State AGs, hospitals at odds over how to save struggling health facilities

17 Jan 2019 12:41 pm by Joshua Sisco

Struggling healthcare providers often view consolidation as the only means of shouldering the ever-skyrocketing cost of care.

Antitrust enforcers understandably have a decidedly more skeptical take, arguing that consolidation is at the root of high healthcare costs. In a pair of ongoing challenges to healthcare deals by the attorneys general of California and Washington, state enforcers are pushing back on agreements that the providers say are essential to their survival.

In California, Attorney General Xavier Beccera wants to delay the bankruptcy sale of two Northern California non-profit hospitals to Santa Clara County. California says the conditions placed on the hospitals from a previous acquisition remain in place, but the county is unwilling to abide. The county says the hospitals will be shuttered if the deal doesn’t close imminently.

In Washington, Attorney General Bob Ferguson wants to unscramble two eggs. The state wants to undo a July 1, 2016, transaction in which CHI Franciscan bought the assets of Silverdale, Washington-based WestSound Orthopaedics, as well as an affiliation completed Sep. 3, 2016, with The Doctor's Group, also in Silverdale. The providers were unsuccessful with a "failing firm" defense, and now have a pending motion that the deals are necessary to save a "weakened competitor".

In late December, over California's objections, a bankruptcy judge in Los Angeles approved Santa Clara County's $235 million purchase of O'Connor Hospital in San Jose and Saint Louise Regional Hospital in nearby Gilroy.

Becerra is now appealing to a US bankruptcy court judge, and seeking to stay the ruling approving the sale. A hearing in bankruptcy court is scheduled for Jan. 30.

The hospitals went up for sale when their owner, Verity Health — which owns four other facilities in Southern California — declared bankruptcy with more than $1 billion in pension and other debt obligations. Verity purchased the hospitals in 2015 from the struggling Daughters of Charity Health.

To ensure Verity continued to properly serve indigent populations, then-California Attorney General Kamala Harris imposed a number of conditions on future obligations focusing on adequate care, charity obligations and building safety for the aging facilities.

The conditions were necessary to ensure "the health, safety, and welfare of the communities served by the six health facilities owned and controlled" by Verity, Becerra wrote in a bankruptcy court filing.

In fact, California rejected an $843 million deal for all six hospitals in 2015 because the buyer, Prime Healthcare, refused to abide by the conditions.

In a statement last week, however, Santa Clara county said the attorney general's actions are misguided: “The Attorney General’s actions to block the sale of Verity’s hospitals to the County is a real threat to the health of our community, our residents and the vulnerable populations the hospitals serve".

The dispute with the county centers on its obligations to abide by the conditions imposed on Verity.

During the sale process, Santa Clara County objected to certain conditions that conflicted with county governance, including pension obligations and oversight panels. California waived those conditions, but says it didn’t waive a host of others.

US Bankruptcy Court Judge Ernest Robles rejected California's request on procedural grounds. He ruled that the state's correspondence with the county and subsequent court filings amounted to waiving its objections. Robles also said the attorney general only has authority to review the sale of non-profit healthcare facilities to for-profit buyers, not public entities like the county.

Meanwhile, Verity is still in search of a buyer for its four other struggling public hospitals.

Further north, the Washington attorney general is set to go to trial against a hospital and two doctors' groups in an attempt to unwind a pair of deals more than two years old.

Franciscan and The Doctors Group argue that their contractual agreements are effectively a merger, while Washington says they are simply a price-fixing agreement in disguise.

Without the agreement, physicians in The Doctors Group, or TDC, would have left the market, the companies said. "TDC was financially distressed, and headed toward likely dissolution had the Transaction not taken place," the companies said in court filings.

"In short, TDC physicians worked harder than industry benchmarks, but were compensated well below average," they said. "If TDC had paid its physicians at levels commeasure with their individual productivity, it would have lost $27 million from 2012 to 2015".

But Washington says numerous internal emails show executives at the companies knew otherwise. Wait times have increased, scheduling has become more difficult and choices in service and location are reduced since last year's transactions, the complaint said. The deals have increased market power for the companies, with CHI Franciscan controlling billing for most orthopedists in the region, for example.

US District Judge Benjamin Settle in Tacoma, Washington, rejected the failing-firm defense because of the state's horizontal collusion claim. But if it chooses to evaluate the deal as a merger, he said he will entertain those arguments. The decision will be made at trial.

Federal and state enforcers have successfully challenged several healthcare tie-ups in recent years, including those in Idaho, North Dakota, Pennsylvania and Illinois. The need to combat rising costs was the common theme from the companies, but burnishing a struggling provider didn't play a major role.

In Idaho, a pair of providers outside Boise unsuccessfully argued that unwinding the deal would weaken competition in the area, among other defenses.

Although the deal was blocked, a three-judge panel on the US Court of Appeals for the Ninth Circuit struggled mightily with the role of consolidation in combatting rising healthcare costs.

With healthcare costs among the most pressing issues facing Americans, consolidation is unlikely to slow anytime soon. The outcomes in Washington and California could have an outsized effect on how antitrust enforcers respond.

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