As Upstate and Crouse secretly plan merger, hospitals aim to avoid federal oversight

Two Syracuse hospitals are quietly trying to prevent federal officials from investigating their proposed merger to see if it’s bad for consumers.

SUNY Upstate and Crouse hospitals are seeking immunity from federal antitrust scrutiny, under a rarely used state law.

That means they want to stop the Federal Trade Commission from examining the merger to determine if the loss of competition will lead to higher prices, lower quality of care and other negative consequences for patients. It if were to find those potential problems, the federal agency could block the merger.

By taking this unusual path, Upstate and Crouse are trying to put all the decision-making power over Syracuse’s biggest health care merger into the state’s hands.

Upstate and Crouse’s effort to evade federal oversight comes at a time when they are also keeping the public in the dark about the proposed merger, which would shake up the Syracuse health care market.

Upstate, a state-owned hospital, will control 71% of the Syracuse hospital market if the merger goes through. The merger would leave Syracuse with two hospital systems: Upstate and St. Joseph’s.

Unlike other hospitals that have merged in New York, Upstate and Crouse have applied to the state Health Department for a certificate of public advantage, also called a COPA.

That certificate is a legal tool that allows the state to approve a health care merger and shield it from federal antitrust oversight. In exchange, the state takes responsibility for supervising the merged entities’ prices and conduct.

Such a hospital merger arrangement has never been used before in New York state. Upstate and Crouse are the first hospitals in New York to seek one of these certificates as part of a merger since the state law allowing the certificates took effect in 2014.

Hospital mergers shielded from federal antitrust scrutiny have happened in other states, sometimes with bad results, experts say.

Neither Upstate nor Crouse would say why they want immunity from federal antitrust enforcement.

But it could be a sign they fear their proposed merger might not survive a federal review.

“Usually the motivating factor behind seeking a COPA is you have concerns the FTC will try to block the merger and maybe even succeed,” said Erin Fuse Brown, a law professor at Georgia State University who has studied the use of this legal tool in mergers.

The Federal Trade Commission declined to comment on the filing by Upstate and Crouse. But in the past the federal agency has sharply criticized New York’s regulations that allow these certificates.

“COPAs are likely to lead to increased health care costs and decreased access to health care services for New York consumers,” the agency said in a 2015 letter to the state Health Department.

The move by Upstate and Crouse comes at a time when the Biden administration is prodding the FTC to be more aggressive in its reviews of hospital mergers, which can lead to higher medical costs and insurance premiums.

Upstate asked the state Health Department in April for permission to acquire Crouse, an independent nonprofit hospital next door, and merge it into Upstate’s system. The combined entity would be Onondaga County’s largest employer, with about 13,000 workers. The merged hospitals would bring in more than $2.3 billion in annual revenues.

Secrecy surrounds hospital merger

The only public hint of the two hospitals’ effort to avert a federal review was contained in a one-sentence notice Crouse posted inconspicuously on its website July 13.

The notice announced Upstate and Crouse have applied for a certificate of public advantage in connection with the proposed merger.

The announcement did not explain what a COPA is or why the hospitals want one.

The terse announcement may have been published to satisfy a requirement in state law that says parties applying for these certificates must notify the public on their websites

That lack of transparency is in keeping with the secrecy that has surrounded the proposed merger since it was announced in April.

Hospital officials have refused to answer questions about the deal.

The financial terms of the proposal have not been disclosed nor have the hospitals said if taxpayer dollars will be used to help pay for it.

Upstate, Crouse and the state Health Department have refused to give syracuse.com | The Post-Standard a copy of the initial application the hospitals submitted in April seeking state approval of the merger.

Last week Upstate and the Health Department also refused to give syracuse.com | The Post-Standard a copy of the hospitals’ application for a COPA.

How government reviews work

Both the FTC and the state attorney general’s office are responsible for enforcing antitrust laws to protect consumers from anticompetitive mergers.

The federal commission does not have the resources to investigate every proposed hospital merger. It tends to concentrate on bigger merger transactions valued at $100 million or more, according to Brown. But it sometimes looks into smaller mergers, she said.

The state AG’s office, not the Federal Trade Commission, reviewed the merger of St. Elizabeth’s and Faxton-St.Luke’s, Utica’s only two hospitals.

But the AG and the feds both have the power to set parameters to control costs as competition among health care providers shrinks.

To address concerns about the loss of competition in Utica, the AG’s office allowed the two financially troubled hospitals to merge under the terms of a 2013 settlement. The settlement limited hospital price increases for five years and prohibited the hospitals from blocking competitors from entering the market.

Why states can shield hospital mergers from federal scrutiny

A 1943 Supreme Court decision, Parker vs. Brown, gave states the authority to exempt merging entities from federal antitrust review if there is clear state policy for regulation to replace competition and the state actively supervises the merged entities.

New York is one of 18 states that allow COPAs. Its law allowing these certificates took effect in 2014 when the state was asking competing health care providers to collaborate as part of an effort to revamp the delivery of care to cut Medicaid spending.

Some providers worried these collaborations might run afoul of federal antitrust laws. To allay those fears, the state gave providers the opportunity to apply for certificates.

The health department granted just two of these certificates to two Staten Island hospitals participating in the state project which ended in 2020. The state has never granted one in connection with a hospital merger.

But federal regulators aren’t keen on using COPAs for hospital mergers.

In its 2015 letter to the state Health Department, the FTC said New York’s regulations allowing these certificates will “… immunize conduct that would not generate efficiencies and therefore would not pass muster under antitrust laws.”

Former FTC Chairman Joseph Simons said in 2019 his agency is skeptical about the use of the certificates to protect consumers from anti-competitive mergers.

“We continue to believe that competition is the best way to reduce prices and improve service quality for health care consumers, just as it is in most other markets,” Simons said.

Eliminating federal review can backfire

Although there has been a wave of hospital mergers over the last 10 years, relatively few have been shielded from federal review.

Little is known about the long-term effects of hospital mergers granted this immunity. The FTC is studying the issue.

In other states, these arrangements are typically used in hospital mergers that eliminate or reduce competition.

Hospitals seeking immunity from federal scrutiny will make a case that the public benefits resulting from the merger outweigh the negative consequences. To get a COPA, merging hospitals will agree to things like rate regulation, price caps and promises to keep facilities open. It’s up to state officials to enforce those commitments.

A recent research study found hospital mergers in North Carolina, Montana, South Carolina and Maine shielded from federal review ultimately lead to higher prices and reduced quality.

Christopher Garmon, a researcher at the University of Missouri and one of the study’s authors, said these arrangements can help keep a lid on merger-related cost increases in the short run. But the problem is state oversight of merged hospitals required by COPAs is often temporary.

State oversight often expires by design. Or state oversight is removed in response to requests from hospital officials who wield a lot of political clout because their institutions are big employers in their communities, he said.

“And when that happens the community is stuck with a monopoly hospital that is unregulated,” Garmon said.

Mission Hospital and St. Joseph’s Hospital in Asheville, North Carolina, merged using a COPA in 1995. The state capped the profit margins and cost increases of Mission Health, the merged entity.

Then in 2015 officials of Mission Health successfully lobbied state lawmakers to repeal the state’s certificate of public advantage. It convinced state officials the law no longer was necessary, citing its 20-year history of complying with state requirements.

But once the state law was repealed “all hell broke loose,” said Erin Brown, the Georgia State University law professor who studied that merger.

Shortly after the repeal, Mission Health canceled its contract with the state’s largest insurer because the insurer refused Mission’s demand for higher reimbursement rates.

Then it agreed to be acquired by HCA Inc., a big national for-profit hospital chain.

Now HCA is being sued by North Carolina residents who allege the hospital chain used its monopoly in Asheville to raise prices after buying Mission Health.

The repeal of the state’s certificate of public advantage law ended up opening the door to the very harms the law was intended to prevent, Brown said.

NY officials now hold the cards

Under New York law, the state Health Department in consultation with the state AG’s office is supposed to evaluate applications for COPAs, like Upstate and Crouse’s.

The regulations say state officials must look at the effect a proposed merger could have on competition, prices, preservation of services, quality of care and other factors. They also must examine the financial conditions of the merging entities and the likelihood that one of the hospitals may close or curtail services if the merger is not approved.

The regulations say state officials can grant a certificate if they decide the benefits of the deal outweigh the disadvantages. A certificate can be granted on the condition that the merging parties achieve quality goals, maintain or expand certain services, limit price increases and abide by other restrictions, according to the regulations.

If a certificate is granted, the state must supervise the merged hospitals for at least two years.

The American Hospital Association, an industry trade group, says the FTC may be setting the bar too high for hospitals to get mergers approved.

In a statement the association said the FTC tends to dismiss hospitals’ claims that mergers will result in lower operating costs, capital costs and other efficiencies.

That’s why some hospitals believe “… the expense and continuing burden of a COPA is better than the alternative of not merging and foregoing the benefits for their communities their mergers would provide,” the association said in a statement.

Garmon, the University of Missouri researcher, said some merging hospitals want to get certificates to avoid long, costly FTC reviews.

“You have to bare your soul to the federal government, give them all sorts of documents and submit to investigational hearings,” Garmon said.

But Lois Uttley of Community Catalyst, a national nonprofit health advocacy group, said that type of examination is needed to determine if the proposed Upstate-Crouse merger will increase costs for patients.

“It would be a shame to exempt this proposed merger from antitrust scrutiny,” Uttley said.

James T. Mulder covers health. Have a news tip? Contact him at (315) 470-2245 or jmulder@syracuse.com