ProMedica vs. the FTC

System’s dominance is at heart of anti-trust case

The FTC record shows that Daniel Wakeman, then CEO of St. Luke’s Hospital in Maumee, wrote in an email that affiliating with ProMedica may not be best for the community, but it would help the troubled hospital.

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ProMedica’s dominance in the Toledo-area health market and charges that the health system uses its position to command much higher reimbursement rates from insurance companies — in comparison with its competitors — has been revealed in court documents to be the crux of the ongoing anti-trust case with the Federal Trade Commission.

ProMedica, the area’s largest health system, is embroiled in a lengthy battle with the FTC over its acquisition of St. Luke’s Hospital in 2010.

ProMedica officials dispute many of the assertions made by the FTC in various documents pertaining to the four-year court battle, but the U.S. 6th Circuit Court of Appeals in Cincinnati sided with the government agency last month and denied ProMedica’s petition to overturn the FTC ruling issued in 2011.

A three-judge panel of the court ordered ProMedica to divest St. Luke’s, stating that it would be illegal and anti-competitive for ProMedica to merge with St. Luke’s. ProMedica officials immediately announced they plan to petition for a rehearing at the U.S. 6th Circuit Court of Appeals. If that is unsuccessful, they intend to appeal to the U.S. Supreme Court.

Circuit Judge Raymond Kethledge asserted in the ruling that “ProMedica’s rates before the merger were among the highest in the state, while St. Luke’s rates did not even cover its cost of patient care. That was true even though St. Luke’s quality ratings on the whole were better than ProMedica’s.”

The judge went on to state that if St. Luke’s is allowed to remain part of the ProMedica system, all ProMedica hospitals would be in an even more dominant position in the Toledo-area market because “the merger would allow ProMedica to unilaterally increase its prices above competitive levels.”

‘Kangaroo court’

Despite being ordered to divest St. Luke’s by both the FTC and the federal court, ProMedica officials are still hopeful they can prevail and win the day in a higher court. ProMedica’s chief legal officer and general counsel, Jeffrey Kuhn, questioned the evidence presented against them and called the FTC investigation and hearing process a “kangaroo court.”

He also charged that although the investigators had access to millions of pages of documents and internal emails from ProMedica, they only appeared interested in cherry picking “snippets” or “soundbites” from the documents to support the case the FTC was building against the merger.

“We are still committed to the principles of why we did the joinder [merger] with St. Luke’s. Probably one of our biggest disappointments is with the soundbites, the snippets, kind of the trial by soundbites. A lot of it we believe was taken out of context and really doesn’t represent the true facts of the case,” Randy Oostra, ProMedica president and CEO, told The Blade.

Mr. Oostra pointed to an internal email that he said was sent years before the merger with St. Luke’s to several company executives. In the email, he said he repeated information told to him by an insurance company representative. Mr. Oostra said in the midst of negotiations over reimbursement rates, the insurance company told him that ProMedica’s rates were the highest in Lucas County. He then included that statement in the email.

“I sent it. I said ‘Hey, we heard from a payer and let’s drill down and make sure we have high quality, low cost because we are always concerned about that,’ ” Mr. Oostra said.

He and Mr. Kuhns said the FTC took just a portion of that email, used it out of context, and said that statement was repeated over and over in court records and included in the recent decision handed down from the appellate court. “The way the record read is that ‘ProMedica has some of the highest rates in the state’ is the phrase that really comes out of the email that they just adopted,” Mr. Kuhn said.

“Our bottom line is we have a 2 to 3 percent operating margin, which we then use to reinvest in equipment and the community and that’s very within the industry standards of what is reasonable. If we had a really high operating margin, then you could say, ‘Oh, wow, they must be getting really high rates,’ ” Mr. Kuhns added.

Even though ProMedica officials objected to what they said were erroneous acute-care rates a federal appellate judge cited in his decision, they refused to provide The Blade the rates they charge patients or their insurance companies at their hospitals in Lucas County. “These managed care agreements are all confidential,” Mr. Oostra said.

FTC documents containing exact figures being paid to each hospital were redacted before records were released to the public. A spokesman for the FTC, Mitchell Katz, said the hospital systems were allowed to review the documents and ask for any confidential business information to be redacted.

The FTC also declined to respond to charges made by ProMedica officials concerning the agency’s hearing process.

“The FTC does not comment on pending litigation and this case is pending,” Mr. Katz said.

The FTC record shows that Daniel Wakeman, then CEO of St. Luke’s Hospital in Maumee, wrote in an email that affiliating with ProMedica may not be best for the community, but it would help the troubled hospital.

4-year battle

ProMedica has been battling with the FTC since July, 2010 — less than two months after the merger agreement was signed. The federal agency immediately questioned whether this pairing of ProMedica with St. Luke’s, reducing the number of hospital systems in Lucas County from four to three, would result in higher prices for consumers.

Each hospital system negotiates reimbursement rates with each insurance company. The formula for reimbursement is very complex and based on many factors.

Professor Robert Town, an expert in health-care management at the Wharton School at the University of Pennsylvania was hired by the FTC to be a witness in the ProMedica-St. Luke’s merger hearings. Mr. Town was asked to perform an economic analysis of the Lucas County market to determine how much each hospital system is being paid by insurance companies for performing medical services and how the merger would affect prices paid by consumers.

According to Mr. Town, before the merger, ProMedica already controlled nearly 47 percent of the market, compared to 28 percent for Mercy, the second-largest health provider. The University of Toledo Medical Center, the former Medical College of Ohio, had 13 percent of the market, followed by St. Luke’s, with just over 11 percent.

He also found that ProMedica’s prices were on average 32 percent higher than Mercy’s, 51 percent higher than UTMC’s, and 74 percent higher than St. Luke’s.

Those figures were quoted in the ruling by Judge Raymond Kethledge, who wrote the appeals court decision siding with the FTC. “Thus, in this market, the higher a provider’s market share, the higher its prices. In ProMedica’s case, that fact is not explained by the quality of ProMedica’s services or by its underlying costs. Instead, ProMedica’s prices — already among the highest in the state — are explained by bargaining power,” Judge Kethledge wrote in his ruling.

Mr. Town said the judge would clear the courtroom when this information was discussed in the recent appellate hearing in order to protect the information from being shared with competing hospitals and insurance companies.

FTC documents repeatedly described the merger as creating a behemoth organization — that would give ProMedica above 50 percent of the general health-care market and more than 80 percent of the obstetrics market in Lucas County. Mr. Town found “the joinder would cause an increase in bargaining leverage of the combined ProMedica and St. Luke’s of almost 13.5 percent.”

In that same document, Mr. Town asserted that after the merger, the increased bargaining power gained by ProMedica would result in increased reimbursement rates for all of the system’s hospitals by 16.2 percent.

“There is a relationship between prices and bargaining leverage. The more bargaining leverage a hospital system has the more negotiated prices will be for insurance companies and typically they pass that on to consumers,” Mr. Town recently told The Blade.

Disputed analysis

ProMedica officials, however, strongly disagreed with Mr. Town’s analysis.

“[Mr.] Town admitted that his comparison consisted of ‘constructed’ prices, not rates one would actually see in health plan/​hospital contracts. Dr. Town constructed an academic pricing model that was a theory and not based on actual rates. We dispute the claim that ProMedica’s rates are among the highest rates in the area. We believe our rates have been and are competitive. Again, neither the courts nor the FTC found that they were anticompetitive,” Mr. Kuhn said.

But again, ProMedica officials refused to provide The Blade with the rates they charge patients and insurers.

Mr. Town said he has testified in many anti-trust cases on behalf of the FTC and that the model he created is based on several “peer-reviewed publications in prestigious economics journals.”

These models have been used in subsequent hospital merger trials, he said.

“They certainly didn’t agree with our analysis but they didn’t present any evidence to the contrary. ProMedica provided no persuasive evidence that this merger would have benefited Lucas County residents,” he said.

Favorable location

St. Luke’s was a desirable addition to the ProMedica network of hospitals because it is in Maumee in what is considered an affluent area, one of the few that has a high concentration of consumers with private or employer-based health insurance. According to FTC documents, two-thirds of Lucas County residents are on government health plans, either Medicare, which is primarily for senior citizens, or Medicaid, which insures those below the poverty line or on disability.

ProMedica purchased about 50 acres of land in 2008 on Arrowhead Road near Dussel Drive in Maumee in anticipation of building its own hospital in southwest Lucas County to attract those coveted commercial insurance consumers before the merger, but those plans were shelved when ProMedica and St. Luke’s joined together.

It was well-known that St. Luke’s was struggling to remain the only independent hospital in the Toledo area. Numerous Blade articles reported the hospital’s financial struggles before the merger and that the hospital was considering cutting money-losing services, including obstetrics, cardiac rehabilitation, and even general surgery to stay afloat.

But the FTC investigation revealed more of the story behind St. Luke’s finances. FTC officials assert that ProMedica was actively trying to inflict more financial hardship on St. Luke’s. FTC documents also charge that “ProMedica repeatedly sought to induce [insurance companies] to exclude St. Luke’s from their networks. For example, ProMedica’s contract with Anthem offered discounted rates conditional on Anthem’s agreement not to include St. Luke’s in Anthem’s provider network.”

Mr. Oostra denied that ProMedica was trying to squeeze St. Luke’s to weaken the hospital’s position before the merger. “We did compete, no doubt about it, but for them to go to the next stage, to make further accusations, again is just disappointing,” he said.

The FTC argued in court that St. Luke’s was actually turning a financial corner under the direction of its CEO at the time, Daniel Wakeman. The hospital was starting to operate in the black but still not able to get the same level of insurance contracts as its competitors.

The FTC found what it considered to be damning evidence that Mr. Wakeman encouraged the board to consider joining ProMedica in a series of internal emails. An excerpt from one read, “Affiliation with ProMedica may not be the best thing for the community in the long run. Sure would make life easier right now though,’ ” the FTC record showed.

Mr. Wakeman was not available to comment on this report.

St. Luke’s anticipated as much as $12 million to $15 million in additional revenues from three insurance companies alone — MMO, Anthem, and Paramount — as a result of joining ProMedica.

Mr. Oostra said, however, that higher rates for St. Luke’s were not the motive behind ProMedica’s decision to merge. He said ProMedica has offered on numerous occasions to create an arrangement so that St. Luke’s continues to negotiate insurance reimbursement rates separately with insurance companies, even after the merger.

“We didn’t have those type of documents. We didn’t do this deal to get higher managed care rates. We didn’t have any documents that said that. They projected those documents on to ProMedica as though we participated in those,” Mr. Kuhn said.

“The numbers are so small with St. Luke’s adding to us. The average is about six patients a day [with private insurance]. So this whole case has been about six patients a day and commercial insurance at St. Luke’s? They would have preferred us to spend a couple hundred million dollars and build a competing hospital, that would be their strong preferences. We don’t think that makes any sense,” Mr. Oostra said.

Contact Marlene Harris-Taylor at mtaylor@theblade.com or 419-724-6091.