Texas regulators OK hospital mergers opposed by FTC

Texas regulators have green lighted a pair of hospital mergers using a method that allows the providers to dodge a federal antitrust challenge.

The Texas Health and Human Services Commission has approved Certificates of Public Advantage to allow Hendrick Health System and Shannon Health System to buy hospitals from for-profit Community Health Systems. That’s despite strong warnings from the Federal Trade Commission that the deals would create monopolies that drive up costs, lower quality and diminish access to services. Hendrick and Shannon will be the only acute-care hospital operators in Abilene and San Angelo once the deals close.

The HHSC’s approval comes with lists of terms and conditions both Hendrick and Shannon must follow. However, some experts question whether the systems will actually have to abide by them. A clause in Texas’ COPA law allows merged entities to terminate COPAs simply by giving HHSC 30 days’ notice.

The FTC and others have pointed out it’s almost impossible to unwind mergers once they’ve been consummated, as service lines will have been consolidated, contacts with insurers renegotiated and staffing reorganized.

Dr. Robert Berenson, an Urban Institute fellow who has studied COPAs, said fact that the systems could opt out of regulation in a year or two is “very problematic.” He said he’s never seen a termination clause in a COPA.

“I’m really worried about the inside dealing here, that this is just a sweetheart deal,” he said.

Chris Garmon, assistant professor of health administration at the University of Missouri-Kansas City, wrote in an email that he predicts Hendrick and Shannon will complete the deals and then terminate their COPAs down the road. All but one of the COPAs implemented nationally before 2010 have since expired or been repealed, yet those mergers are still in place.

Ken Field, an antitrust partner with Jones Day who represents both Hendrick and Shannon, disagreed that the termination clause allows the systems to dodge oversight.

“I really do think that argument is a boogie man because no party could actually take advantage of it the way people are afraid of,” he said.

An HHSC representative did not respond to a request for further explanation on that point.

For-profit CHS said in a statement it plans to close the sales in the coming weeks. Hendrick plans to buy 231-bed Abilene Regional Medical Center. Hendrick currently runs the only other acute-care hospital in Abilene, a city of roughly 123,000 people. Hendrick would also buy CHS’ 188-bed Brownwood Regional Medical Center in Brownwood, about 80 miles southeast of Abilene.

Shannon plans to buy 171-bed San Angelo Community Medical Center in San Angelo. Shannon currently runs the only other acute-care hospital in San Angelo, a western Texas city of about 100,000 people.

HHSC’s approval includes a list of conditions the systems must abide by. Perhaps the most important is the rate review process, as research has shown hospital mergers drive up prices. In this case, HHSC wrote simply that it will establish a rate review process and require approval before any hospital service rate changes.

HHSC said it disagrees with the FTC’s assertion that the lack of specificity in Texas’ COPA law on rate review means the commission will not “apply the full force of its resources to ensure that the benefits to Texans residing in communities where a COPA is in effect outweigh any disadvantages.” To that end, HHSC said it will evaluate proposed rate increases by comparing them to price indexes, cost report data, government program rates and other information as deemed necessary.

COPA rules or even merger consent decrees usually contain clauses that cap rate increases at specific levels, Berenson said.

“To simply say they are going to do rate review suggests to me this is not serious,” he said. “It doesn’t look like they’re committed to restraining price.”

The HHSC is also requiring Hendrick and Shannon to host annual public hearings and provide the commission copies of comments, summaries of comments received and attendee counts.

The terms also require the systems submit detailed quarterly reports that must contain an extensive list of information on quality, costs, access and competition.

On the quality front, the systems will have to share in their quarterly reports evidence on how quality has improved, patient volumes and readmissions and explanations of how patient services were optimized, among other items.

The quarterly reports also require them to share data on “pricing, quality and availability” of ancillary and physician services, but don’t go into specifics on how price information should be presented or what price information is required. The quarterly reports must also show how cost savings will be reinvested locally.

With respect to accessibility, the quarterly reports must list risks facing the systems’ respective counties and explain how the mergers mitigated those. The systems must show the mergers’ impacts on wait times, service delivery expansion, infrastructure investment and charity care. The quarterly reports must also provide data to show the mergers did not reduce competition among physicians and other providers, among several other points.

The state is also requiring the COPA holders submit annual reports that include information about the benefits of the COPA, actions taken to comply with the COPA terms and “information relating to price, cost, and quality of and access to healthcare for the population served by the hospital.”

In its explanations for approving the COPAs, HHSC wrote that Texas’ attorney general had advised that the benefits of the proposed deals outweighed any disadvantages attributable to reductions in competition that may result. The attorney general, however, agreed with the FTC that the Hendrick deal could impede competition, which may adversely affect prices, quality and access. Ultimately, HHSC said it determined the mergers will benefit the public by maintaining or improving the quality, efficiency and accessibly of healthcare services and that those benefits outweigh any disadvantages.

The commission said it received 41 letters raising concerns about the Hendrick deal and 29 letters supporting it. It also received 33 letters supporting the Shannon deal. The commission did not respond to Modern Healthcare’s request for those letters on Tuesday.

The CEOs of Hendrick and Shannon both donated money to the Texas representative who carried the bill that last year became the state’s COPA law. They said in statements they appreciate the work of state regulators and look forward to completing the deals in the coming weeks.