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Published: 10/10/2011 - Updated: 2 years ago

ProMedica offers plan to save merger with St. Luke's

BY JULIE M. McKINNON
BLADE STAFF WRITER

ProMedica is proposing having a separate team negotiate insurer contracts for merger partner St. Luke's Hospital in the hopes of easing regulatory fears about the partnership.

Yet attorneys for the Federal Trade Commission -- who argue that hospital prices could rise more than 56 percent at St. Luke's and nearly 11 percent at other ProMedica hospitals if the partnership forged last year is allowed -- maintain that the merger is anti-competitive and divestiture is the only remedy.

And they want ProMedica to divest St. Luke's to an approved acquirer within six months of winning their case, according to documents filed as part of an FTC administrative trial in Washington.

The two sides recently gave closing arguments for the eight-week trial, which started May 31 and was spread out over the summer.

They also have filed documents disputing many of each other's arguments, including ProMedica's that the economic model that an FTC expert used to derive hospital price increases is flawed.

Jeffrey Kuhn, ProMedica's chief legal officer and general counsel, said the hospital partners do not believe their transaction is anti-competitive but are willing to have a separate team negotiate hospital rates for St. Luke's with insurers.

That relationship would be similar to one the FTC used a few years ago to settle its case with Evanston Northwestern Healthcare Corp. in Illinois, where Highland Park Hospital has a separate negotiating team from Evanston and Glenbrook hospitals.

ProMedica, meanwhile, has invested about $15 million in St. Luke's to implement electronic medical records as required by the government and for other projects, which would not be repaid if the FTC gets its way. St. Luke's, which had trouble negotiating above-cost hospital rates while independent, now is in better financial shape since joining ProMedica, and employees have been reassigned between the two, Mr. Kuhn noted.

"We just think it would be horrible if St. Luke's would be pulled back out of ProMedica," he said.

Regulators began to look into ProMedica's merger with St. Luke's more than a year ago, and in March, the FTC received a preliminary injunction in U.S. District Court in Toledo so the partners couldn't fully join.

ProMedica cannot reduce staffing or clinical services at St. Luke's while the anti-competitive question is being settled, although the FTC has allowed the partners to move rehabilitation beds from the Maumee hospital to Flower Hospital to free up space and to make some other joint moves.

The FTC declined to comment on ProMedica's proposed remedy last week, saying it doesn't typically comment on ongoing cases. A decision by the FTC's administrative judge is expected in coming months.

So-called conduct remedies, such as the one ProMedica has proposed, have become more common in the last decade with the FTC and the Department of Justice, said David Garcia, a partner with the law firm Sheppard Mullin Richter & Hampton LLP, which is not involved with the case.

Conduct remedies generally are less onerous than divestitures, the southern California lawyer said. "This has become all the rage now," Mr. Garcia said.

"In the last five years, these deals have proliferated in a lot of different ways." If ProMedica's proposal is accepted, however, negotiations to outline the agreement still would have to take place, he said.

ProMedica's Mr. Kuhn said FTC lawyers have not appeared to accept ProMedica's proposal, and they have not been open to negotiations.

Once the FTC's administrative judge makes his decision, either ProMedica or FTC attorneys can appeal to the commission. Although FTC attorneys would have to accept the commission's decision, which probably would take a month or two, ProMedica can appeal to the Sixth Circuit Court of Appeals in Cincinnati, Mr. Kuhn said.

Board members and executives for St. Luke's and ProMedica will continue to fight for the partnership, which they believe benefits the community, Mr. Kuhn said.

"We are fully committed," he said. "We believe this is the right thing to do."

If FTC attorneys prevail and St. Luke's is divested to a willing buyer, such as Mercy Health Systems or the University of Toledo Medical Center, the former Medical College of Ohio, that still would create competitive harm, ProMedica argued in court papers. Their condition that ProMedica's insurance arm, Paramount Health Care, could not terminate its agreement with a divested St. Luke's also would give the Maumee hospital a competitive advantage it did not have before the partnership, it argued.

During the eight-week trial, FTC attorneys called on executives from various Toledo hospitals, experts, insurers, and employers. Insurers unanimously agreed the St. Luke's merger with ProMedica would cause hospital rates to rise, according to the FTC.

"Because of the acquisition, the competitive check that St. Luke's provided has vanished and ProMedica's dominance is now increased," the FTC said in a court document.

Even a ProMedica expert, who criticized the FTC expert's price analysis, said estimated prices would increase 18 percent at St. Luke's and 5 percent at other ProMedica hospitals, according to the FTC.

Yet ProMedica continues to maintain it would not be able to raise hospital rates above competitive levels with St. Luke's. Insurers, for example, could exclude ProMedica from their network and use Mercy and UTMC.

Contact Julie M. McKinnon at: jmckinnon@theblade.com or 419-724-6087.



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