Department of Health and Human Services


OFFICE 

INSPECTOR GENERAL


THE EFFECTS OF HOSPITAL MERGERS


ON THE AVAilABiliTY OF SERVICES


A Case Study of Eight Hospital Mergers 

tIlVJCES. 

Richard P. Kusserow l. INSPECTOR GENERAL 4-


'l1i
 d3a FEBRUARY 1991 
Department of Health and Human Services


OFFICE 

INSPECTOR GENERAL


THE EFFECTS OF HOSPITAL MERGERS


ON THE AVAILABILITY OF SERVICES


A Case Study of Eight Hospital Mergers 

~ StIlVJCES. 

f ~. Richard P. Kusserow l. INSPECTOR GENERAL 4-

'l1i~d3a 

. OEI-04-91-00500 
EXECUTIVE SUMMARY


PURPOSE 

This repon describes the effects on the availability of hospital services when hospitals merge. 

This repon contains a case-by-case description of the eight mergers in the study sample. 

A report entitled "The Effects of Hospita Mergers on the Availability of Services 

(OEI-04-90-02400) was issued at the same time as this repon. That repon is a summary, based 

on findings, of the hospital mergers in the study sample. 

BACKGROUND 

Changes in Medicare hospital reimbursement and other "belt-tightening" actions by pub ic and 

private payers have forced hospitals to operate more effciently. Among the cost-cutting 

measures considered by hospitals are resource-sharng arangements 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 (FTC), however 

maintain that mergers may, in some situations, reduce healthy competition. It is their 

responsibility to protect consumers from anti-competitive actions which may result in higher 

prices and restricted 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 DOl's and FTC'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 industry 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 includes acquisitions) have occurred 

annually in the past decade. The DOl and FTC 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 suppon the work of the task force. 

This repon assesses the effects of hospital mergers on the availability 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 availability of hospital services resulted from any of the 

mergers. In all eight merger cases, the availability of hospital services was maintained or 

improved. 

RECOMMENDATIONS 

This report contains no recommendations. However, the HHS Hospital Merger Task Force may 

make recommendations based on these and other studies. 
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TABLE OF CONTENTS


EXECUTIVE SUMMARY 

INTRODUCTION
 . . . . . . . . . . . . . . . . . . . . . 1


CASE STUDIES 

Ottumwa Regional Health Center


Ottumwa, Iowa. . . . . . . . . . . . . . . . . 4


Newton Medical Center 


Newton, Kansas . . . . . . . . . . . . . . . . 6


Mercy Hospitals and Health Services of Detroit


Trinity Lutheran Hospital


Staten Island Hospital


The Allentown Hospital - Lehigh Valley Hospital Center


Methodist Hospital of Middle Tennessee


Detroit, Michigan . . . . . . . . . . . . . . 8


Kansas City, Missouri . . . . . . . . . . 11


St. Francis Medical Center


Grand Island, Nebraska . . . . . . . . 14


Staten Island, New York . . . . . . . . 16


Allentown , Pennsylvania. . . . . . . . 18


Winchester, Tennessee. . . . . . . . . . 21


AGENCY COMMENTS .................................................. 23


ENDNOTES. . . . . . 
INTRODUCTION


PURPOSE 

This repon describes the effects on the availability of hospital services when hospitals merge. 

The Secretary of the U.S. Depanment of Health and Human Services (HHS) requested this 

inspection. 

This repon contains a case-by-case description of the eight mergers in the study sample. 

A report entitled "The Effects of Hospital Mergers on the Availability of Services 

(OEI-04-90-02400) was also issued at the same time as this report. That report is a summary, 

based on findings, of the hospital mergers in the study sample. 

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 

400 by 1995.


Changes in Medicare hospital reimbursement and other "belt-tightening" actions by public and 

private payers have forced hospitals to operate more efficiently. Among the cost-cutting 

measures considered by hospitals are resource-sharng arrangements and consolidation. Some 

hospitals conclude that merger is the best course to remain viable. 

The U. S. Department of Justice (DOJ) arid the Federal Trade Commission (FTC), however 

maintain that mergers may, in some situations, reduce healthy competition. It is their 

responsibility to protect consumers from anti-competitive actions which may result in higher 

prices and restricted 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 

criteria in the Guidelines take into account the geographic market, the product market, the 

market shares 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 industry are deeply concerned about DOl's and FTC's increased 

interest in and challenges to hospital mergers in the past few years. Recent antitrust suits have 

caused a great deal of consternation in the industry 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 FTC 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 suppon the work of the task force. 

This repon assesses the effects of hospital mergers on the availability of hospital services. 

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, shon-term acute medical and surgical inpatient 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 AHA list contained 20 mergers that met the study 

criteria. From this list we identified: 

rural 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 information from hospital administrators 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 examined on the pre-merger versus the post-merger availability of hospital and 

related health care services. To ascenain the effect of the merger on availability, the pre-merger 

services offered by both merger panners were compared to the services stil offered by the 

post-merger facility. If a service was deleted as a result of the merger, the study team ascenained 

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. 
RECOMMENDATIONS 

This repon contains no recommendations. However, the HHS Hospital Merger Task Force may 

make recommendations based on these and other studies. 
CASE STUDIES


Thefollowing is a case-by-case description, based on discussions with respondents, of the eight 

mergers in the study sample. 

OttUnlwa Regional Health Center St. Joseph Health and 

Ottunlwa, fA Rehabilitation Center 

Ottunlwa, fA 

merged into 

OTTUMWA REGIONAL HEALTH CENTER 

OTTUMWA, 

WHAT WERE THE HOSPITALS LIKE BEFORE AND AFTER THE MERGER? 

Prior to the merger there were two hospitals approximately 1.5 miles apart serving approximately 

25,000 residents of Ottumwa, Iowa. They were Ottumwa Regional Health Center, the 183-bed 

community hospital, and religiously-affliated St. Joseph Health and Rehabilitation Center ("St. 

Joseph' ), with 82 beds. Both were general acute care 
 ospitals.

Many years prior to the merger the two hospitals had agreed that St. Joseph' s would focus on 

substance abuse, while Ottumwa Regional Hospital would perform most of the obstetrcal 

gynecological and pre-natal services. However, according to respondents, the hospitals were 

beginning to compete with each other by duplicating many services. 

A few years before the merger, Ottumwa Regional Hospital formed a venture capital company 

called Ottumwa Regional Venture, Inc. , which served as a holding company for the hospital and 

other for-profit enterprises. In 1987 , after lengthy negotiations, the owners of St. Joseph' , the 

Sisters of Humility, sold the hospital to Ottumwa Regional Venture, Inc. Ottumwa Regional 

Hospital and St. Joseph' s were merged to form Ottumwa Regional Health Center. St. Joseph' 

was closed as an acute care hospital and became the site for an outpatient services center. 

Ottumwa Regional Health Center now operates 237 acute care beds. 

WHAT WERE THE PROBLEMS AND WHY DID THEY MERGE? 

Most respondents said they realized that the community could not suppon two acute care 

hospitals. The hospitals were being drained financially by competing with each other for 

pa6ents and duplicating expensive equipment. Revenues were decreasing due to reduced 

reimbursements, declining admissions, and shorter stays. Ottumwa Regional Health Center was 

designated a Regional Referral Center, but was reportedly in danger of losing this designation if 

its patient mix did not increase. 
Respondents said they feared that if the decline continued, both hospitals would be forced to 

close. The merger was a way to address these problems and improve the capital position of the 

surviving hospital. 

WAS THE MERGER CHALLENGED? 

No one formally opposed the merger. During the negotiation period, a committee was 

established with representation from the medical community as well as both hospitals to look at 

the community s health care needs. All of St. Joseph' s personnel were offered jobs and were 

able to retain their seniority. The physicians had admitting privileges at both hospitals. Several 

physicians said they supported the merger because of the potential increases in effciency. 

The FTC informally inquired into the merger, but did not challenge it. 

DID THE MERGER AFFECT THE AVAILABILITY OF HOSPITAL SERVICES? 

The availability of inpatient services was unaffected by the merger. Although St. Joseph' s closed 

as an acute care hospital, the distance to Ottumwa Regional Health Center is approximately 1.5 

miles and both are on the same bus route. After the closure of the emergency room at St. 

Joseph' , it was reponed by one respondent that patients seeking emergency treatment had 

slightly longer waits. No services were deleted as a result of the merger. 

The availability of outpatient services has improved since the merger. An extracorporeal shock 

wave lithotripter and a magnetic resonance imager have been purchased. A free-standing blood 

bank has been added.


Ottumwa Regional Health Center continues to offer alcohol and chemical rehabilitation services 

at the St. Joseph' s location. The building provided space to add services such as an adult 

daycare center, respite care, mental health and psychological services, home health care and 

hospice service. 
Axtell Christian Hospital Bethel Deacolless Hospital 

Newtoll, KS Newton, KS 

merged illto 

NEWTON MEDICAL CENTER 

NEWTON, KS 

WHAT WERE THE HOSPITALS LIKE BEFORE AND AFTER THE MERGER? 

Prior to the merger there were two competing general acute care hospitals in Newton, Kansas. 

Bethel Deaconess Hospital ("Bethel") operated 90 beds, and Axtell Christian Hospital ("Axtell" 

operated 32 beds approximately one mile away. Bethel offered a few more services than Axtell 

but in general they provided similar primary health care services. They competed with each 

other for Registered Nurse staff, physician referrals, patients, and the procurement of advanced 

medical equipment. 

Both hospitals were private, riot-for-profit institutions with religious affiliations: Bethel with the 

Mennonite Church and Axtell with the United Church of Christ. Both hospitals served Medicare 

and Medicaid patients and provided charty care to persons unable to pay. They were governed 

by separate boards comprised of lay people and representatives from their respective churches. 

The two hospitals served the residents of NewtOn (population 16 5(0) and Harvey County 

(population 30,000 to 32 000), which had a stable economy based on agriculture, farm 

implement manufacturing, rail transponation, health care, and aircraft manufacturing in Wichita 

25 miles away. The only other general acute care hospital in the area is Halstead Hospital in 

Halstead, Kansas , a 190-bed hospital approximately 10 miles from Newton. Halstead Hospital , a 

secondary and teniary level referral center for Western Kansas, is not considered a competitor 

according to respondents. 

The original merger plans were to consolidate the two parent hospitals into Newton Medical 

Center but to keep both physical locations open until a new facility could be built which would 

house the combined institutions. Six months into the merger it became apparent that this was not 

economically feasible. The Axtell facility was closed. 

Newton Medical Center, which is not religiously affiliated, is now housed in the location which 

was formerly Bethel. Newton Medical Center is a 72-bed hospital owned by Newton Healthcare 

Corporation, a private, not-for-profit corporation. Newton Healthcare Corporation also owns 

Harvey County Home Health and two for-profit corporations, and maintains its offices in 

Newton Medical Center. The majority of the patients who had been served by Axtell and most 

of the Axtell physicians moved to the Bethel location. A Board of Directors comprised of 19 lay 

people governs the hospital. 
WHAT WERE THE PROBLEMS AND WHY DID THEY MERGE? 

A merger between the two hospitals had been discussed and analyzed for some years prior to 

1987. Since the early 1980's the community and the two hospitals knew that they were 

overbedded and that competing with each other was creating costly duplications of services and 

equipment. In 1981 a committee was formed to discuss merging. At that time the resistance was 

too great, the idea was tabled, and the committee inactivated. 

Around 1985 both hospitals were suffering from decreasing occupancy, shorter stays per patient 

and a general downward trend financially. Other problems were a shonage of Registered Nurses 

and some diffculty in finding specialists. At that time the merger committee was reactivated 

and the merger was planned. The merger was officially accomplished on July 17 , 1987 , and 

operationally effective on January 1 , 1988. 

Most of the pre-merger problems were addressed by the merger, although there is stil a shortage 

of Registered Nurses. Competition for Registered Nurses is fierce, particularly due to Newton 

proximity to Wichita where higher pay is offered. 

WAS THE MERGER CHALLENGED? 

The promise of a new hospital at a new location made the merger and the subsequent closure of 

Axtell more palatable. Despite the promise there was some resistance to the merger, particularly 

on the pan of physicians who had practiced at Axtell. Some sense of loss was felt by the 

community, but no serious resistance came from any comer of the community. The community 

continues to be supportive of Newton Medical Center. 

The other problem was a statutory prohibition to licensing two physical facilities under one 

license. The Kansas State Legislature passed enabling legislation which eliminated this obstacle. 

No antitrst enforcement agency challenged the merger. 

DID THE MERGER AFFECT THE AVAILABILITY OF HOSPITAL SERVICES? 

The availability of services has not been affected adversely by the merger. No pre-merger 

services were deleted. Availability has been improved by adding health promotion services, an 

in-house computed tomographic (CT) scanner, and by upgrading the nursery from a Level I 

(well baby) to a Level II (intermediate care) facility. 

Medicare and Medicaid patients continue to be served, and no policy or procedural changes have 

occurred regarding care for charty cases. Patients who formerly went to Axtell and who lived 

near Axtell have to travel approximately 1 mile further to Newton Medical Center. 
Samaritan Health Center Mount Carmel Mercy Hospital 

Detroit, MI Detroit, M I 

merged into 

MERCY HOSPITALS AND HEALTH SERVICES OF DETROIT


DETROIT, MI


WHAT WERE THE HOSPITALS LIKE BEFORE AND AFTER THE MERGER? 

Prior to the merger there were two hospitals in Detroit, Michigan which were divisions of the 

Sisters of Mercy Health Corporation. They were 451-bed Mt. Carmel Mercy Hospital ("Mt. . 

Carmel") in Nonhwest Detroit, and 236-bed Samartan Health Center ("Samaritan ) in East 

Detroit. Both hospitals served the inner city residents of Detroit, a predominantly lower 

socio-economic, black population. 

Mt. Carel provided tertiary level care and Samartan provided secondar level care. Both 

hospitals were led by a governing board comprised of lay, religious , and medical people. Both 

had its own CEO and a full complement of managerial staff. 

Sisters of Mercy Health Corporation, a not-for-profit subsidiary corporation of Mercy Health 

Services, owns 23 hospitals and six outpatient clinics. Mercy Health Services is a not-for-profit 

Michigan corporation sponsored by the Sisters of Mercy of the Province of Detroit who are 

dedicated to providing health care to people in need, giving priority to those who are 

economically disadvantaged. The other subsidiares of Mercy Health Services are a home health 

care agency, an alternative financing system, 20 retirement living and long-term care facilities, a 

foundation for fund development, an information systems division and an insurance company. 

The two Detroit hospitals and the six outpatient clinics merged management and governance 

structures on August 1, 1987, to become ,Mercy Hospitals and Health Services of Detroit. The 

hospitals maintained their own physical plants and their respective names. 

WHAT WERE THE PROBLEMS AND WHY DID THEY MERGE? 

In 1987 the MSA of Detroit, with a population of approxi!lately 5 million, was recovering 

somewhat from the economic slump in the automobile industr. The inner city, with a 

population of around 1 millon, was experiencing an ongoing decline. Middle income people 

continued to migrate to the suburbs and the remaining population was plagued by rising 

unemployment, a high infant mortality rate, and increasing drug and education problems. 

As the population served by both hospitals became increasingly indigent, and as paying patients 

became fewer and fewer, these two facilities created an ever-increasing drain on the total system. 

In addition to the demographic changes and their accompanying impact on patient mix, all 

hospitals in the tri-county area of Detroit were faced with high liability insurance premiums. 

The cost of liability insurance in Detroit is estimated to be six to seven times the national 

average, and is among the highest in the nation. 
Samaritan s situation was exacerbated by its loss of patients and physicians in the 9 years prior to 

this merger. In 1978 Samartan , known then as St. Joseph Mercy Hospital , and Evangelical 

Deaconess Hospital merged at the management level, but maintained their own physical plants. 

In 1983 St. Joseph Mercy Hospital moved to the old Detroit Receiving Hospital, losing patients 

and physicians in the aftermath. In 1984 both St. Joseph Mercy Hospital and Evangelical 

Deaconess moved into the present physical facility and became Samaritan Health Center. Again 

patients and physicians' were lost. By 1987 Samartan had lost all of its specialists except for one 

orthopedic surgeon.


By 1987 Mt. Carmel and Samartan, but more so Samartan with its larger indigent care base, had 

become constant financial drains on the system. Together they accounted for millions of dollars 

in losses each year. Corporate manageme t decided to merge the two management teams 

operational functions and governing boards. These changes would reduce both capital and 

operating costs; eliminate duplication and redundancy; iricrease market share; and expand and 

improve the ambulatory and primar care delivery system network. The combined hospitals 

would be more competitive in the Health Maintenance Organization (HMO) market. The stated 

thrust of the merger was to increase the number of patients belonging to HMO' s and Preferred 

Provider Organizations, by offering a city-wide distrbution of ambulatory and inpatient 

facilities. All of these improvements, ultimately, were geared towards reducing the financial 

drain on the corporate parent. 

WAS THE MERGER CHALLENGED? 

As far as the general public was concerned, nothing had changed, and they offered no resistance 

or opposition. According to most respondents there were negative reactions from within the two 

hospitals, panicularly on the part of the physicians. As staff were terminated, anxiety over job 

security and the presence of new administrators and managers rose. The sense of separateness 

between the two medical staffs was heightened. No antitrust enforcement agency challenged the 

merger. 

DID THE MERGER AFFECT THE AVAILABILITY OF HOSPITAL SERVICES? 

The availability of services was unaffected by the merger. No changes were made in the medical 

services offered, and no intermingling of medical staffs occurred. Some respondents felt 

however, that due to cutbacks in personnel, the level and possibly the quality of some services 

suffered. No services were deleted at that time. In late 1989 the pediatric inpatient unit at 

Samaritan closed due to low census. Samaritan s women s center also closed some time after the 

merger, but not for reasons associated with the merger. 

The merger somewhat alleviated the financial drain the two hospitals were creating; however, the 

drain continued. In fiscal year 1989 the two facilities accounted for a combined loss of around 

$28 million. In July of 1990 the 1987 merger of the management strctures of these two facilities 

was nullfied. 
As of July 1, 1990, Mt. Carel Mercy Hospital, although stil a pan of the Sisters of Mercy 

Health Corporation, was placed under the management of the Detroit Medical Center. Detroit 

Medical Center owns Grace Hospital and six other hospitals. Under the letter of intent which 

created the new management agreement, Detroit Medical Center wil renovate Mt. Carmel to 

accommodate cenain services such as obstetrics. The medical staffs and employee groups of Mt. 

Carmel and Grace Hospital wil be consolidated into one organization to be housed at the Mt. 

Carmel location. Detroit Medical Center wil assume ownership of Mt. Carmel on April 1, 1991. . 

As of July 1, 1990, the Sisters of Mercy Health Corporation entered into a joint venture 

agreement with Henry Ford Health Systems regarding Samartan Health Center. Per the 

agreement, Henry Ford Health Systems wil manage Samartan under a five-year management 

contract, as well as provide "significant financial support" to Mercy H,ealth Services. Henry 

Ford Health Systems ' physicians will work with Samartan s medical staff to provide care to the 

patients at the hospital and its six outpatient centers known as Mercy Family Care Centers. The 

president of the Sisters of Mercy Health Corporation said of the venture: "The involvement of 

Ford physicians wil allow us to expand the services we currently offer and reach an even larger 

part of the underserved populations, which is consistent with the missions of the Religious 

Sisters of Mercy and Henry Ford Health Systems ' Urban Health Initiative. 
Trinity Lutheran Hospital St. Mary s HO!lpital


Kansas City, MO Kansas City, MO


merged into 

TRINITY LUTHERAN HOSPITAL


KANSAS CITY, MO


WHAT WERE THE HOSPITALS LIKE BEFORE AND AFTER THE MERGER? 

Prior to the merger there were two general acute care hospitals within 1 block of each other in 

Kansas City, Missouri: 253-bed Trinity Lutheran Hospital and 198-bed St. Mary s Hospital ("St. . 

Mary ). Trinity Lutheran Hospital provided mostly teniar level care, and St. Mary s provided 

mostly general, primary level, family-practice services. They both served the area of Kansas 

City called "midtown. 

Trinity Lutheran Hospital was owned by Trinity Health Systems, Inc., a not-for-profit 

corporation housed in Trinity Lutheran Hospital, and was run by a governing board comprised of 

community leaders and physicians. St. Mary s was owned and operated by the SSM Healthcare 

in St. Louis, Missouri. The SSM Healthcare is a not-for-profit Missouri corporation sponsored 

by the Franciscan Sisters of Mar, and is guided by a lay advisory board. The pre-merger 

occupancy rate at Trinity Lutheran Hospital was 47 percent, with an average daily census of 119. 

The occupancy rate at St. Mary s was 45 percent, with an average daily census of 90. 

The primary industries in Kansas City are marketing and shipping agrcultural goods; 

manufacturing machinery, transportation equipment, steel, and chemicals; oil refining; 

automobile assembling; and printing and publishing. The MSA of Kansas City has a population 

-of one and one half milion. The population of Kansas City, Missouri alone is approximately 

450 000. 

The metropolitan area of Kansas City was growing economically. Midtown was comprised 

mainly of lower income, caucasian elderly subsisting on Social Security benefits, and a small 

Hispanic population. At one time the area was populated by middle income families, most of 

whom had migrated to the suburbs. Large hotel/convention complexes are being developed in 

and near midtown. The area is now beginning to attract middle income residents who are 

purchasing and renovating old homes. 

The merger process began between the two hospitals in mid-1987. Final legal documents were 

signed on February 16 1988. Shortly after Trinity Health Systems, Inc. acquired St. Mary s from 

SSM Healthcare, St. Mary s was closed as a general acute care hospital and became the site for 

the psychiatric and alcohol/chemical dependency services of Trinity Lutheran Hospital. 

Trinity Lutheran Hospital is run by a governing board comprised of approximately 26 people 

two of whom are previous board members from St. Mary s. The occupancy rate at Trinity 

Lutheran Hospital is now 63 percent, with an average daily census of 171. 
, 

WHAT WERE THE PROBLEMS AND WHY DID THEY MERGE? 

The primary reason for the merger was the failing financial condition of St. Mary s, and the 

desire of SSM Healthcare to divest itself of that facility, which was draining the entire system. 

Trinity Lutheran Hospital wanted to increase its market share by acquiring the physicians and 

patients from St. Mary s; Trinity feared that a competitor might purchase the facility if it did not. 

According to respondents, if St. Mary s had not been acquired by Trinity Health Systems, Inc. or 

some other health care organization, SSM Healthcare wo.uld eventually have closed the hospital 

and sold the real estate. 

Many of St. Mar s financial problems have been attrbuted to the changing demographics of the 

area. The migration of families out of the area had a panicularly negative impact on 

family-practice-oriented St. Mary s. The aging population which remained in the area could not 

support the facility adequately, panicularly the obstetrcal and gynecological services. Trinity 

Lutheran Hospital, on the other hand, offered a higher level of acute care services and was not 

affected as much as St. Mary s by these demographic shifts. Both hospitals were experiencing 

declining census and were duplicating some services. St. Mary s also was losing physicians due 

to aging of the staff and some migration to the suburbs. 

The entire Kansas City area was overbedded, according to respondents. Five blocks from Trinity 

Lutheran Hospital and St. Mar s Hospita was Truman Medical Center, the city s 271-bed 

community hospital. Within a 2 to 5-mile radius were St. Luke s Hospital, Menorah Medical 

Center, Research Medical Center, Baptist Medical Center, St. Joseph' s Hospital, Bethany 

Medical Center, and the University of Kansas Hospital. 

WAS THE MERGER CHALLENGED? 

There were no obstacles to the merger, although a small group of Catholics who supponed St. 

Mary s felt a certain sense of loss and elected to go to another Catholic hospital rather than use 

Trinity Lutheran Hospital. The majority of the St. Mary s patients and physicians did move to 

Trinity Lutheran Hospital. Efforts were made to absorb the non-medical staff into Trinity 

Lutheran Hospital; those employees who could not be accommodated at Trinity Lutheran 

Hospital were provided severance pay. No antitrust enforcement agency challenged the merger. 

DID THE MERGER AFFECT THE AVAILABILITY OF HOSPITAL SERVICES? 

The availability of hospital services was unaffected by the merger. All pre-merger services 

continued, with the exception of obstetrcal services. Trinity Lutheran Hospital in Kansas City, 

Missouri elected not to offer obstetrcal services after the merger with St. Mary s Hospital. 

Trinity Lutheran had not offered obstetrical services for at least a decade prior to the merger 

because of local demographic changes and the fact that hospitals nearby still offered obstetrcal 

care. 

The area surrounding Trinity Lutheran Hospital midtown " had changed from young, middle 

class families to a predominantly elderly population living mainly on Social Security benefits. 
Statistics from the AHA on the number of binhs and bassinets in the hospitals serving the area of 

midtown" indicate that births and bassinets at St. Mar s had steadily declined in the three years 

preceding the merger. The Medicare utilzation rate at Trinity Lutheran Hospital increased by 

160 percent from 1986 to 1989, clearly demonstrating an increase in the volume of elderly patients. 

Trinity Lutheran Hospital and St. Mar s served the indigent before the merger and Trinity 

Lutheran Hospital continues to do so. There were no changes made in policies at Trinity 

Lutheran Hospital regarding charty care. The amount of uncompensated care provided by 

Trinity Lutheran Hospital doubled after the merger, and the hospital's Medicaid utilization 

increased by 472 percent from 1986 to 1989. These figures imply that Trinity s services were 

available to and used by the former patients of St. Mar s. Further, respondents believe that the 

merger improved the quality of care at Trinity Lutheran by increasing the volume and frequency 

of specialized procedures. 

There is a perception that a "domino effect" was avened by the acquisition of St. Mary s. If it 

had closed outrght, according to some respondents, the closure would have created a fear on the 

part of the physicians and the community that Trinity Lutheran Hospital was next. This could 

have caused a flght from Trinity Lutheran Hospital, creating a self-fulfilling prophecy. 

In February of 1990, Trinity Lutheran Hospital entered into another merger, this time with 

Research Medical Center, a 100-bed general acute care hospital about 5 miles from Trinity 

Lutheran Hospital. The merger involves sharing administrative services and creating efficiencies 

by sharing personnel to accommodate the peaks and valleys of activity at each hospital. The 

arrangement prevents the loss of personnel who require full-time employment and saves the 

hospitals from paying expensive overtime rates. 
St. Francis Medical Center Grand Island Memorial Hospital 

Grand Island, NE Grand Island, NE 

merged into 

ST. FRANCIS MEDICAL CENTER 

GRAND ISLAND, NE 

'''HAT WERE THE HOSPITALS LIKE BEFORE AND AFTER THE MERGER? 

Prior to merger Grand Island, Nebraska, a community of' about 40,000, had three hospitals: 

Veterans Administration Medical Center (162 beds); Grand Island Memorial Hospital (1l4 beds); 

and St. Francis Medical Center (131 beds). Grand Island Memorial Hospital and St. Francis 

Medical Center were located only 3 blocks apan. Both were general acute care facilities, 

offering approximately the same mix of services, and competing for referrals. 

The administrations and boards of the two hospitals negotiated a merger. The Sisters of Charity 

Health Care System, the parent corporation of St. Francis Medical Center, offered to acquire 

Grand Island Memorial Hospital. Lutheran Hospitals and Homes Society of America, parent of 

Grand Island Memorial Hospital, accepted the offer in April of 1987. The merger agreement 

included a plan to close one of the two facilities as a general acute care hospital. Following a 

review and analysis by a consultant, the merged hospital board opted to close the Grand Island 

Memorial Hospital facility. 

St. Francis Medical Center now has 139 acute care beds. The former Grand Island Memorial 

Hospital building is used for expanded outpatient services and for a new skiled nursing facility. 

WHAT WERE THE PROBLEMS AND WHY DID THEY MERGE? 

Admissions were declining at both hospitals. Occupancy rates were around 50 percent. Grand 

Island Memorial Hospital was losing money and incurrng debts. Respondents said Grand Island 

Memorial Hospital would have inevitably closed. St. Francis Medical Center was faced with the 

threat of losing its Rural Referral Center designation if admissions continued to decline. 

Competition between the hospitals was financially draining and damaging the community 

perception of both. Both administrations agreed that they were in a deteriorating situation. 

"VAS THE MERGER CHALLENGED? 

No objections to the merger were raised. All staff at the Grand Island Memorial Hospital were 

offered jobs at the new hospital and counselors were available to help ease any stress caused by 

the changes. Prior to the merger most of the physicians had staff privileges at both facilities, and 

had already begun holding combined staff meetings. To funher insure integration, three board 

members from Grand Island Memorial Hospital were added to the governing board of the new 

hospital. No antitrust enforcement agency challenged the merger. 
DID THE MERGER AFFECT THE AVAILABILITY OF HOSPITAL SERVICES? 

The availability of services has improved for the community. Respondents said the merger made 

it possible to add and expand services. The Grand Island Memorial Hospital facility provided 

needed space for services, without the capital expense of building new facilities. The building 

now houses outpatient services such as: alcohol and drug rehabilitation services; eating disorders 

treatment; lithotripsy; hemodialysis; radiation and chemotherapy treatment; and mammography. 

The building also houses a new skiled nursing facility, offices and classrooms. St. Francis 

Medical Center has added a cardiac catheterization laboratory and plans to add rehabilitation 

serVIces. 

Due to the new hospital's religious affiiations, elective tubal ligation services were deleted. 

These services are available at a hospital 20 miles away. 

Respondents say the financial strength of the hospital allows more charity care to be offered. 

The hospital has recently begun to help build clinics in remote areas to increase access and to 

insure referrals for inpatient care. The hospital administration estimates that approximately 35 

percent of admissions now come from outside the county. 
Staten Island Hospital 

Staten Island, NY 

Richmond Memorial Hospital 

and Health Center 

Staten Island, NY 

merged into 

STATEN ISLAND HOSPITAL 

STATEN ISLAND, NY 

WHAT WERE THE HOSPITALS LIKE BEFORE AND AFTER THE MERGER? 

Prior to the merger, Staten Island Hospital was a 470-bed teaching hospital on the north end of 

the island. It offered many sophisticated inpatient procedures and clinical services. Although 

the hospital was located in a middle-income area, many of the clinic patients were covered by 

Medicaid or not at all. Richmond Memorial Hospital was a 172-bed community hospital located 

on the south end of the island, 8 miles away. In addition .to basic medical/surgical services, it 

offered outpatient psychiatric services and methadone treatment. 

In 1987 the hospitals merged under a corporate umbrella, Community Health Systems of Staten 

Island. For the first two years of the merger nothing changed in the operation of the two 

facilities. In 1989 a new CEO encouraged further consolidation and a single Medicare provider 

number was requested and granted. The medical staffs were integrated by June 1990. 

The hospital has recently been renamed Staten Island University HospitaL The former Staten 

Island Hospital site became University Hospital North, and the former Richmond Memorial 

Hospital site became University Hospital South. Basic medical and surgical services at both 

locations have remained the same, and new facilities and services have been created. 

WHAT WERE THE PROBLEMS AND WHY DID THEY MERGE? 

Richmond Memorial Hospital served a sparse population and the medical staff was dwindling. 

Occupancy rates were low compared to other hospitals in New York. There was a cash flow 

problem and malpractice insurance rates were increasing. Renovations completed in 1986 did 

not upgrade the operating rooms , which limited the new services it could offer. According to 

respondents, the hospital did not serve enough low-income patients to meet its Hill-Burton 

obligations because of its location. 


Staten Island Hospital was a financially sound hospital due to strong investment returns. 

However, it was overcrowded and unable to meet patient demands. Because of strict controls on 

hospitals by the State of New York, the hospital was not permitted to expand. Some respondents 

feared that the overcrowding would force the hospital to reduce services, especially clinics which 

served primarily Medicaid and charity patients. 

Richmond Memorial Hospital sought a merger to ease its financial problems. Most physicians at 

Richmond Memorial Hospital already had admitting privileges at Staten Island Hospital and the 

same union represented workers at both. After 18 months of planning and development, the 
administrations and boards of the two hospitals agreed to become part of a holding company, the 

Community Health System of Staten Island. The merger was designed to better integrate 

services and improve service delivery; maximize resource utilization; eliminate duplication; 

produce economies of scale; and recruit staff. 

WAS THE MERGER CHALLENGED? 

No formal opposition was presented to the merger. The merger had been planned to minimize 

objections. Staten Island Hospital's former CEO became the CEO of the merged hospital, while 

Richmond Memorial Hospital's former board chairman became chairman of the new board. All 

board members were offered positions on the new hospital board or on the boards of subsidiaries 

of the new corporation. All staff were guaranteed job security and the medical staffs were given 

three years to consolidate. 

The community raised no formal objections. A few people feared that the Richmond Memorial 

site would be closed as a hospital and that the increased drg treatment services at that location 

would bring addicts to their neighborhood. No antitrst enforcement agency challenged the 

merger. 

DID THE MERGER AFFECT THE AVAILABILITY OF HOSPITAL SERVICES? 

The availability of services has not been diminished by the merger. Respondents believe that 

availability has been improved by the addition of services. Several specialized services were 

consolidated and expanded in the space available at the former Richmond Memorial Hospital. 

These services included inpatient alcohol and drg treatment services, psychiatric inpatient 

services, geriatrc services, and cenain surgeries. Although this has increased the distance that a 

patient living in the north end of the island must travel by 8 miles, free van services are available 

and bus and rail lines are convenient for most. 

Recently, a $40 milion ambulatory center was built adjacent to the former Staten Island 

Hospital. A new oncology center, a magnetic resonance imager, and an in-vitro fenilization 

clinic are housed in the ambulatory center. 
Allentown Hospital Lehigh Valley Hospital Center 

Allentown, PA Allentown, PA 

merged into 

THE ALLENTOWN HOSPITAL-LEHIGH VALLEY HOSPITAL CENTER 

ALLENTOWN, PA


WHAT WERE THE HOSPITALS LIKE BEFORE AND AFTER THE MERGER? 

Prior to the merger there were three general acute care hospitals in Allentown. The two largest 

of the three, Allentown Hospital and Sacred Heart Hospital, jointly built a teniary care facility in 

the suburbs in 1974, called Allentown Sacred Hean Hospital Center. By 1975 the joint venture 

was in trouble, and several lawsuits ensued. By the end of the decade, Allentown was embroiled 

in what was referred to locally as "the hospital wars." The medical community, local religious 

and political leaders, and the general public polarzed over the conflict. 

In 1980 a judicial ruling "demerged" Allentown Sacred Heart Hospital Center. That ruling 

required that Sacred Hean Hospital become an independent hospital again. Allentown Sacred 

Heart Health Center was renamed Lehigh Valley Hospitai Center. Members of the Sacred Heart 

Hospital board were replaced by newly-appointed members from the community. A holding 

company, HealthEast, Inc. ("HealthEast ), was created to manage both Allentown Hospital and 

Lehigh Valley Hospital Center. HealthEast has its own board comprised of community 

representati ves. 

During the 1980s both hospitals continued to add beds. By 1987 Allentown Hospital had 284 

beds and Lehigh Valley Hospital Center had 462. Except for emergency services, very few 

medical services were duplicated between the two. 

HealthEast also grew as a system. In addition to the two general acute care hospitals, it operated 

a hospital in Lehighton, Pennsylvania, two nursing homes, two family care centers, an alcohol 

and drg treatment center, a hospice and home care services. The company also oversaw a trust 

fund which raised donations for the system and operated a for-profit subsidiary. Some ancilary 

services once provided by each hospital, such as lab services, were consolidated into one service. 

In 1987 (with a legal effective date of January 1, 1988) Allentown Hospital and Lehigh Valley 

Hospital Center merged, creating The Allentown Hospital - Lehigh Valley Hospital Center. The 

merged hospital was comprised of two sites, operated under two licenses, and had two Medicare 

provider numbers. The two boards were combined into one and one administration ran both 

sites. The Allentown Hospital - Lehigh Valley Hospital Center operates 803 beds. 
, 

, 

WHAT WERE THE PROBLEMS AND WHY DID THEY MERGE? 

The administrations and the boards of both hospitals said that the merger was a "natural 

progression" for the system. The merger was intended to make the operation of the two 

hospitals more efficient. It reduced overhead costs by eliminating duplicative management 

positions. 

The Allentown Hospital - Lehigh Valley Hospital Center is the largest hospital in Pennsylvania. 

Some board members and staff say it is now easier to recruit prominent administrators and 

specialists. The capital position of the combined hospitals has improved. The merger also 

allowed the sizable Pool Trust Fund, donated to the Lehigh Valley Hospital Center, to be used to 

fund projects at The Allentown Hospital. 

WAS THE MERGER CHALLENGED? 

There have been no organized objections to the merger. Most of the community was unaware 

that a merger had occurred. About 90 percent of the physicians at both sites had staff privileges 

at both hospitals before the merger and even before the merger the two medical staffs were 

holding combined meetings. No antitrust enforcement agency has challenged the merger. 

DID THE MERGER AFFECT THE AVAILABILITY OF HOSPITAL SERVICES? 

The merger had no affect on the availability of hospital services. For the patients at both sites 

nothing has changed. Occupancy rates have remained stable. The mix of services offered at 

each site has not changed. The Allentown Hospital, located in the western end of town 

continues to provide the primar care, obstetrical and gynecological services, psychiatric 

services, pediatrcs and clinics. The Lehigh Valley Hospital Center, in the suburbs west of town 

is a secondary/tertiary care facility. It operates with state-of-the-art equipment and techniques, 

and has developed a regional market for cenain specialties , such as open hean surgery. 

The hospital has not merged again since 1987. However, in 1988 the Lehigh County Board of 

Assessment Appeals revoked the tax exempt status of The Allentown Hospital - Lehigh Valley 

Hospital Center. As a result of this revocation action, the Coun of Common Pleas of Lehigh 

County, Pennsylvania ordered an accounting of the stewardship of the hospital. This audit was 

initiated because the loss of the hospital's tax exempt status called into question its charitable 

nature. The audit culminated in an Adjudication and Decree, issued in July of 1990 by Judge 

Robert K. Young. 

Judge Young stated in his Adjudication that There is nothing harmful in HealthEast wanting to 

do well with its Hospitals , but its main purpose must be to provide quality health care at an 

affordable price. " He went on to say, "The Trustees must remind the community that access to 

proper health care is not only a basic human right, but that the lack of care to any significant 

group of residents has a direct negative effect upon all of us. HealthEast " he said has 

become too powerful and too controllng. 
The Judge charged the Board of Trustees with addressing the prevailing perception that 

HealthEast is misusing its power and with setting policies based upon health care needs of the 

citizens of the area rather than "primarly for the purpose of gathering or holding onto patients, 

or of enlarging the investment ponfolio. " Finally, Judge Young required that the hospital be 

audited by the Court again within five years from the date of the Decree. 
Methodist Hospital of Emerald-Hodgson Hospital 

Middle Tennessee Sewanee, TN 

Winchester, TN 

merged into 

METHODIST HOSPITAL OF MIDDLE TENNESSEE 

WINCHESTER, TN 

WHAT WERE THE HOSPITALS LIKE BEFORE AND AFTER THE MERGER? 

Prior to the merger there were two general acute care hospitals in Franklin County, Tennessee. 

Methodist Hospital of Middle. Tennessee in Winchester operated 103 beds, and, 13 miles a way, 

Emerald-Hodgson Hospital in Sewanee operated 42 beds. Methodist Hospital of Middle 

Tennessee served primarily the residents of Franklin County (population 31 (00), which was an 

economically-stable rural county in middle Tennessee supponed mainly by agriculture and some 

light manufacturing. 

Methodist Hospital of Middle Tennessee was owned and operated by Methodist Health Systems 

Inc. , a not-for-profit, multi-hospital corporation. Emerald-Hodgson Hospital was owned by the 

University of the South, but was managed and operated by a series of not-for-profit hospital 

management corporations, the last of which was Erlanger Health Systems, Inc. 

Emerald-Hodgson Hospital served primarly Grundy County, population 13 800, which is 

contiguous to Franklin County. Once a prosperous coal mining area, Grundy County was 

economically depressed and its residents were predominantly low income, elderly. 

Before the merger, Methodist Hospital of Middle Tennessee s occupancy rate was 52 percent, 

with an average daily census of 54. Emerald-Hodgson Hospital had an occupancy rate of 23 

percent, with an average daily census of 10. Both facilities served Medicare and Medicaid 

patients. The mix of services offered at both hospitals was vinually the same, including a 

computed tomographic (CT) scanner, obstetrical services, and a complete emergency department. 

After the merger, which occurred on October 26 1987, Emerald-Hodgson Hospital still belonged 

to the University of the South and was leased to and managed by Methodist Health Systems , Inc. 

The Methodist Hospital of Middle Tennessee facility in Winchester was thereafter regarded as 

the full-service general acute care facility, and Emerald-Hodgson Hospital its satellite. The 

merged hospitals are run by a board of directors which is comprised of lay people, medical staff 

and administrative staff. 

WHAT WERE THE PROBLEMS AND WHY DID THEY MERGE? 

The primary reason for the merger was the imminent ban.ptcy of the company which was 

leasing Emerald-Hodgson Hospital prior to the 1987 merger, Erlanger Health Systems , Inc. 

Erlanger ). As a result of Erlanger s serious financial problems, rumors were rampant 

throughout the area that Emerald-Hodgson Hospital was going to close. Some respondents felt 

that the quality of care at Emerald-Hodgson Hospital had declined. Emerald-Hodgson Hospital 
was losing medical staff and money and had an extremely low census. The morale of the 

non-medical staff was low, and the community was losing confidence in the institution. The 

University of the South sought another health care organization to take over the management 

function. Methodist Health Systems, Inc. responded. 

WAS THE MERGER CHALLENGED? 

There was a great deal of anxiety on the pan of the employees regarding the security of jobs and 

benefits. The community was quite skeptical that the merger could save Emerald-Hodgson 

Hospital from closing. However, no obstacles were presented to the merger. No antitrust 

enforcement agency challenged the merger. 

DID THE MERGER AFFECT THE AVAILABILITY OF HOSPITAL SERVICES? 

The availability of services actually improved, primarly for elderly, low income residents of 

Grundy County. Although cenain services were deleted from the Emerald-Hodgson facility, it 

and the facility in Winchester are both more accessible to the residents of Grundy County via a 

free transportation system. A toll-free telephone line was installed in Grundy County for 

residents to request the van service. 

The services which the Emerald-Hodgson facility lost are stil available at the facility in 

Winchester. Those services include outpatient surgery, an intensive care unit, obstetrics (binhing 

room, labor room, delivery, recovery room), and a computed tomographic (CT) scanner. 

Patients at the Emerald-Hodgson site who need any of these services may be transponed to the 

facility in Winchester by the free van service. 

Methodist Hospital of Middle Tennessee added a myriad of outpatient and inpatient services and 

programs, and an outpatient and inpatient alcohol/chemical dependency unit and services. A 

helipad was built at the Emerald-Hodgson site for receiving emergency cases, and skiled 

nursing and long-term care were added. 
AGENCY COMMENTS


The draft repon entitled "The Effects of Hospital 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 written comments on the draft report from the Assistant Secretary 

for Planning and Evaluation and verbal comments from members of the Secretary 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, changed the name of 

the repon 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 Antitrust?" Health Policy Week. February 12, 1990 and Tinker 

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

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

February 26, 1990.