Department of Health and Human Services

OFFICE 
INSPECTOR GENERAL

THE EFFECTS OF HOSPITAL MERGERS

ON THE AVAilABiliTY OF SERVICES

f.RV'CESO 
l. Richard P. Kusserow
INSPECTOR GENERAL 
/("d3a  FEBRUARY 1991  '' 
", '" 
Department of Health and Human Services

OFFICE 
INSPECTOR GENERAL

THE EFFECTS OF HOSPITAL MERGERS

ON THE AVAILABILITY OF SERVICES

f.RV'CES. 
~t-
Richard P. Kusserow
E. 
INSPECfOR GENERAL 
~/("d3a  OEI-04-90-02400  EXECUTIVE SUMMARY

PURPOSE 
This repoI1 describes the effects on the availability of hospital services when hospitals merge. 
BACKGROUND 
Changes in Medicare hospital reimbursement and other "belt- tightening" actions by public and 
private payers have forced hospitals to operate more effciently. Among the cost-cutting 
measures considered by hospitals are resource-sharng aIangements and consolidation. Some 
hospitals conclude that merger is the best course to remain viable. 
The U.S. Department of Justice (DOJ) and the Federal Trade Commission (FfC), however 
maintain that mergers may, in some situations, reduce he lthy competition. It is their 
responsibility to protect consumers from anti-competitive actions which may result in higher 
prices and restrcted choices. The DOJ prepared the Federal Merger Guidelines ("Guidelines 
in 1968. The DOJ uses the Guidelines to determine which proposed mergers may violate 
antitrust law. The FTC uses the Guidelines and other criteria for their merger analyses. The 
Guidelines do not mention the hospital industr specifically, nor issues of access to care. 
Some members of the hospital industry are deeply concerned about DOJ' s and FfC' s increased 
interest in and challenge to hospital mergers in the past few years. Recent antitrust suits have 
caused a great deal of consternation in the industr and have complicated the decision-making 
process for hospitals considering merger. On the other hand, figures from the American Hospital-
Association indicate that 40 to 60 mergers (the term inchides acquisitions) have occurred 
annually in the past decade. The DOJ and FfC have brought fewer than 10 antitrust cases 
against hospitals during that time. 
In November 1989, Secretar Sullvan appointed a task force to examine hospital merger issues 
and asked the Inspector General to conduct ceI1ain studies to SUPPOI1 the work of the task force. 
This repoI1 assesses the effects of hospital mergers on the 
availabilty of hospital services. 
FINDINGS 
This assessment of eight hospital mergers found that: 
In all cases, one or both of the merging hospitals suffered from declining occupancy, 
lagging revenues, and/or rising costs. The mergers addressed these problems; all of the 
remaining hospitals are reported to be stronger as a result of merger. 
None of these mergers drew community opposition, and none were challenged by antitrust 
enforcement agencies. . 
 Of the 16 merging hospitals, four closed (ceased to provide general acute care) after the 
merger. 
No negative effects on the availabilty of hospital services resulted from any of the 
mergers. In all eight merger cases, the availabilty of hospital services was maintained or 
improved. 
RECOMMENDATIONS 
This repOI1 contains no recommendations. However, the HHS Hospital Merger Task Force may 
make recommendations based on these and other studies.  ... ..... ......... ............ ...... ................... ..
. . . . . . . . . . . . . . ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ... . . . . . .
. ..  ..  ..  ....   ..  ..  ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ....... ..  ........... ..  ........... ..  ........... ..  ........... ..  ........... ..  ...........   .............   .....  ..   ...   ...   ...   ....    ...   ..  ..  ..  ..  ..  ..  . . . . . . . . . . . . . . .'  ..  ..  ..  ..  . 
TABLE OF CONTENTS

Page 
EXECUTIVE SUMMARY 
INTRODUCTION 
. . . . . . . . . . . . . . . . . . . . 1

. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 
FINDINGS. 
. . . . . . . . . . . . s 
What Were the Hospitals Like? 
Were the Mergers Challenged? 
Why Did the Hospitals Merge? 
What Were the Results of the Mergers? ................................. 7

Did the Mergers Affect the Availabilty of Hospital Services? ...............

CONCLUSION 
. . . . . . . . . . . . . . . . . . . . . . o

AGENCY COMMENTS 
ENDNOTES.  ' .
INTRODUCTION

PURPOSE 
This repoI1 describes the effects on the availabilty of hospital services when hospitals merge. Its 
findings are based on an assessment of eight hospital mergers that occurred in 1987. 
BACKGROUND 
Observers of the health care industry note the dramatic changes in that industry in recent years, 
including an increase in the number of mergers. One independent surveyor has forecast that the 
number of hosRitals in multi-hospital systems wil increase from about 2,400 in 1986 to over 
3,400 by 1995.

Changes in Medicare hospital reimbursement and other "belt-tightening" actions by public and 
private payers have forced hospitals to operate more effciently. Among the cost-cutting 
measures considered by hospitals are resource-sharng aIangements and consolidation. Some 
hospitals conclude that merger is the best course to remain viable. 
The U. S. Department of Justice (DOJ) and the Federal Trade Commission (FfC), however 
maintain that mergers may, in some situations, reduce healthy competition. It is their 
responsibilty to protect consumers from anti-competitive actions which may result in higher 
prices and restrcted choices. The DOJ prepared the Federal Merger Guidelines ("Guidelines 
in 1968. The DOJ uses the Guidelines to detennine which proposed mergers may violate 
antitrst law. The FTC uses the Guidelines and other criteria for their merger analyses. The 
criteria in the Guidelines take into account the geographic market, the product market, the 
market shars of each merging entity, the effects of competition on prices, imminent financial 
failure, and effciencies to be gained through merger. The Guidelines do not mention the 
hospital industr specifically, nor issues of access to care. 
Some members of the hospital industr are deeply concerned about  DOl's and FfC' s increased 
interest in and challenges to hospital mergers in the past few years. Recent antitrst suits have 
caused a great deal of consternation in the industr and have complicated the decision-making 
2 On the other hand, figures from the American 
process for hospitals considering merger.
Hospital Association indicate. that 40 to 60 mergers (the term includes acquisitions) have 
occurred annually in the past decade. The DOJ and FfC have brought fewer than 10 antitrust 
cases against hospitals during that time. 
In November 1989, Secretar Sullvan appointed a task force to examine hospital merger issues 
and asked the Inspector General to conduct certain studies to  work of the task force. 
SUPPOI1 the 
This repoI1 assesses the effects of hospital mergers on the availability of hospital services.  A companion repoI1 entitled "The Effects of Hospital Mergers on the Availabilty of Services: A 
Case Study of Eight Hospita Mergers" (OEI-04-91-00500) was issued at the same time as this 
repoI1. That document describes, case-by-case, each of the hospital mergers in the study sample. 
SCOPE 
The study examined eight cases of hospital merger that occurred during 1987. 
is defined as a 
For purposes of this study, the term  merger  includes acquisition. A  hospital 
facility that provides general,  inpati nt services. 
shOI1-term acute medical and surgical 
METHODOLOGY 
In selecting the eight mergers for the case studies, we began with the American Hospital 
AH 
Association s (AHA) list of 1987 mergers. The  list contained 20 mergers that met the study 
criteria. From this list we identified: 
mergers where both hospitals were located in the same 
rura general acute care hospital 
county, and 
uMrbane getnreroal pacuote lcairet ahosnpit aSl mteragetrsi wshteriec boathl h oAspitarlse waere  l(ocMated Sin tAhe s)am. e
.
We selected four mergers from each group. 
We conducted on-site visits to each community in the eight case studies. The study team 
obtained informatipn from hospital admistrators and staff, hospital board members, business 
leaders, local physicians, other local health care providers, local public officials, concerned 
citizens, State hospital associations, and State health planning agencies. 
This study examned the pre-merger versus the post-merger availabilty of hospital and related 
health care services. To ascenan the effect of the merger on avaiabilty, the pre-merger services 
offered by both merger parers were compard to the services stil offere by the post-merger 
facility. If a service was deleted as a result of the merger, the study team asceI1ained the 
availability of that service from another provider, and the distance to that provider. 
We did not analyze the broader and more complex issue of access to care that would have 
required examination of a number of factors beyond the scope of our review, such as: the 
availability or adequacy of health insurance coverage; patient and physician preferences to use a 
particular hospital; and the availability of related health care services in the area served by a 
hospital.  SAMPLE

The following eight hospital mergers were included in the study:

MERGER RESULT  MERGING HOSPITALS 
Ouumwa Regional Health Center  Ottumwa Regional Health Center 
Ouumwa, IA
 Ouumwa, IA

St. Joseph Health andRehabilitation Center 
Ottumwa, IA 
Newton Medical Center  Axtell Christian Hospital 
Newton, KS  Newton, KS 
Bethel Deaconess Hospital 
Newton, KS 
Mercy Hospitals and Health Services of Detroit  Samartan Health Center 
Detroit, MI  Detioit, MI 
Mount Carel Mercy Hospital 
Detroit, MI 
Trinity Lutheran Hospital  Trinity Lutheran Hospital 
Kansas City, MO  Kansas City, MO 
St. Mar s Hospital 
Kansas City, MO 
St. Francis MeaicaJ Center  St. Fracis Medcal Center 
Grand Island, NE  Grand Island, NE 
Grand Island Memorial Hospital 
Grand Island, NE 
Staten Island Hospital  Staten Island Hospital 
Staten Island, NY  Staten Island, NY 
Richmond Memorial Hospital and Health Center 
Staten Island, NY  SAMPLE coot. 
MERGER RESULT  MERGING HOSPITALS 
The Allentown Hospital- Allentown Hospital 
Lehigh Valley Hospital Center  Allentown, PA 
Allentown, PA 
Lehigh Valley Hospital Center 
Allentown, PA 
Methodist Hospital of Middle Tennessee  Methodist Hospital of Middle Tennessee 
Winchester, TN  Winchester, TN 
Emerald-Hodgson Hospital 
Sewanee, TN  . '
FINDINGS

This inspection found that among the eight 1987 hospital mergers studied: 
In all cases, one or both of the merging hospitals suffered from declining occupancy, 
lagging revenues, and/or rising costs. The mergers addressed these problems; all of the 
remaining hospitals are repoI1ed to be stronger as a result of merger. 
eNonne off tohesre mcergeersm dreewn cotmm unaity goppeosnitiocn, iande nosne .we re c
 hallenged by antitrust
Of the 16 merging hospitals, four closed (ceased to provide general acute care) after the 
merger. 
No negative effects on the availabilty of hospital services resulted from any of the 
mergers. In all eight merger cases, the availabilty of services was maintained or improved. 
WHAT WERE THE HOSPITALS LIKE? 
All of the 16 hospitals involved in these mergers were not-for-profit. Each hospital had its own 
administration and independent board. As a result of the mergers, the eight hospitals remaining 
each has an independent administration and board. 
The eight hospitals operate at 12 acute care facilties: four of the merged hospitals maintain acute 
care services at two locations; the other four hospitals closed one of the locations as an acute care 
facilty. 
The hospitals, prior to the merger, vared' in size from 32 beds to 470 beds. The average size of 
beds. 
the 16 hospitals was 206 beds. 
After merger, the eight remaining hospitals var in size from 72 beds to 803 beds, averaging 365
WERE THE MERGERS CHALLENGED? 
No challenge was presented to any of the mergers by any antitrust enforcement agency. In 
Ottumwa, Iowa the Federal Trade Commission did informally inquire into the proposed merger 
but did not challenge it. 
Further, there were no organized efforts within the hospitals or from the communities to prevent 
any of the mergers.  WHY DID THE HOSPITALS MERGE? 
In all of the cases, respondents said the decision to merge was prompted by problems within the 
hospitals. These problems vared widely in their severity and ultimate consequences, according 
to respondents. For example: 
Emerald-Hodgson Hospital in Sewanee, Tennessee was facing ceI1ain closure if it had not 
merged. Its closure would have deprived the Grundy County residents of a convenient and 
easily-accessible source of primar health car. 
In Newton, Kansas, continued competition between the two hospitals resulted in 
duplicative services and equipment. Continued competition would have drven both into 
financial failure, leaving the town without a hospital. 
In Allentown, Pennsylvania, the merging hospitals wanted to improve their position 
funher by reducing overhead expenses.

The factors cited by respondents which prompted decisions to merge were similar to the factors
4 Those studies found
found by the Inspector General in previous studies of hospital closure.

declining occupancy, lagging revenues and/or rising costs weakened hospitas to the extent that

they had no choice but to merge or close.

In this study, the factors cited are: 
Declining Occupancy 
Medical advances and new technology have allowed some procedures that formerly 
required hospitalization to be performed on an outpatient basis. 
Lengths 
of stay have also shoI1ened. 
Demogrphic changes have reduced admssions to certn services. For example, the 
famile&w-ho were formerly served by St. Mar s Hospital in Kansas City, Missouri have 
migrated to the suburbs. The elderly population remaiing in the area did not require 
hospital. 
obstetrcal services offered by the 
Lagging Revenues 
Insurers, in effoI1s to better control their costs, are limiting reimbursement. 
Economic changes in the community have increased the pOI1ion of indigent and 
under-insured patients. 
Rising Costs

New medical technology is a major capital expense, especially when hospitals must 
finance duplicate equipment to compete with each 9ther.  - ..
Labor costs are increasing and competition for staff, especially Registered Nurses and 
specialists, is keen. 
Liabilty insurance costs, especially in the tr-county area of Detroit, Michigan, have risen 
significantly. 
WHAT WERE THE RESULTS OF THE MERGERS? 
Respondents at all of the hospitas said the mergers made the hospitals stronger institutions and 
provided benefits. Some examples of the benefits specifically identified by respondents are: 
The post-merger Allentown Hospital- Lehigh Valley Hospital Center, now the largest 
hospital in Pennsylvania, was able to recruit nationally':prominent heaI1 and psychiatric 
specialists and retain staff physicians. 
In Ottumwa, Iowa, Ottumwa Regional Health Center was able to acquire more 
sophisticated equipment: a  magnetic resonance imager (MRI). 
lithotrpter and a 
In the Emerald-Hodgson Hospital in Sewanee, Tennessee, the post-merger hospital 
provided job security and employee benefits which had not been provided by the 
pre-merger management firm. 
By consolidating some administrative and management functions, Mercy Hospitals and. 
Health Services of Detroit eliminated management positions and reduced overhead 
expenses. 
The merger in Newton, Kansas ended the "medical ars race" which resulted from 
competition between the hospitals: Costly duplicafion of technology and staff was no 
longer necessar. 
In Staten Island, New York, the "overfowing" hospital was able to better utilze available 
space by1ansferrng some services to its "underused" merger panner. 
The hospitals in Grand Island, Nebraska and Ottumwa, Iowa were able to insure their 
Regional Referral Center status by halting declining admissions. 
However, for one hospital the strength gained from the 1987 merger was not long-lived. For 
another, the oppoI1unity for additional economies was a motivation to merge again several years 
later. 
Mercy Hospitals and Health Services of Detroit  the merger resulting from combining 
Mt. Carel Mercy Hospital and Samartan Health Center -lost approximately $28 
milion in fiscal year 1989. Worsening conditions compelled the corporate parent to 
demerge" them and to enter into new arangements.  As of July 1, 1990, Mt. Carel Mercy Hospital merged under a letter of intent with another 
Carel wil 
hospital, agreeing to consolidate medical staffs and employees. Mt. 
purchased by the other hospital's parent organization on April 1, 1991. 
Samartan Health Center, the other hospita in the 1987 Detroit merger, entered into ajoint 
venture agreement. As of July 1 , 1990, another hospita system wil manage Samartan for 
the next five years. The maaging system wil provide "financial SUPPOI1" in return for the 
use of Samartan Health Center and other health care facilties owned by Samartan 
parent corporation.

nto a new merger 
Trinity Lutheran Hospital in Kansas City, Missouri has also entered 

abIangoemetnt. Thrinity  and hanothoer acsute cpare hiospitta wila sharel admisnistr.ative  serv
 ices and 
personnel. This aIangement is intended to accommodate peaks and valleys in activity at
DID THE MERGERS AFFECT THE AVAILABILITY OF HOSPITAL SERVICES? 
Although four of the facilties closed after the merger, none of the mergers had a negative effect 
on the availability-of hospital services. In fact, services have been added at most of the hospitals 
since the merger. For example, as a result of the merger: 
In Grand Island, Nebraska, a skilled nursing facility was opened and outpatient services 
were expanded, including radiation therapy, radioactive implants, hemodialysis, and 
cardiac catheterization. 
times a week.
In Newton, Kansas, the newborn nursery has been upgraded from a Level I (well baby) 
facilty to a Level II (intermedate care) facilty. An "in-house" computed tomogrphic.
(CT) scanner has replaced the mobile scanner which visited Newton Medcal Center three 
In Staten Island, New York, psychiatrc emergency services, an MRI, a hospice, and 
cardiac catheterization services were added. A ski  ed nursing facility was also opened. 
In the case of the merger which created Methodst Hospital of Middle Tennessee, the 
availabilty of services and access to those services for the elderly poor was dramatically 
improved. The previously-troubled Emerald-Hodgson Hospital located in Sewanee 
opened a skilled nursing facilty and implemented a free transporttion system for the 
elderly poor in Grundy County. The system provides better access not only to 
parer 
Emerald-Hodgson Hospita, but also to its merger  13 miles away in Winchester. 
addition to free transpoI1ation, a toll-free telephone line to Sewanee was installed for the 
use of Grundy County residents. 
Only two of the eight merged hospitals deleted a service as a direct result of the merger: 
Trinity Lutheran Hospital in Kansas City, Missouri elected not to offer obstetrcal services 
after the merger with St. Mary s Hospital. Trinity L  theran had not offered obstetrcal  services for at least a decade prior to the merger because of local demographic changes and 
the fact that hospitals nearby stil offered obstetrcal care. 
The area served by Trinity Lutheran Hospital, "midtown " had become predominantly 
elderly. Statistics from the AHA on the number of biI1hs and bassinets for the period 
preceding the merger corroborated the claims of the Kansas City respondents that births 
were declining. Obstetrcal services are still available from other hospitals nearby, 
including Truman Medical Center, only five blocks away, and from Menorah Medical 
Center, approximately 2 to 3 miles away. 
Post-merger data on the average daily census at Trinity Lutheran Hospital and 
Medicare/Medicaid utilization figures all strongly indicated that the majority of St. Mar 
St. Mar 
non-obstetrcal patients were, in fact, using Triity Lutheran Hospitalafter 
closed as a general acute care facilty. 
miles away. 
Due to religious affiiations in the Grand Island, Nebraska merger, elective tubal ligations 
were discontinued. That service can now be obtained from a hospital approximately 20
In four of the eight mergers in the study sample, one of the hospitals closed as a general acute 
care facility. The additional distance that patients must travel due to the closure is insignificant 
and appears to have had no impact on the availability of hospital services. The distance to the 
remaining facilty in the four cases ranges from 1 block to approximately 1.5 miles. 
In three of the four cases where one of the hospitals closed, the buildings are now used for other 
services: 
In Kansas City, Missouri, the building houses both inpatient and outpatient psychiatricand 
alcohol/chemical dependency services and some administrative offices. 
In Ottumwa, Iowa, the building is used for outpatient care, home health care, rehabiltation 
servic~  office space. 
In Grad Island, Nebraska, the building houses an extensive range of outpatient services, a 
skilled nursing facility, offices, meeting rooms and a child daycare center. 

CONCLUSION 
In all eight cases of the mergers studied here, even when -a hospital closed, the availability of 
services was maintained or improved. 
RECOMMENDATIONS 
This repoI1 contains no recommendations. However, the HHS Hospital Merger Task Force may 
make recommendations based on these and other studies. 
 AGENCY COMMENTS

The draft repoI1 entitled "The Effects of Hospita Mergers on Access to Care" was submitted for 
comment to the appropriate Operating Divisions within HHS and the Secretar s Task Force on 
Hospital Merger. We received wrtten comments on the draft report from the Assistant Secretary 
for Planning and Evaluation and verbal comments from members of the Secretay s Task Force 
on Hospital Merger. Both remarked that the focus of the study is availability of services, not the 
broader and more complex issue of access to care. We agree. An analysis of the many issues 
relating to access to care is beyond the scope of this study. We, therefore  hanged the name of 
the repoI1 to reflect more clearly its narower focus.  ENDNOTES

Edward A. Grant, CPA and Edward J. Giniat, CPA. "Evaluating Mergers and Acquisitions 
with a Purchase Investigation.  April 1988. 
Healthcare Financial Management. 
For an overview of concerns in the hospital industr see Marbeth Burke. "Mixed Signals 
from Government Have Chiling Effect on Mergers.  June 5, 1990. See also 
Hospitals. 
HHS Neutral on Hospital  Health Pol  Februar 12, 1990 and Tinker 
Antitrst?"  cy Week. 
Ready. "Court Axes Merger of Two Non-Profits.  rch 6, 1989. 
HealthWeek. 
Merit C. Kimball. "Wil HHS Advise  HealthWeek. 
Justice, FfC on Hospital Antitrust?" 
Februar 26, 1990. 
Offce of Inspector General, Department of Health and Human Services. "Hospital 
Closure: 1987," OAI-04-89-00740, May 1989 and "Hospital Closures: 1988, 
OEI-04-89-01810, April 1990.