Department of Health and Human Services


OFFICE 

INSPECTOR GENERAL


THE EFFECTS OF HOSPITAL MERGERS


ON THE AVAilABiliTY OF SERVICES


f.RV'CESO 

Richard P. Kusserow l. 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. 

~tRichard 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 HospitalAssociation 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


FINDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

What Were the Hospitals Like? . . . . . . . . . . . . s 

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 

process for hospitals considering merger.2 On the other hand, figures from the American 

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 SUPPOI1 the work of the task force. 

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. 

For purposes of this study, the term merger includes acquisition. A hospital is defined as a 

facility that provides general, shOI1-term acute medical and surgical inpati nt services. 

METHODOLOGY 

In selecting the eight mergers for the case studies, we began with the American Hospital 

Association s (AHA) list of 1987 mergers. The AH list contained 20 mergers that met the study 

criteria. From this list we identified: 

rura general acute care hospital mergers where both hospitals were located in the same 

county, and 

urban general acute care hospital mergers where both hospitals were located in the same. Metropolitan Statistical Area (MSA). 


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 

Ouumwa Regional Health Center 

Ouumwa, IA


Newton Medical Center 

Newton, KS 

Mercy Hospitals and Health Services of Detroit 

Detroit, MI 

Trinity Lutheran Hospital 

Kansas City, MO 

St. Francis MeaicaJ Center 

Grand Island, NE 

Staten Island Hospital 

Staten Island, NY 

MERGING HOSPITALS 

Ottumwa Regional Health Center 

Ouumwa, IA


St. Joseph Health andRehabilitation Center 

Ottumwa, IA 

Axtell Christian Hospital 

Newton, KS 

Bethel Deaconess Hospital 

Newton, KS 

Samartan Health Center 

Detioit, MI 

Mount Carel Mercy Hospital 

Detroit, MI 

Trinity Lutheran Hospital 

Kansas City, MO 

St. Mar s Hospital 

Kansas City, MO 

St. Fracis Medcal Center 

Grand Island, NE 

Grand Island Memorial Hospital 

Grand Island, NE 

Staten Island Hospital 

Staten Island, NY 

Richmond Memorial Hospital and Health Center 

Staten Island, NY 
SAMPLE coot. 

MERGER RESULT 

The Allentown HospitalLehigh Valley Hospital Center 

Allentown, PA 

Methodist Hospital of Middle Tennessee 

Winchester, TN 

MERGING HOSPITALS 

Allentown Hospital 

Allentown, PA 

Lehigh Valley Hospital Center 

Allentown, PA 

Methodist Hospital of Middle Tennessee 

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. 

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 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 

the 16 hospitals was 206 beds. 

After merger beds. , 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 

obstetrcal services offered by the hospital. 

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 lithotrpter and a magnetic resonance imager (MRI). 

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 

hospital, agreeing to consolidate medical staffs and employees. Mt. Carel wil 

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 

aIangement. Trinity and another acute care hospita wil share administrative services and 

personnel. This aIangement is intended to accommodate peaks and valleys in activity at

Trinity Lutheran Hospital in Kansas City, Missouri has also entered 


both hospitals. 


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. 

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. times a week. (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 

Emerald-Hodgson Hospita, but also to its merger parer 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 

non-obstetrcal patients were, in fact, using Triity Lutheran Hospitalafter St. Mar 

closed as a general acute care facilty. 

Due to religious affiiations in the Grand Island, Nebraska merger, elective tubal ligations 

were discontinued. That service can now be obtained from a miles away. 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. Healthcare Financial Management. April 1988. 

For an overview of concerns in the hospital industr see Marbeth Burke. "Mixed Signals 

from Government Have Chiling Effect on Mergers. Hospitals. June 5, 1990. See also 

HHS Neutral on Hospital Antitrst?" Health Pol cy Week. Februar 12, 1990 and Tinker 

Ready. "Court Axes Merger of Two Non-Profits. HealthWeek. rch 6, 1989. 

Merit C. Kimball. "Wil HHS Advise Justice, FfC on Hospital Antitrust?" HealthWeek. 

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.