Another theory, from the buyer point of view, on why privatization of hospitals has increased in recent years is

the favorable market for debt. According to James Goody, Vice President and Portfolio Manager at Associated

Bank, “the robust debt market will continue to drive mergers and acquisitions…it’s really an opportunistic time

to take advantage of low interest rates.” The debt market, along with healthcare reform – which has been

extremely favorable to for-profit hospital chains, has created a boost in these companies share prices. Tenet

Healthcare Corp., the company applying to purchase several hospitals in Connecticut, closed nearly 30% higher

on the last day of 2013 than it had at the end of 2012 (Kutscher, 2014).

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With specific regard to the sale of ECHN, Tenet Healthcare, with its boost in capital from its rise in share prices,

may have offered ECHN a deal they could not refuse – which include promises to maintain community services,

restrict downsizing and cutting of service lines, and an additional seventy-five million dollars of capital funding

for “upgrades to ECHN facilities and projects to improve our services” above the price of purchasing the hospital

group (Eastern Connecticut Health Network, 2014).

C. The Case for Privatization

Privatization advocates say that public or non-profit ownership encourages inefficiencies or unresponsiveness to

meeting population health needs. They say such systems can be too sensitive to political influence and lack the

proper incentives to produce efficient and effective care (Villa & Kane, 2012).

Before delving further into why for-profit hospitals may be more efficient, it would be wise to define what it

means to be inefficient in a healthcare market. According to the World Health Report 2000, technical efficiency

refers “to the extent that resources are being wasted – efficiency is a measure of the degree of producing the

maximum number of outputs from a given amount of inputs.” Examples of these inefficiencies can include:

“excessive hospital length of stay, over-prescribing, over-staffing, use of branded over generic drugs, and

wastage of stock” (Hsu, 2010).

The prevailing theory among those who support for-profit medicine is that under non-profit systems, physicians

and hospital administrators are not incentivized to act in a cost-efficient manner. They argue that the decisions to

purchase highly trained personnel and sophisticated equipment are made “without regard for their need or likely

use…and that costly technologies are adopted and services added that are only marginally beneficial” (Andre &

Velasquez). In addition to the positive economic incentives built within a for-profit system, as outlined

previously, according to Professor Angela Mattie, a management professor at Quinnipiac University, “a for-

profit corporate structure should help bring economies of scale by allowing hospitals to consolidate

administrative functions, which should free up more capital to invest in health care services.” And for smaller

community hospitals the alliance with a larger system could allow hospitals to “tap into the knowledge base and

best practices used by much larger health care networks” (Bordonaro, 2013).

There are several theories that support the concept that “ownership” matters in performance and efficiency of

health systems and that a for-profit system is more efficient than a non-profit or government-owned entity. For

example, a publicly owned hospital might be inefficient because the relationship between the owners and the

managers is mediated by politicians who impose objectives on these firms that might help them to gain votes

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(e.g. by favoring union’s collective bargaining power, or by seeking patronage appointments for their supporters)

but conflicts with efficiency. A second theory posits that public organizations are required to maximize the well-

being of all patients in a service area, making it more difficult for publicly owned organizations to set shared

performance goals and, consequently, to implement effective incentive schemes that promotes efficiency. (Villa

& Kane, 2012) It is hard however to confirm or substantiate these theories as there is very little literature on the

matter. According to the report from the WHO cited earlier, in the United States it was “determined that non-

profit hospitals were more efficient than for-profit hospitals.” (Hsu, 2010) Further, in a meta-regression analysis

conducted by Drs. Karen Eggleston and Yu-Chen Shen of Stanford University, they found mixed results as it

relates to efficiency claims. “Efficiency studies of a single or limited number of states found for-profits have no

difference or are more efficient than not-for-profits, while the majority of national studies found for-profits to be

less efficient” (Changes in Health Care Financing & Organizations (HCFO), 2008).

Other arguments offered by proponents include the idea that “any community losses from conversions are offset

by financially strengthened institutions, an increase in tax revenues, and the movement of nonprofit assets to

other charitable purposes…they also maintain that in some over-bedded markets where failing hospitals might be

of questionable value to communities, for-profit buyers that own other hospitals in the same markets (are

credited) for shutting down redundant hospitals that nonprofit boards were unwilling to close. (Collins, Gray, &

Hadley, 2001)

There is more research that supports the claims that for-profits are better able to adapt to changes in the

marketplace however. According Larry Van Horn, Executive Director of Health Affairs at Vanderbilt University,

“With a history of operating with business objectives in mind, it makes sense that for-profit hospitals will be

better able than non-profits to adapt to the changing hospital environment, and to reconfigure production under a

new set of constraints.” Dr. Van Horn also notes that for-profits will have easier access to equity capital to

improve facilities and expand their market reach (Van Horn, 2011).

Additionally, as touched on earlier, one of the understated benefits of allowing hospitals to convert their tax

filing status is that those facilities no longer operating under the 501(c)(3)tax exemption would provide the state

and local townships with a windfall in revenues. For example, St. Francis’ conversion could provide a

tremendous amount of revenue for the city of Hartford. “According to the city assessor, St. Francis Care owns 41

buildings in Hartford with an assessed value of $296.3 million…That would generate about $11.3 million in new

property tax revenue for the city at a time when its budget has faced slim margins.” (Bordonaro, 2013)

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As it relates to Connecticut’s potential conversions, Kevin Gage, Chief Financial Officer for Stamford Hospital,

opines that “there should not be a knee-jerk reaction against conversions of hospitals to for-profit entities as long

as those hospitals act on the same level playing field as other non-profit hospitals and government-owned

hospitals.” Gage believes that innovation and efficiencies can be gained through conversions, as well as access to

capital to improve and upgrade facilities, but asserts that whether a hospital is for-profit or non-profit, “they all

share a responsibility to their community”(Gage, 2014).

Overall, based on the reports that for-profit hospitals have the ability to respond with speed and veracity to

changes in profitability and dynamic market environments, and because of their access to capital to refurbish and

expand facilities, one could easily conclude that the for-profit hospitals have the ability to keep hospital doors

open and remain a critical provider of care in the community.

D. The Case against Privatization

While there are certainly strong arguments for why privatization of struggling healthcare facilities is a viable

solution to preventing closures and maintaining access, there are certainly risks that need to be considered before

the state allows such changes in tax-filing designations.

One of the major risks has to do with incentives inherently built into a for-profit model. For-profit hospitals and

systems have a fiduciary obligation to maximize shareholders’ wealth. This obligation may run counter to the

provision of community benefits, such as care for the uninsured (Thorpe, Florence, & Seiber, 2000). According

to a study published by Jill Horowitz in Health Affairs, For-profits are most likely to offer relatively profitable

medical services and are most responsive to change in service profitability than either government-run or

nonprofit hospitals (Horowitz, 2005). For example, the Horowitz study found that for-profits are more likely

than non-profits to offer procedures such as open-heart surgery, a relatively profitable service, and less likely to

offer psychiatric emergency care, a relatively unprofitable service (Horowitz, 2005). This characteristic –

profitability sensitivity you can call it – was present in more than just surgery and psychiatric care types. “Tests

of more than thirty other services yielded similar results. While for-profit hospitals were only somewhat more

likely than nonprofits to offer relatively profitable services, both for-profit and nonprofit hospitals were

considerably more likely than government hospitals to offer relatively profitable services. For-profits were less

likely than nonprofits, which in turn were less likely than government hospitals, to offer relatively unprofitable

services. For-profit hospitals were more responsive than the other types were to rapid changes in service

profitability.” For-profits responsiveness to financial incentives are noteworthy for its magnitude and speed

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(Horowitz, 2005). Understandably, these financial motivations can be critically hurtful to patient access for

communities with large patient populations that require access to services deemed “unprofitable.”

Connecticut’s junior Senator, Chris Murphy (D-CT) released a paper in June outlining some of the concerns his

office has relating to for-profit medicine. The report did not offer a strong opinion for or against the conversions

but did provide readers with a series of facts that might be of concern. Some highlights include the fact that for-

profit hospitals are more likely to pursue and offer patients more financially profitable services as discussed

earlier; spending on Medicare enrollees were higher in states dominated by for-profit hospitals; non-profit

hospitals tend to behave differently when sharing a marketplace with for-profit hospitals as there is a tendency

for a “spillover” effect in how services are delivered; these effects include:

The tendency of non-profits to respond by aggressively seeking revenue-increasing

opportunities

Adopt profitable services

Discourage admissions of unprofitable patients

Reduce resources devoted to patients they do admit (Office of Senator Chris Murphy, 2014)

This “spillover effect” is likely because non-profits attempt to balance their profitable and unprofitable

service lines so that profitable procedures and services help to subsidize unprofitable ones. When a for-

profit hospital enters a marketplace, and begins to dominate the market share for those services it leaves

for-profits with little choice but to follow suit.

Another reason to be hesitant about converting a non-profit to a for-profit entity is embedded within a

report published by the Commonwealth Fund in 2001. For those who argue that conversions are the only

way to keep hospital doors open, in their study of eight hospital conversions, they determined that in “six

of our eight cases, sale to a for-profit owner failed as a permanent solution to the financial decline of

hospitals.” They were particularly unsuccessful for hospitals in over-bedded or urban markets (Collins,

Gray, & Hadley, 2001).

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V. REVIEW AND GENERAL CONCLUSIONS

A. Review of Findings and General Conclusions

The Universal Health Care Foundation of Connecticut (UHCFC) has commissioned a review of the academic

literature, industry narratives, government forecasts and economic impact of hospital consolidation and

conversion trends nationally and locally and provide a narrative for consumers, policy makers, and industry

leaders to better understand the issue. Based on the findings above, there are several areas where the literature

agrees upon a general trend and suggests policy recommendation, and there are also areas where there is still

much ambiguity and in which more research is required.

Generally, what is occurring within the Connecticut hospital system is not unusual and is fairly consistent with

nationwide consolidation and conversion trends. Both urban and rural, community and academic medical centers

are sensing the disruptive nature of health care reform. The primary driver of the consolidation and conversion

movement today appears to be hospital leaders’ generally held belief that revenues will decline in the months

and years ahead. Their efforts are motivated by their oaths to better their institutions and survive in the current

market environment – and if that means following strategies that result in bigger systems – whether through

consolidations of and between non-profit entities or acquisitions and conversions to for-profit health systems,

they will take the action necessary to ensure the survival of their institution; secondary to falling revenues are the

financial incentives built within payment reforms that rewards forming more integrated health systems where

care is coordinated, information is shared, and the continuum of care does not begin and end in an inpatient bed;

finally, the efforts by some in the state to convert their hospitals to for-profit entities are likely caused by worry

from leaders of struggling hospitals and hospital systems that they may not be in a financial position to weather

revenue declines while at the same time offering critical services to their communities.

The literature also heavily warns of the dangers of diminishing market competition. Article after article, expert

after expert, each identify hospital consolidation associated with significant price increases without an equally

proportional benefit in quality of care. This should be extremely concerning phenomenon for policymakers in

Connecticut currently reviewing the series of mergers and conversions being discussed in the state Attorney

General’s Office and Department of Public Health. At the same time, however, there is new evidence that

payment reforms built into ACOs and other integrated health systems support the premise that coordination of

care will increase efficiency and thus lower cost – you need to look no further than the Montefiore example

discussed in section 3C, and the 18 other health systems that showed successful declines in cost through ACO

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innovation. With regards to for-profit vs. non-profit medicine, the evidence suggests that non-profits are better

incentivized to treat vulnerable populations and allow for access to a larger range of service lines, but at the same

time, not allowing a hospital to convert might result in its financial doom.

B. Policy Recommendations

Upon reviewing the literature, the largest concern for policymakers found in this paper should be the historical

anticompetitive nature of hospital mergers. There is strong historical precedence that concentration of market

power leads to higher prices; reductions in access in the long-run; and negligible differences in quality. The

dilemma with consolidation is the contrasting policy goals set by our leaders in Washington D.C. – on one hand,

coordination of care, sharing of information, and forming larger organizations designed to manage population

health fundamentally conflict with the goals of antitrust law that promotes competition between hospitals and

health systems and believes that less concentration of power will result in greater accountability and better

outcomes.

As it relates to policies to address these issues and reach the goal of greater access, better quality, and lower

costs, the UHCFC must be careful and cognizant of the multitude of forces and the complexity of the issues

facing hospitals in today’s dynamic landscape – I would warn against any taking hard stances for— or against

consolidations and conversions. The issue is too complex, too institution-specific, to judge in a narrow prism of

right or wrong. Each hospital has a story, with a role to play in the community and incentives to respond to that

may or may not be in the public’s best interest. The long-term history does and should give many great pause for

the negative effects of consolidation, but recent examples, such as those at Montefiore Medical Center and other

successful ACO initiatives should temper reflexive judgments against allowing such experiments in care

coordination.

Therefore, my policy recommendations as it relates to these issues is as follows:

1. Develop robust and clear economic and legal standards for judging the likely impact of mergers on price, access, and quality that allow for more salient enforcement of anti-trust laws

The impact of a hospital merger can have a profound impact on access, patient health, and cost of care. As I

have repeated several times in this paper, the history suggests the danger of allowing a merger to go through

under the ambiguous justification that it will lower costs and improve quality through coordination of care and

improved efficiency of service delivery. There simply does not yet exist a preponderance of evidence that ACOs

or ACO-like programs will effectively control cost. The fact is – there is greater history of evidence that market

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concentration is and has been a prime driver of the United States status as an outlier in terms of price of

healthcare, and subsequently spending on healthcare compared to other advanced nations. According to Dr.

Thomas Bodenheimer, writing for the Journal of Medicine and Public Issues, “the historical domination of

providers and suppliers over payers has (resulted) in a price structure far difference from that of health care in

most developed nations” (Bodenheimer, 2005). Despite a recent string of success in antitrust enforcement as

discussed in section 3D, the history of hospital antitrust cases had been notable for its lack of success, which

some suggest may have been caused “due to judges and juries holding views of hospital markets as being

different from markets for other goods and services” (Gaynor, 2006).

According to Martin Gaynor of Carnegie Mellon University, “hospitals are an industry with unique attributes,

but nothing about the specifics of the health care industry suggests that the unregulated use of market power in

this industry is socially beneficial. As a consequence, the antitrust laws should be enforced here as in any other

industry” (Gaynor, 2006).

While the perception may be that it is the sole role of the FTC and the DOJ to enforce antitrust violations, under

the legal doctrine of Parens Patriae11 the state attorney general would have the legal standing to bring suit

against an enterprise that harms the public and where victims are unable to defend themselves from that harm.

“During the past roughly 30 years, states have regularly brought parens partriae actions to redress consumer

deception and antitrust violation” (Hines, 2004). Additionally, in Title III of the Hart-Scott-Rodino Antitrust

Improvements Act of 1976, Section 4C of the Clayton Act was codified to confer statutory parens partriae

authority to state attorney generals to protect persons injured by federal antitrust violations – meaning, the

federal government has granted the legal authority to states, specifically attorney generals, to enforce federal

antitrust laws (Hines, 2004).

While it is more appropriate to leave the specific standards for enforcement to the state legislature on the advice

and counsel of economic and clinical experts, the standards set should require the strictest and most accurate

economic predictions available based on the counsel and recommendations of a disinterested 3rd party (Theresa

Harrison’s suggested economic models would be a good starting point); that sets clear statutory limits on market

concentration, leaving little room for interpretation from judges and juries trying antitrust cases and which puts

the legal burden on the merging parties to prove how and why a potential merger will not have anticompetitive

effects; and which requires both prospective reviews (as required by the Hart-Scott-Rodino Act) of proposed

11 A doctrine that grants the inherent power and authority of the state to protect persons who are legally unable to act on their own behalf.

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mergers and periodic retrospective reviews of mergers that have taken place already. These standards are legal,

have been practiced in healthcare and other industries, and should allow for flexibility of institutions to continue

to develop administrative innovations as encouraged under the Affordable Care Act and other state and federal

policies.

2. Require hospitals that enter into a merger to develop a state-approved plan for divesture and/or other remedies should there be an anti-trust violation

Typically when an antitrust case is found to have merit, meaning when a judge rules that a hospital system – or

any business entity for that matter – is in violation of Clayton or Sherman antitrust acts, there are four

remedies available to courts, the FTC and DOJ in antitrust cases: (1) structural remedies, (2) conduct

remedies, (3) monetary remedies, and (4) criminal remedies. The generally accepted remedy is to “restore

competition” to the marketplace by divesting the assets (structural remedy) involved — “an undoing of the

acquisition is a natural remedy” (Lomax).

According to a legal analysis published by Dionne Lomax, a Partner at Vinson & Elkin LLP, noting the

prevailing Supreme Court Legal approach to these matters “divestiture serves three remedial functions: (1)

ending illegal combinations or conspiracies, (2) depriving antitrust violators of the benefits of their unlawful

action, and (3) breaking up or neutralizing monopoly power.” This structural remedy, as the court sees it, is

intended to ensure that competition is restored to the level at which it existed before the merger and not

to increase competition. “Considerations when determining a proposed remedy’s effectiveness are speed,

certainty, cost, efficacy, and enforceability…and at the same time, the remedy must cause as little harm as

possible to the general public and innocent shareholders of the companies involved in the illegal

combinations.”

By contrast, Conduct Remedies allow merged entities to remain intact while requiring the violating

organization to change their behavior. Courts have typically followed divesture as the primary remedy to

antitrust violations, “It is simple, relatively easy to administer, and sure.” Further, the DOJ identified four

problems with conduct remedies, according to Lomax’s study: “(1) Direct costs of supervising and

monitoring the entity’s activities to ensure compliance; (2) the likelihood that the entity may attempt to

evade the remedy’s ‘spirit’ while remaining technically compliant; (3) the conduct restraints may inhibit

the efficiencies that initially made the merger attractive; and (4) the restraints may prevent the entity

from responding effectively to changes in the market. (Lomax)

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While three quarters of divestitures were successful in fulfilling its goals, there was also evidence that

divestitures did not always create a viable new competitor – a serious problem when you are discussing

the health and well-being of a patient population. According to Lomax, the strongest argument against

structural remedies is the difficulty in applying post-merger. “When two companies have combined their

products, manufacturing lines, real estate, intellectual property, and staff, disrupting the integration may

be challenging, costly, and harmful to the company, the market and consumers.”

For example, in 2000 Evanston Hospital and Glenbrook Hospital merged with Highland Park Hospital to

form the Evanston Northwestern Healthcare Corporation (ENH). More than four years after the merger,

on February 10, 2004, the FTC issued a three-count complaint against EHN arguing that the merger had

resulted a reduction of competition in violation of the Clayton Act § 7 and price fixing. Following an 8

week trial, an Administrative Law Judge (ALJ) ruled that the merger had indeed “substantially lessened

competition” and resulted in higher prices.

Despite the ALJ ordering full divesture of the three hospitals in Evanston, the FTC found that the costs

associated with separating hospitals that had functioned as one entity for several years would be too high

– the Commission determined that competition could be restored through injunctive relief instead. “The

Commission concluded that requiring ENH to divest Highland Park would have had a significant, negative

effect on Highland Park’s cardiac surgery program. Instead, the Commission ordered an injunctive

(conduct) remedy that required ENH to “establish separate and independent negotiating teams.” This

arrangement would allow managed care organizations to contract separately with hospitals that were in

competition, and allow the entity to retain the benefits of such as efficient service delivery; shared

electronic health records; and integrated administrative functions such as purchasing of supplies

(Lomax).

Because the goal of an anti-trust remedies are to return market competition to what it was prior to

mergers, and because it is also the goal to not harm the public in doing so, a robust policy requiring a plan

for divesture and/or guidelines for remaining in compliance with conduct remedies should be a

requirement of all hospitals. While I have not found evidence of a similar statute in my research of

healthcare consolidation, there is precedence for these types of requirements in banking law.

The Bank Holding Company Act grants the Federal Reserve Board of Governors the authority to force a

company to divest their assets if they have been found to be in violation of law. The policy statement

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concerning divestures of bank holding companies notes that “divestures have taken many different

forms, and the Board has followed a variety of procedures in enforcing divesture requirement. Because

divesture may occur under widely disparate factual circumstances, and because such forced dispositions

may have the potential for causing serious adverse economic impact…it is important to maintain a large

measure of flexibility in dealing with divestures.” The policy statement goes on to state “there will be

substantial advantages to divesting companies in taking steps to plan for and accomplish divestures well

before the end of the divesture period” (Legal Information Institute).

Anti-competitive activities are a real and present danger to the public – it affects price, access, and quality

of healthcare. Hospitals that enter into mergers should be prepared to respond quickly in the case that

they are found to be in violation of antitrust laws, including but not limited to the Clayton Act and/or

Sherman Antitrust Act. According to Lomax, antitrust practitioners agree that the most effective remedies

are those that “resolve the anticompetitive harm, restore competition, and prevent future anticompetitive

conduct.” Requiring the hospitals to participate in developing remedy plans would allow for quick

response time to anti-competitive rulings.

3. Require all hospital systems (for-profit; non-profit; and government-owned) to follow the regulations

outlined in section IV of this paper, including the Community Health Needs Assessment

There is a plethora of literature that suggest that for-profit hospitals plan their service delivery model around

activities that maximize profit by diminishing the availability of unprofitable services such as psychiatric care,

passing costly patients on to non-profit and government-owned facilities, and aggressively pursuing and

expanding profitable services. (Horowitz, 2005) Frank Sloan of Duke University says “it has been widely

believed among experts in the health field that (for-profit) hospitals…motivated by profit may be inclined to sell

more care than consumers would demand” (Sloan, 2000).

While for-profits are required to fulfill some regulatory requirements to operate, such as “Commercial

Reasonableness,” “Stark Law,” “Anti-Kickback Statues,” and “EMTLA,” they are not required to proactively

seek out information about how to improve the health of their communities. (Bales, Tiberio, & Tesch, 2014)

One of the major purposes of the Community Health Needs Assessment (CHNA) included within the ACA, is

to get a sense of what patients’ demands are within its service area. It answers questions such as: What is the

age, ethnicity, education and health literacy of our population? What are the most prevalent diseases? What

services are we failing to provide and/or what services are we overproviding? As Sloane notes in his paper on

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hospital behavior, consumers of health services rarely act with great knowledge about their choices for services

and hospitals are buffeted by artificial demand resulting from 3rd party payers:

“There are many classes of services for which the seller knows more than the patient, client, or donor. For such “customers”, evaluating and rewarding performance is difficult. Often, for such services, the customer may never know for certain what would have happened if the service had not been performed or if it had been purchased from another seller. If, in the case of health care, the patient improved, was it because of, or in spite of, the care received? Would an elderly, infirm resident of a nursing home have been better off in another home? The buyer of legal services will never learn whether he or she would have been better off dealing with another attorney; was a lawsuit won (or lost) because of or in spite of the attorney? When college education is purchased , would the student have received a “better” education elsewhere? When a charitable donation is made to an organization, what would have happened to the needy if the donation had not been made?

Because of the sheer complexity of healthcare, consumers are often not in the best position to make judgments

about their health and thus rely on their physicians and hospitals to guide them to the best and most effective

treatment. Hospitals, ideally, are supposed to be trusted institutions with obligations to providing the best patient

care possible. Whether they are corporately owned or non-profit, the obligation to providing the best and most

appropriate care to their communities extends beyond ownership type, and exempting for-profits from the

requirement to assess their communities through the CHNA would be a disservice to their patient population and

to themselves. With the history of this ownership type’s propensity toward profit maximization, the CHNA will

provide a reasonable remedy and guidelines for working with patients, community leaders, and caretakers in

deciding and ensuring the service area needs are met. Further, because the CHNA requires a certain level of

transparency, it will help to prevent decision making based primarily on profit motives. If corporate run hospitals

are going to make money, it should be merited on their efforts to provide efficient care, not on cherry picking

patients and services.

4. When assessing whether to allow a non-profit to convert to for-profit determine whether the hospital is critical to health and well-being of the community it serves

As discussed in Section 4B, one of the main drivers of hospital privatization is a response to an oversupply of

beds in a service area. Bed occupancy and the ratio of beds per population are primary metrics when discussing

hospital capacity planning. (Rechel, Wright, Barlow, & McKee, 2009)

Supply of hospitals beds are usually determined by state regulators through Certificate of Need (CON) laws. In a

paper discussing Michigan’s CON process, author Shaun Langley and his associates, explain that in Michigan

the CON Commission is tasked with “balancing cost, quality, and access of health care services within the

state.” Langley explains that Michigan’s laws on bed licensing is meant to allow for beds to “meet, but not

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exceed, the demand for health care services in an area.” In Michigan, all regulatory decisions relating to bed

need are made by “aggregating zip codes and facilities into groups that reflect use patterns; these groupings

reflect the geographic distribution of the state’s population, use rates, and hospitals.” The problem with

Michigan’s bed need methodology is that the regulatory body quantifies bed need by “multiplying use rates in a

base year and scaling them based on projected population growth.” The problem with this methodology is that it

did not account for other factors such as patients coming in and/or leaving the state for care and changes in

population demographics (i.e. age, gender, race). As a result, in 2006, even though bed demand increased by

roughly 4 percent, the total bed demand – in the aggregate – was more than 5,000 beds fewer than the supply of

beds. (Langley, 2010)

The problem with oversupply of hospital beds is best described by the famous health policy thought leader,

Milton Roemer, who surmised that “supply may induce its own demand where a third party practically

guarantees reimbursement of usage.” This is the basis for Roemer’s law – which found a positive

correlation between the number of short-term general hospital beds available per 1,000 population and the

number of hospital days used per 1,000 population. (Shafrin, 2006)

So, when you apply this rule to Connecticut, one must wonder – considering the strong evidence of Roemer’s

law existence – how some hospitals’ struggling to keep up their average daily census levels can justify their

need to the community. For example, Rockville and Manchester Hospitals, both members of the Eastern

Connecticut Health Network have occupancy rates of 30 and 44 percent, respectively, well below the state and

national averages; and both are located within the same service area (northeast of Hartford; about 9 miles apart)

and are barely achieving a positive patient care margin. It would serve policy makers well to look hard at

whether a conversion to for-profit tax status is necessary in this case – or whether it will drive up costs and take

aggressive steps to further induce demand. Connecticut does have a robust Certificate of Need application which

requires hospitals to justify expansions, but as it relates to conversions, the application only asks one open ended

question for hospitals: “Explain how the proposal contributes to the quality of health care delivery in the region”

(Department of Public Health, 2013)

The scope and detail required for justifying hospital conversions should be expanded to include greater

specificity and higher standards for approval, especially when policy experts are vehemently arguing that

struggling hospitals should be closed. For example, at the Aspen Ideas Festival in July 2014, Dr. Tony Cosgrove

of the Cleveland Clinic and Jonathan Bush, CEO and Co-Founder of Athena Health argued that there are too

many hospitals. “Hospital occupancy in the United States right now is 65 percent. There were a million hospital

beds 20 years ago. Now there are 800,000 and we still have too many.” (Gamble, Becker Hospital Review,

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2014) Dr. Ezekiel Emanuel, former Health Policy Advisor to the Obama Administration, predicted that the

future healthcare system will be one with fewer hospitals – and that “a number of hospitals will have to close

after the healthcare system restructures itself in a more efficient way. (Gamble, Becker Hospital Review, 2014)

5. Advocate that gross receipts are assessed progressively – that is, the larger the institution the higher the tax rate – this is not dissimilar from Massachusetts Chapter 224 law.

The thought of a hospital tax is probably not going to be very popular among hospital leaders, especially when

many are complaining about the recently passed hospital tax (Stuart, 2014), but it has proven to be an effective

tactic in addressing certain disparities in market power between hospitals in other states. In Massachusetts, the

Chapter 224 law, investments are made “in prevention and wellness ($60 million), health information technology

($30 million), and struggling community hospitals ($135 million) through an assessment on health plans and

acute hospitals with more than $1 billion in net assets and less than 50 percent of revenue generated by public

payers.” (Gosline & Rodman, 2012) By targeting health systems that overleverage their market power and

redistributing those funds to other critically needed areas, the state can ensure that access to important health

systems remain, and that hospitals struggling to compete – and who may be inclined to consolidate – could

receive funds to help them remain independent and focused on providing for their communities.

6. Develop an All-Payer Claims Database* allowing study of price, quality, cost-effectiveness, utilization rates across all facilities, MSA, and settings of care

According to the Robert Wood Johnson Foundation, “All Payer Claims Database (APCD) systems can fill

critical information gaps for state agencies, to support health care and payment reform initiatives, and to address

the need for transparency in health care.” The database would provide support to consumers, purchasers, and

even hospitals to understand the “cost, quality, and utilization of health care for (patients)” (Porter, Jo; Love,

Denise; Peters, Ashley; Sachs, Jane; Costello, Amy, 2014).

APCD data can provide state policy-makers with standardized and transparent data to assess the financial effects

of health care transformation projects, assess demographic and geographic variations in health care utilization,

and provide a statewide overview of health care costs and quality. APCD data supports analysis of:

the cost of adverse health events

differences in cost and utilization between the Medicaid and commercially insured population

variation in provider reimbursement rates and total medical expenditures by type of service

out-of-state health care migration patterns

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gaps in health prevention and promotion programs

total cost of care for state residents

Historically cost of healthcare has been a mysterious and unavailable to many policymakers. Insurers were afraid

of revealing rates to competitors, hospitals were fearful of exposing charge-master prices, and this secrecy had

been a major contributor to that lack of an agreed upon unit price for a healthcare widget. The APCD would

allow for a more appropriate understanding of cost, greater ability to judge disease patterns, utilization rates,

efficacy, and quality.

A good example of the effective use of an APCD was implemented by the Dartmouth Atlas of Healthcare, an

ongoing policy project conducted by the Dartmouth Institute for Health Policy and Clinical Practice.

“In a 2009 meta-analysis using a large Medicare claims database, Dartmouth Atlas researchers found that differences in nationwide Medicare spending had no correlation to the health outcomes of beneficiaries, a finding that supported exploration of value-based purchasing arrangements in lieu of traditional fee-for-service models” (Porter, Jo; Love, Denise; Peters, Ashley; Sachs, Jane; Costello, Amy, 2014).

Another way to use an APCD is through Peer Comparison reports. These reports allow policymakers and

analysts to create benchmarks “which payers and providers can compare payment rates, conduct

performance analysis, and improve clinical quality” (Porter, Jo; Love, Denise; Peters, Ashley; Sachs, Jane;

Costello, Amy, 2014).

The bottom line is, an advanced APCD database that allow for analytical comparisons of cost, utilization and

quality will allow payers, government and consumers to choose and dictate prices to providers based on the

merits of the services offered, rather than the leverage gained through market power. Judging hospitals and

providers on clinical effectiveness and efficiency should contribute creating economic incentives to offer higher

quality, more efficient service for patients.

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