Expert Spotlight

Kevin Pflum has been retained as the expert on two hospital mergers—on opposite sides. For one, he worked on behalf of the merging parties; for the other, he worked on behalf of the state’s attorney general. Here are his thoughts on how that work was both similar and different.

Q. Can you give a broad overview of the two cases?

A. Lifespan and Care New England, two healthcare systems and employers in Rhode Island, proposed to merge and create a new academic health system affiliated with Brown University. The state’s Attorney General (AG) retained me to analyze the likely competitive effects of the merger and assist with the state’s investigation. This merger didn’t clear.

The case in Indiana involved a distressed hospital and a healthy hospital. They filed for a Certificate of Public Advantage, or COPA, believing that the Federal Trade Commission, which was investigating the matter, would not approve the transaction. In this case, the state Department of Health (IDOH) approved the COPA, allowing the hospitals to merge.

Q. So in the Rhode Island case, you worked on behalf of the Attorney General’s Office, and in the Indiana case, you worked on behalf of the merging hospitals?

A. That’s correct.

Q. Please share more details.

In Rhode Island, I conducted comprehensive theoretical and empirical analyses of the merger across several product markets. My analysis showed that the merger was likely to substantially lessen competition across multiple service markets, and the AG blocked it.

In Indiana, without the merger, one of the hospitals was at significant risk of eliminating many services or closing altogether, potentially leaving just one general acute care hospital in Terre Haute. The FTC’s concern was that the acquisition would result in significant price increases. The federal antitrust laws are there, of course, to prevent such an outcome. A COPA allows a state to immunize the hospitals from federal regulation. I analyzed the potential price effect that might have resulted when various conditions were in effect with the COPA. Informed by findings from the economics literature, I found that the conditions would be expected to mitigate the competitive risks while preserving services at the acquired hospital.

Q. What does a COPA do?

A. COPAs immunize hospital mergers from federal antitrust laws by giving the state oversight. Their purpose is to allow states to consider a broader set of policy objectives than just the potential competitive effects. The FTC is critical of them, citing literature that has found evidence that they have resulted in higher prices and reduced quality of care. COPAs do put restrictions on merged systems, and these restrictions are often time limited. COPAs are in currently in place in numerous states, including Florida, Tennessee, Texas, and Virginia.

Q. Tell us more about the differences between the two cases.

A. The main difference was that in Rhode Island we were looking at two healthy hospitals, and in Indiana, one of the two was distressed. That played into the outcomes for both.

Lifespan and Care New England were the two largest multihospital healthcare systems and employers in the state. My analysis showed that their merger would result in a substantial lessening of competition with no offsetting benefits, which was in violation of both state and federal antitrust laws. The AG denied the application, and the hospitals abandoned their merger attempt.

In Indiana, the transaction involved a merger of the only two hospitals in Terre Haute, Indiana. The situation was effectively the same as a 2:1 merger—the result would be just one hospital. The healthy hospital believed that the merger it would allow it to optimize its services and generate efficiencies. The FTC and the IDOH strongly scrutinized the merger. The FTC relied on public data about the hospital’s financials, which masked the hospital’s true operating margin because of intercompany transfers to the hospital. There was no other potential buyer, as other interested parties backed out.

Q. How did your analysis in the Indiana case differ from the Rhode Island case?

A. My work in both cases involved the same level of rigor, but for the Indiana case, I was initially retained to focus on the potential labor market effects of the merger. The concern was that the merger would negatively affect the labor markets for nurses, ancillary staff, and potentially physicians. I analyzed these labor markets and found that the consolidation was not likely to have a negative effect on wages. For example, I used publicly available information on nurse wage levels and information from the hospitals on where nurses were previously employed and had gone after leaving. The merged hospitals faced significant competition for labor from other employers, and that would not change after the merger.

As the case progressed, I was asked to analyze the potential price effects under the conditions that would be imposed by the COPA as well as to analyze the target hospital’s financials. Analyses by economists that IDOH had retained made certain assumptions that overstated the potential price effects. My analysis showed that the transaction with the proposed conditions was likely to generate a net benefit for patients in Terre Haute. The IDOH approved the COPA with conditions.

Q. For the Indiana case, you didn’t submit a report, right?

A. I prepared and submitted an expert report for the Rhode Island matter. For the Indiana case, I submitted white papers and gave a presentation to the Department of Health. Federal agencies understand competition—that’s their business—but I adapted my presentation for IDOH, which does not have antitrust expertise, to better ensure it fit within the context of their knowledge. I believe that my experience as a professor at the University of Alabama, where I had to teach complex economic concepts to MBA students, was helpful in this scenario.

Q. Any final thoughts?

A. Just that the common adage that every merger is fact specific is true. These two cases had some similarity on their face—they were both essentially two-to-one mergers—but underneath they were quite different.