Connecticut Hospital Consolidation Report 10.13.14 (2) (2)

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CONNECTICUT HOSPITAL CONSOLIDATION AND CONVERSION IN THE ERA OF
HEALTH CARE REFORM:
A COMPREHENSIVE REVIEW OF THE ECONOMIC DETERMINANTS AND SOCIAL IMPACT OF HOSPITAL MARKET
STRATEGIES IN CONNECTICUT
By,
Jeremy Mand, M.P.H.
COMMIMMISSIONED BY THE UNIVERSAL HEALTH CARE FOUNDATION OF CONNECTICUT

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TABLEOF CONTENTS
OVERVIEWOF CURRENTEVENTS 3
A. CONSOLIDATIONS 3
B. CONVERSIONS 6
DRIVING FORCES BEHIND CURRENT MARKET ACTIVITY 9
A. HISTORICAL CAUSES 9
B. REIMBURSEMENT 10
C. ACCESS TO CAPITAL 12
D. THE AFFORDABLE CARE ACT 13
E. OTHERPUBLICPOLICIES 14
IMPACT OF HOSPITAL CONSOLIDATION 15
A. IMPACTONPRICE 15
B. IMPACTONQUALITY OFCARE 17
C. IMPACTON COST SAVINGS 20
D. IMPACT ONACCESS TO CARE 22
E. LEGAL RAMIFICATIONS 23
FOR-PROFIT VS. NON-PROFIT HOSPITALS 26
A. LEGALPROCESS FOR CONVERSIONSIN CONNECTICUT 27
B. DRIVERS OFPRIVATIZATION 28
C. THE CASE FOR ALLOWING FOR-PROFIT HOSPITALS 31
D. THE CASE AGAINST ALLOWING FOR-PROFITHOSPITALS 33
REVIEW AND GENERAL CONCULSIONS 32
A. REVIEW OF FINDINGS AND GENERAL CONCLUSIONS 35
B. POLICY RECOMMENDATIONS 36

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I. Overview of Current Events
From the early 1970s through the year 2000, the Connecticut hospital system1 remained unusually steady relative
to other markets with respect to each individual hospital’s strategic market position. The state hospital industry
during this time period could be characterized as stable, with very few closings, a limited number of mergers
between individual hospitals and/or larger hospital organizations, limited affiliations between hospitals and
physician groups or other service providers (e.g. independent physician organizations; private practices), and a
nearly non-existent market penetration of for-profit hospital entities (Sager, 2014).
A. Consolidation
In recent months and years, especially since the financial crisis of 2007-2009 and the passage of the Patient
Protection and Affordable Care Act (ACA) in 2010, the Connecticut hospital system has and continues to
experience fundamental changes in its organizational form and the structure of its healthcare providers. Between
2009 and 2013 there were thirteen attempts and seven successful hospital consolidations and/or partnerships, a
substantial increase from the four that occurred in the previous decade. (Kaylin, 2014) (Connecticut Hospital
Association, 2013) Of the 29 acute care hospitals providing critical health care services in the state, 16 are now
currently part of a larger hospital parent company with the capacity to negotiate reimbursement prices for all of
its facilities.
The 16 network-affiliated hospitals are now divided into four systems: Eastern Connecticut Health Network
which includes Manchester Memorial Hospital and Rockville General Hospital as well as a number of urgent
care facilities, specialty practices, and affiliated laboratories (Eastern Connecticut Health Network); Western
Connecticut Health Network which was formed in 2010 and includes Danbury Hospital, New Milford
Hospital, and the recently acquired Norwalk Hospital, as well as an affiliation with Western Connecticut Medical
Group and a number of urgent care sites (Western Connecticut Health Network); Yale-New Haven Health
System, by far the largest hospital system in the state as measured by total number of beds, which includes Yale-
New Haven Hospital, Bridgeport Hospital, Greenwich Hospital, and the recently acquired Saint Raphael’s
Hospital (O'Leary, Merger of Yale-New Haven Hospital, Saint Raphael's signed; DeStefano lauds nuns for
decades of aid, 2012) as well as the Northeast Medical Group (Yale-New Haven Health System); and Hartford
Healthcare which includes Hartford Hospital, the Hospital of Central Connecticut, Mid-State Medical Center,
Windham Hospital, the recently acquired Backus Hospital (Backus Hospital, 2013) and Norwich Hospital in
1
Connecticut Hospital System can be defined as active acute-care hospitals serving residents of the state of Connecticut

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addition to affiliations with Hartford Medical Group and a number of other diagnostic and ambulatory care
centers (Hartford Healthcare).
Of the remaining 13 acute-care hospitals in Connecticut, some are affiliated with out-of-state hospital networks.
For example, Stamford Hospital is affiliated with New York-Presbyterian Health System (New York-
Presbyterian Health System) and St. Vincent’s Medical Center is a member hospital of Ascension Health, the
nation’s largest Catholic non-profit hospital network (Ascension Health). Other independent hospitals are
currently pursuing partnerships with for-profit entities or are planning to build their own network.
Financially, Connecticut’s hospitals have performed adequately in recent years, well enough that they have not
needed to consolidate previously, but as we will discuss further, events are unfolding that can justify their
concerns and legitimize – from their view - future changes in their business models. As noted in Figure 1 below,
excess revenues overexpenses2, a measure of profitability, has varied from hospital to hospital, with some
hospitals such as Yale-New Haven and Bridgeport hospitals’ showing tremendous growth, while other facilities
such as Charlotte-Hungerford struggling mightily. While – on its face –financial sustainability appears randomly
assigned between small and large small hospitals and hospital systems, and between affiliated and non-affiliated
hospitals (e.g. Manchester Memorial Hospital, a member of Eastern Connecticut Health Network saw their
annual profitability decline by 49.7 percent whereas Bristol Hospital, a non-affiliated community hospital saw
their profitability increase by 42.5 percent) if you look to Figure 2, you can see that in the aggregate those
hospitals that are part of a larger network affiliation have realized significantly greater growth in profitability
than those hospitals that are not. Overall, hospital profitability for affiliated systems grew by 24.4 percent,
supported mostly by the state’s largest hospitals – such Yale-New Haven Hospital, Hartford Hospital, and St.
Vincent’s Medical Center. Hospitals not affiliated with larger health networks saw their profitability increase by
only 15.6 percent over the same time period.
2
The amount (in $) of total revenues that exceeds (or fails to exceed) total expenses

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Figure 1:
Figure 2
Hospital executives of these non-affiliated community hospitals that have struggled financially have pleaded that
they’re in desperate need of capital to upgrade their facilities, invest in health information technology, and keep
up with their competitors. They claim, that because of their small margin for errors, “reducing waste may be
Hospital
Yale-New Haven
John Dempsey Health Center
Saint Mary's Hospital
St. Vincent's Medical Center
Bridgeport Hospital
Danbury Hospital
Stamford Hospital
Rockville General Hospial
Manchester Memorial Hospital
Middlesex Hospital
Johnson Memorial Hospial
Waterbury Hospital
Backus Hospital
Charlotte Hungerford Hospital
Greenwich Hospital
Hartford Hospital
Saint Raphael's
Mid-State Medical Center
Bristol Hospital
New Milford Hospital
Hospital of Central Connecticu
Windham Community Hospital
Griffin Hospital
Connecticut Children's Medical Center
Lawerence and Memorial Hospital
Day Kimball Healthcare
Norwalk Hospital
Saint Frances Hospital
Sharon Hospital
Total Beds
1,571
174
379
520
383
371
330
118
283
297
101
393
233
182
206
867
467
156
154
134
446
144
180
187
308
122
366
682
94 `
c
2009 Excess Revenues over
Expenses
Expenses
Expenses
Expenses
Expenses
CAGR /Excess Revenues
over expenses (2009-2013)
C
52,901,000.00$ 84,700,000.00$ 67,162,000.00$ 130,609,000.00$ 178,722,000.00$ 27.6%
15,472,967.00$ 24,290,140.00$ 16,631,394.00$ 8,495,398.00$ 4,049,405.00$ 30.7%
8,269,000.00$ 6,553,000.00$ (1,621,000.00)$ 6,768,000.00$ 10,508,000.00$ 4.9%
7,351,000.00$ 37,577,000.00$ 20,328,000.00$ 85,258,000.00$ 42,607,000.00$ 42.1%
1,590,000.00$ 17,567,000.00$ 34,006,000.00$ 34,868,000.00$ 36,447,000.00$ 87.1%
38,514,639.00$ 44,579,698.00$ 23,685,920.00$ 53,376,261.00$ 38,641,523.00$ 0.1%
30,020,000.00$ 29,585,000.00$ 31,916,000.00$ 22,170,000.00$ 7,169,000.00$ -24.9%
1,361,145.00$ 3,087,872.00$ (629,284.00)$ 319,751.00$ 2,658,626.00$ 14.3%
5,945,570.00$ 5,682,134.00$ 6,063,646.00$ 9,166,829.00$ (212,690.00)$ -49.7%
18,791,000.00$ 24,942,000.00$ 21,519,000.00$ 29,074,000.00$ 24,128,000.00$ 5.1%
(5,991,672.00)$ 27,537,135.00$ (2,591,275.00)$ (1,979,386.00)$ (4,622,272.00)$ 7.3%
484,463.00$ (3,800,627.00)$ (9,028,804.00)$ 1,489,088.00$ (2,383,922.00)$ -29.9%
11,476,359.00$ 18,751,784.00$ 25,143,143.00$ 39,383,829.00$ 35,533,499.00$ 25.4%
1,293,651.00$ 6,614,590.00$ 6,420,499.00$ 4,518,171.00$ (17,504,322.00)$ -51.9%
9,482,000.00$ 12,993,000.00$ 6,022,000.00$ 15,983,000.00$ 27,930,000.00$ 23.3%
(6,914,647.00)$ 41,090,788.00$ 16,081,100.00$ 37,327,360.00$ 108,784,776.00$ 51.1%
(11,654,000.00)$ 1,675,000.00$ 2,864,000.00$ (4,071,000.00)$ -$ 30.1%
4,695,082.00$ 7,894,028.00$ 10,741,215.00$ 17,644,456.00$ 18,201,665.00$ 31.1%
373,398.00$ 1,785,817.00$ 2,190,536.00$ 2,301,326.00$ 2,190,756.00$ 42.5%
(5,165,070.00)$ (5,407,814.00)$ (3,826,378.00)$ (5,200,285.00)$ (2,083,520.00)$ 19.9%
15,676,309.00$ 13,901,685.00$ 24,020,058.00$ 35,036,062.00$ 23,430,619.00$ 8.4%
(1,185,004.00)$ (1,662,820.00)$ (4,062,810.00)$ (713,336.00)$ (7,218,544.00)$ -30.3%
1,230,684.00$ (178,738.00)$ (945,124.00)$ (3,855,696.00)$ 4,322,996.00$ 28.6%
1,293,651.00$ 6,614,590.00$ 6,420,499.00$ 4,518,171.00$ (17,504,322.00)$ -41.4%
6,012,146.00$ 15,158,370.00$ 16,766,396.00$ 10,767,187.00$ 17,549,573.00$ 23.9%
604,893.00$ 1,738,817.00$ (181,893.00)$ 867,638.00$ (8,504,632.00)$ -41.9%
11,786,694.00$ 1,459,018.00$ 17,014,933.00$ 26,380,740.00$ 24,538,844.00$ 15.8%
14,571,151.00$ (3,393,435.00)$ (17,047,000.00)$ 4,902,000.00$ 33,138,000.00$ 17.9%
N/A 1,573,006.00$ 1,496,783.00$ (42,106.00)$ 1,612,174.00$ 0.6%
Hospitals
Expenses
Expenses
Expenses
Expenses
Expenses
CAGR /Excess Revenues
over expenses (2009-2013)
C
Overall
Affiliated
Non-Affiliated
ç ç
ç
ç
ç
ç
$228,286,409 $422,908,038 $316,559,554 $565,362,458 $582,129,232 20.6% ç
$133,760,652 $238,314,040 $151,799,840 $281,344,243 $398,050,704 24.4% ç
$62,458,892 $108,393,700 $124,283,288 $206,564,104 $128,977,287 15.6% ç
ç ç ç ç ç ç ç

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particularly important…compared with larger hospitals because they typically have less capital resources,
meaning less room for error in meeting new quality and cost demands” (Rodak, 2012).
The claims that they have limited capital appears to be valid as each of the five major hospitals up for acquisition
had less than $25 million in cash reserves on its books as of FY 2013. (Connecticut Department of Public Health,
2014) Given their finances and their financial performance relative to affiliated networks, it is easy to understand
why consolidation is a viable solution for an independent hospital’s financial well-being and why it is being
pursued.
However, the larger national trend in consolidation may be just as much psychological as economic in nature.
According to Dr. John Chessare, President and CEO of Greater Baltimore Medical Center HealthCare, he
doesn’t see any future for community hospitals. He asserts “there’s a fantastic future for community health
systems. If small standalone hospitals are only doing what hospitals have done historically, I don’t see much of a
future for that. But I see a phenomenal future for health systems with a strong community hospital that breaks
the mold [of patient care].” Further echoing that point is Tim Bateman, executive director of the Community
Hospital Network, who notes “the physical hospital will matter less in the future than the cumulative assets that
the hospital entity brings to the table in the form of engaged, informed and committed medical staff and
professionals” (Rodak, 2012). On Wall Street, analysts report that community hospitals that are not moving to
shake up their business models in this current environment are “signing [their] own death certificate.” (Turpin,
2014)
b. Conversions
With all the major restructuring of non-profit hospitals occurring within the state, it should also be pointed out
that a major focus of this paper – along with consolidation – is the efforts of several small community hospitals
and poorer performing health networks to sell their assets to the large, national, for-profit healthcare chains. In
2013, Eastern Connecticut Health System, Bristol Hospital Health Group, and Waterbury Hospital each signed
letters of intent to be acquired by Vanguard Health System, a for-profit multi-region hospital chain with a
presence in states such as Arizona, Illinois, Massachusetts, Michigan and Texas. Vanguard was later acquired by
another for-profit entity, Tenet Healthcare, further highlighting the local and national trend in consolidations (of
hospitals) and conversions (to for-profit entities). The potential acquisition of Eastern Connecticut Health by
Tenet Healthcare includes a partnership with the non-profit Yale-New Haven Health System that Eastern
Connecticut Health Network says “should achieve cost and operational savings, one that would be better

7
prepared for coming changes in health care reform…The Vanguard network would also provide capital to invest
in the Eastern Connecticut network's facilities” (Dowling, 2013).
The word from hospitals expecting to be acquired by Tenet Healthcare is that the for-profit system will provide
the struggling hospitals in Waterbury, Bristol and of Eastern Connecticut Healthcare with capital to invest in
technology and facility improvements they cannot currently afford (O'Leary, Connecticut Hospital Care Posed
for Big Changes, 2013). Gayle Capozallo, Executive Vice President and Chief Strategy Officer of Yale-New
Haven Health System, said in testimony regarding Connecticut SB 460 and HB 5571, that the partnership
between Yale-New Haven and Tenet Healthcare is “about preserving – and ultimately expanding – access to care
for patients in local communities…Tenet will bring the capital necessary to financially stabilize these hospitals,
address their existing liabilities and invest in their organizations in a way that no one else, including Yale-New
Haven can.”
In reviewing each of these hospitals’ financial statements, it does appear that Capozallo is correct about the
hospitals’ need for capital. In recent years, the smaller community hospitals up for acquisition have by-and-large
worked with little margin for error. Though hospital administrators have commendably kept operating expenses
steady while negotiating modestly higher revenue to improve their patient care margins3, they remain in poor
financial position to invest in upgrading their facilities and/or expand services if there is demand for such
actions.
Before Tenet Healthcare Corporation can acquire any of these hospitals, however, there are legal roadblocks that
need to be addressed by state policymakers. “Legislation that would have provided a governance structure to
allow for-profit hospitals to operate…was introduced and adopted on the last night of the legislative session in
May (2013).” However, the legislation was vetoed by Gov. Dannel Malloy who argued that more discussion
about the operation of for-profit hospitals in the state is warranted (O'Leary, Connecticut Hospital Care Posed for
Big Changes, 2013). Federal and state law prohibits the corporate practice of medicine, which means that
hospitals owned by corporations, generally, cannot directly employ physicians. However, a Connecticut statute
that was adopted in 2009 that would have allowed for the creation of medical foundations between formerly
competing entities (e.g. Yale-New Haven and Eastern Connecticut Heath Network) will require amendments
before Tenet can legally acquire any hospital assets (O'Leary, Connecticut Hospital Care Posed for Big Changes,
2013). Trip Pilgrim, senior vice president and chief development officer of Tenet Healthcare, noted that the
company is working with the CT Attorney General’s office on an interim arrangement that would allow Yale-
3
The percent of revenue above expenses derived from patient care

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New Haven Hospital System to create another medical foundation that Tenet could join “as a way for it to hire
physicians” (O'Leary, Connecticut Hospital Care Posed for Big Changes, 2013).
After the initial legislation was blocked, on June 3rd, 2014 Gov. Malloy signed S.B. 35, An Act Concerning
Notice of Acquisitions, Joint Ventures, Affiliations of Group Medical Practices and Hospital Admissions,
Medical Foundations and Certificates of Need. The law requires “parties to certain transactions that change the
business or corporate structure of a medical group to notify the attorney general…and requires the attorney
general to use information submitted to him as part of an antitrust investigation” (Connecticut Legislature, 2014).
The current transactions are currently under a Certificate of Need review in which the Commissioner of Public
Health must conclude that the community affected will be assured of “continued access to high quality,
affordable care after accounting for any proposed change impacting hospital staffing and that a commitment has
been made to provide care to the uninsured and underinsured.” (Eastern Connecticut Health Network, 2014)The
timeline for approval of these transactions can run anywhere from 9 to 12 months and it is estimated that the
conversion of non-profit entities such as Eastern Connecticut Health Network could be approved somewhere
between March and June of 2015 (CT Office of the Attorney General, 2014).

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II. Driving Forces Behind Current Market Activity
There is significant concern among consumer groups, anti-trust enforcement agencies, and policymakers that the
proliferation of hospital mergers and increased consolidation of healthcare providers and systems will lead to
higher prices and subsequently greater spending. While there is strong and legitimate reason for Connecticut
hospitals’ desire to consolidate and/or merge with other health systems, the concern is that as larger health
systems increase their market share, they will be able to extract higher prices from payers. There currently is
considerable discussion and hypothesis among policymakers, hospital organizations, and payers – including
employer groups – about what exactly are the driving forces behind the local and national trend in hospital
consolidation. Several of the major arguments put forth as reasons for consolidation are as follows:
A. Historical Causes
While recent activities highlight the accelerating nature of these mergers and partnerships – after all the number
of mergers and acquisitions has doubled since 2009 (Tsai & Jha, 2014) – the trend in consolidation was born
long before health care reform.
For some, the consolidation trend began with the proliferation of health insurance during the 1990s. During this
time period, Managed Care Organizations (MCOs) used their bargaining power to exclude costly providers, hold
down costs through draconian utilization review efforts. In response to the cost-containment strategies
introduced by MCOs, hospitals began to consolidate. “Coping with managed care was a key issue for hospital
leaders. One of hospitals’ main responses to the growth of managed care was consolidation. Hospitals correctly
perceived that by merging with others in the same community, they would increase their leverage with health
plans. The U.S. Federal Trade Commission (FTC) challenged some of these mergers as anticompetitive, but the
hospitals prevailed in court in every case during this period” (Ginsburg, 2005). When conflict between insurers
and hospitals over price went public, hospitals had a big advantage – “they weren’t evil pencil-pushers trying to
deny care; rather, they were your friendly medical provider, always eager to provide it” (Salam, 2014).
Additionally, there was also fear from non-profit hospital leaders from for-profit hospital acquisitions, such as
those seen during Columbia/HCA phenomenon4 of the 1990s, which led to the belief that if they did not combine
with other health systems to create a stronger bargaining position, that their hospitals would undoubtedly be
doomed (Ginsburg, 2005).
4
Columbia/HCA was a for-profit multi-state hospital chain that aggressively bought hospitals throughout the United States during the 1990s, and was eventually found guilty of
fraudulently billing Medicare

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The largely agreed upon characterization of the hospital market today is that “larger, geographically dominant
systems command larger fees while smaller, unaffiliated facilities are eventually trampled by insurers and
systems fighting over unit cost” (Turpin, 2014). And this has generally been true since the late 1990s. Following
the revolt against managed care5 (Baker & Salisbury, 1997), health insurance companies began giving
preferential reimbursement to larger hospitals considered critical to their policy-holders while “smaller,
independent hospitals, specialists and primary care providers experienced steeper cuts in reimbursement,
precipitating insolvencies, fire sales, retirements and sales of private practices” (Turpin, 2014) .
More recently, the Great Recession has also created difficulties for community hospitals’ efforts to remain both
financially solvent and independent. “The recession created an explosion of bad debt for many hospitals as
people lost their jobs, with patients migrating to state Medicaid rolls or being unable to pay at all. As a result,
about one-third of hospitals experienced negative operating margins in 2008” (Grauman, Harris, & Martin,
2010).
B. Reimbursement
Reimbursement considerations are consistently touted as one leading cause for market consolidation. Across the
nation, there is great uncertainty among healthcare executives about the amount and form of reimbursement (e.g.
FFS or Global Capitation) and how the weight of the multitude of regulations and programs within the
Affordable Care Act (ACA) will affect reimbursement, expenses, and operations. These uncertainties have many
hospital executives concluding that continued growth in revenues is unlikely. For example, Eileen Sheil,
corporate communications director of the world-renowned Cleveland Clinic, stated that their decision in 2013 to
reduce expenses by 6 percent was simply because they believed they “are going to be reimbursed less.” (Turpin,
2014)
Hospitals are already receiving lower Medicare payments from the federal government (Livio, 2013) and, as
alluded to earlier, changes are being made to how some hospitals are paid – instead of the traditional fee-for-
service model, payments are now incentivizing caregivers to keep patients healthy and out of the hospital.
According to Barnabas Health of New Jersey CEO Barry Ostrowsky, “revenue pressure” is a key reason that his
hospital is looking to expand its reach. Ostrowsky says that pressures such as cuts in reimbursement for hospital
readmissions and errors will be alleviated through consolidation. He expects Barnabas to “save millions on
billing, purchasing, and other administrative costs” through consolidation (Livio, 2013).
5
The phenomenon in the late 1990s where managed care companies were heavily criticized for their cost-control practices

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Moody’s Investor Service Outlook echoes Mr. Ostrowsky’s sentiment regarding revenue pressure. In their 2012
outlook – which revised its not-for-profit hospital industry outlook to negative (from stable) in 2008 and reports
in 2012 that the outlook is expected to remain negative for the foreseeable future – “hospitals are faced with an
unprecedented threat to revenues…we expect revenue growth to continue to be weak and not able to keep pace
with normal spending inflation” (Guerin-Calvert & Maki, Hospital Realignment: Mergers Offer Significant
Patient and Community Benefits, 2014).
In Connecticut, the reimbursement issue is further inflamed by the Connecticut Legislature’s decision to reduce
funding for Medicaid by about $6 billion during FYs 2014 and 2015. (Kaiser Health News, 2013)
Peter Karl, President and CEO of Eastern Connecticut Health Network, spoke about the effect of lower
reimbursements. He noted that “The Affordable Care Act is designed to provide insurance to (the uninsured) and
hospitals, as an industry, accepted that they would accept lower payments as more of their patients now have
some form of insurance.” However in Connecticut, unlike other parts of the country says Karl, residents are
relatively well insured so there is not the same benefit of more revenue (from previously uninsured patients) for
hospitals in the state. Kevin Gage of Stamford Hospital concurred, noting that hospitals’ uncompensated care
pool has not significantly decreased as a result of the ACA. (Gage, 2014) Karl noted that because Connecticut
hospitals were unlikely to reap those benefits, he projected that community hospitals’ in the State would have
had to reduce their expenses by 15 to 20 percent if structural changes were not made (CT Office of the Attorney
General, 2014). Karl also acknowledged the payment reforms that are shifting risk onto providers are also
incentivizing reforms to the delivery of care, further stressing the need for integrated, population-based health
systems that require investments in care coordination and information technology which lends itself toward
consolidation movement.
Furthering the arguments of reimbursement-induced consolidation, along with Medicare and Medicaid’s efforts
to purchase value-based healthcare, commercial payers have also jumped on the bandwagon and started to
change their payment methodologies as well. (Wood, 2013) This phenomena was confirmed by Gage, who noted
that consumer driven health plans that push the burden of first dollar coverage onto the patient have diminished
utilization rates for his hospital, and likely other hospitals in the state. (Gage, 2014)

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C. Access to Capital
Struggling community hospitals who have consistently performed poorly in financial measures have also turned
to consolidation as a means to access capital for facility improvements that weren’t previously available to them.
This need for capital is also related to revenue concerns previously addressed because greater revenue usually
means more money to spend on capital projects.
For many years, low-cost capital allowed hospitals to grow their organizations to maintain competitiveness
within the marketplace, attract new physicians, and fund compliance with regulations. Today, because of
numerous economic factors - including those mentioned earlier such as volume reductions and more
government-funded care (which pays less than cost) - hospital boards are concerned about the “long-term
viability of their institutions and…their ability to weather the (financial and regulatory) storm alone” (Grauman,
Harris, & Martin, 2010). The reduction in capital projects was reported to be as high as 43 percent in 2009 by
McGraw Hill Construction, and the American Society of Healthcare Engineering reported that 42 percent of
hospital projects in 2009 were canceled or delayed because of higher cost of capital.
These capital projects, advocates argue, can be used to fund facility improvements, product line development, IT
improvement, or physician alignment strategies, and the pressure to implement these improvements is a major
reason hospitals are seeking a merger partner or acquisition. (Grauman, Harris, & Martin, 2010) Further,
“hospitals that are struggling financially typically receive lower bond ratings and, thus, are less credit-worthy,
which limits their ability to access capital. These hospitals can quickly fall into a downward spiral — without
adequate access to capital, they are unable to make necessary investments for the future, and their financial
health continues to plummet. Unless hospitals short-circuit the downward spiral by improving their access to
capital, they will continue to fall behind and may never regain their footing” (Morrisey, Heifetz, & Singer, 2012)
There are several examples nationwide of hospital consolidation strictly for the need to access capital. For
example, in New Jersey, Hackensack University Health Network said their decision to affiliate themselves with
LHP Hospital Group of Texas and purchase Mountainside Hospital gave the facility access to capital that
allowed for the opening of a wound care center and the creation of additional orthopedic services (Livio, 2013).
In Detroit, the potential merger of Beaumont Health System, Oakwood Healthcare Inc. and Botsford Health Care
into a new $3.8 billion health corporation could give each affordable access to capital that “none of the systems
could achieve on their own” (Greene, 2014). According to Jim McTevia, a healthcare consultant, the merger
“makes sense from an access-to-capital standpoint, because the larger the institution, the greater the cash flow

13
and the greater ability to service debt.” McTevia goes on to explain that hospitals “have to have access to capital
because there is so much uncertainty in the future with an aging population and declining reimbursement.”
(Greene, 2014)
D. Affordable Care Act
To some, federal government policies (especially those included within the ACA) have encouraged the creation
of larger hospital systems and networks as the new model of healthcare. In the big picture, it is easy to see their
argument as the numbers do bear a strong correlation (there were 105 mergers reported in 2012 alone, up from
50 to 60 annually in the pre-ACA, pre-recession years) (Dafny, Hospital Industry Consolidation - Still More to
Come?, 2014).
According to the CT Hospital Association, the ACA requires hospitals to find new strategies to reduce cost of
care by operating as efficiently as possible while improving the quality care provided, and expanding capacity to
handle all the newly insured patients – not a particularly easy task. Built into the ACA, they say, are economic
incentives that encourage hospitals to treat patients in the most appropriate setting (often outside of hospital) and
reimburse providers for quality rather than quantity. To achieve these goals and respond appropriately to the
economic incentives, hospitals’ argue that “integrated healthcare systems and networks enable them to better
control costs, realize administrative efficiencies, and take advantages of economies of scale. Clinical and quality
improvements can then be translated across a larger patient population” (Connecticut Hospital Association,
2013).
It is true that the federal government has encouraged integration and to a certain degree is sending the message
that bigger is better. Accountable Care Organizations (ACOs) are one of the main ways the ACA seeks to reduce
health care costs. It incentivizes healthcare organizations to form networks that coordinate patient care and
become eligible for bonuses when they deliver care efficiently (Gold, 2014). The theory is that the bigger the
hospital network is, the more effective and cost-effective they will be through their scaled efforts to coordinate
care, leverage health information technology to improve clinical decision-making, and reduce inefficiencies and
redundancies allowing for fewer expenses and improved health outcomes (Tsai & Jha, 2014).
ACOs were such a big component of the ACA, in part, because Congress is trying to make “providers jointly
responsible for the health of their patients, giving them financial incentives to cooperate and save money by
avoiding unnecessary tests and procedures.” This is especially important with such a large number of baby-

14
boomers scheduled to retire over the next several years and entitlement costs expected to balloon proportionally
(Gold, 2014).
Further highlighting the ACA’s not so tacit encouragement of consolidation through the formation of ACO’s is
the Federal Trade Commission’s “Statement of Antitrust Enforcement Policy Regarding Accountable Care
Organizations Participating in Medicare Shared Savings Program.” The policy statement confirms that ACA
encourages physicians, hospitals, and other health care providers to integrate delivery systems and relaxed
regulations regarding the antitrust review of healthcare organizations applying for ACO status, with the goal of
allowing more ACOs to be formed as quickly as possible (Department of Justice: Antitrust Division, 2011).
However, in a New York Times article published in mid-September, 2014, Deborah Feinstein, director of the
Bureau of Competition at the Federal Trade Commission argues that the ACA – while encouraging cost-
containing techniques through integration – does not give hospitals the authority to bypass antitrust laws. Ms.
Feinstein said “(she doesn’t) think there’s a contradiction between the goals of health care reform and the goals
of antitrust” (Pear, 2014).
E. Other Public Policies
Along with national economic trends and industry specific pressures discussed earlier, there are also several
State and Federal policies relating to reimbursement that are driving Connecticut hospital mergers. According to
Bruce Cummings, President and CEO of Lawrence and Memorial Hospital, the largest acute care facility in
Southeastern Connecticut:
“The key drivers behind mergers and acquisitions in CT are: cuts in Medicare reimbursement; the gross
receipts tax proposed by Governor Malloy and approved by the Legislature which is taking over $300
million from CT hospitals ($500 million according to Peter Karl, CEO of Eastern Connecticut Health
Network) and redirecting it into the State's General Fund; federal sequestration (2% in Medicare cuts);
CMS/Medicare changing the criteria for what constitutes an "inpatient admission", resulting in large
increases in patients who are now classified as "observation status" and billed as outpatients (for which
hospitals received only a fraction of what would have been previously considered an acute inpatient
admission) yet the same amount of work/resources are involved; and, last but not least, declines in volume.
Add it all up and hospitals are having to take radical steps to keep the doors open: cuts in programs, cuts in
staff, and/or merging with a larger entity” (Cummings, 2014).

15
III. Impact of Hospital Consolidation
Hospital consolidation in the United States is not a new or recent phenomenon. In fact today over two-thirds of
all US hospitals and over 80 percent of all hospital beds are part of a larger health system, alliance, or network
(Weil T. , 2010). However, while the impact varies from state-to-state, region-to-region, and depend greatly on a
number of different variables that must be analyzed and considered, the general conclusion among researchers is
that mergers generally cause prices to rise with negative impacts on access and quality. (Dafny, Hospital Industry
Consolidation - Still More to Come?, 2014) These conclusions are very concerning considering that hospital
merger and acquisition activity has increased nearly 50 percent since 2009, reaching its highest point in the last
10 years (PwC, 2013).
Looking to the future, the impact of hospital consolidation may or may not follow these same historical
shortcomings. With such transactions now being accompanied by investments in new technology, formation of
Accountable Care Organizations (ACOs), greater emphasis on payment reform which focuses healthcare
purchasing on quality not quantity, and strong national incentives to lower costs, the outcome of mergers may be
different than what they have been historically, or they may continue to cause out of control price increases. In
this section, the focus will be on the historical research on hospital consolidation and the possibility that future
mergers might not have the same negative impact.
A. Impact on Price
Supporters of consolidation argue that mergers offer the opportunity to lower price by achieving economies of
scale allowing for shared savings through improved efficiency and subsequently lower costs for all. However,
almost all retrospective studies suggest that hospital consolidation results in concentration of market power and a
rise in the price of care. In the United States, “the major findings relating to potential economies of scale as a
result of mergers are disappointing. Where there is less and less competition between hospitals for patients, the
cost of health care appears to rise” (Weil T. , 2010).
According to Avik Roy, Senior Fellow for Policy Research at the Manhattan Institute and former health policy
advisor to Presidential nominee Mitt Romney, since 1997 (after the revolt against managed care) inpatient
spending has grown considerably due to hospital consolidation. An earlier wave of consolidations beginning in
the late 1990s were so dramatic that market activity relating to mergers and acquisitions were nine times greater
by the end of the decade than at the start. As a result, market concentration - as measured by the Herfindahl-

16
Hirschman Index (HHI)6 - rose from 1,576 in 1990 to 2,323 by 2003.7 “The change is equivalent to a reduction
from six to four competing local hospital systems” (Vogt & Town, 2006). According to Roy, “hospitals had a lot
more market power, and were able to dictate rates to payers” as a result of these consolidations. Roy notes that
consolidation, specifically, “has a dramatic effect on prices.” Further, not only do mergers affect the prices of
care at merging facilities, competitors in the same geographic marketplace also raise their prices (by up to 40%)
to keep pace with their competitors (Roy, 2012). In comparing hospitals in concentrated markets and those in
more competitive markets, Roy noted that the higher prices generally result only in greater contribution margins
(more profit) for these health systems – not a greater ability to cover higher fixed costs to meet (supposedly)
greater demand (Roy, 2012). This premise is further supported by comments from Reiham Salam, a contributor
for the National Review, who agrees with Roy, saying “the high reimbursement rates that flow from bargaining
power helps to subsidize bloat: more or more generously-compensated staff than is strictly necessary,
underutilized facilities, and a lack of spending discipline across the organization, among other things” (Salam,
2014).
Dr. Leemore Dafny, a professor at Northwestern University, provides further evidence of Roy’s assertion that
consolidation strongly relates to dramatic price increases. She found that “hospitals raise prices by about 40
percent after the merger of nearby rivals and that the primary drivers of higher health care costs are prices”
(Dafny, Esitmation and Identification of Merger Effects: An Application to Hospital Mergers, 2009).
The Synthesis Project, an initiative of the Robert Wood Johnson Foundation to produce briefs and reports that
synthesize research findings on perennial health policy questions, compiled five major studies published between
2007 and 2010 on hospital consolidation. The studies generally found that there is a strong positive correlation
between market consolidation and price growth (Gaynor & Town, The impact of hospital consolidation - Update,
2012).
6 HHI: A commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting
numbers. The HHI number can range from close to zero to 10,000
7
According to the U.S. antitrust enforcement agencies, a market with HHI greater than 1,800 is considered highly concentrated.

17
The effects on price however are somewhat dependent on the type of methodology used to study consolidation
impacts. There are three types of approaches to hospital price competition research: (1) structure-conduct-
performance approach; (2) the event study approach; (3) the simulation approach. Each methodology has
produced different results. “For example, simulation studies have produced estimated changes in price as high as
53 percent…event study approach estimates a 10-40 percent increase, while the structure-conduct-performance
approach yields lower estimates of 4-5 percent (Vogt & Town, 2006).
Before drawing conclusions on correlation between merger-and-price, researchers must note the importance of
understanding the context of the merger, the method of study, and acknowledge the shortcomings of any analysis
in making any broad policy recommendations. According to Dr. Dafny, structural demand models (i.e. structure-
conduct performance approach) provide the greatest ability to extrapolate the impact of future mergers on prices
because they controls for selection bias. Their main shortcoming is the fact that “these models require extensive
assumptions about consumer demand and firm objectives, do not fully incorporate rivals’ reactions to actions
taken by merging parties, and are computationally intensive and challenging to implement” (Dafny, Esitmation
and Identification of Merger Effects: An Application to Hospital Mergers, 2009).
B. Impact on Quality of Care
With regard to quality of care, it is generally perceived by the public and some policy-makers that larger hospital
systems – especially those with teaching programs – result in better health outcomes. Other experts believe,
however, that is a misconception. Some research suggests that consolidations “tend to decrease rather than
increase quality of care” because as market power grows “it becomes less critical for the organization to enhance
its quality edge as a strategy to increase market share” (Weil T. , 2010).

18
Dr. Avik Roy says that while consolidation advocates vehemently argue that integrated mergers will result in
higher quality of care, historical studies on the matter suggest mix results: “Some studies say it decreases quality,
some studies say it increases quality, some studies say it has no effect.” He concludes that there is no conclusive
evidence that concentrated hospital markets result in greater outcomes (Roy, 2012).
Judging quality of care involves looking at a wide range of process and outcome measures over a long period of
time to attain verifiable statistical differences in specific health outcomes. This is a long and arduous process that
few have undertaken. With that said, Mutter et al. (2011), writing for the International Journal of the Economics
of Business in February 2011, and citing two defining studies on the impact of consolidations on quality,
concludes that the two variables are not completely independent. The first study, by Ho and Hamilton (2000),
found that “hospital consolidations have no impact on inpatient mortality for AMI or stroke patients…but do
increase the probability of 90-day readmission for AMI patients” indicating that the impact of consolidations
vary but do have an effect on outcomes – at least on certain measures. The other longitudinal study, by Cuellar
and Gertler (2005), reported “no significant changes in [composite measures of quality] among hospitals that
joined systems, relative to hospitals that did not, except that consolidating hospitals reduced the rate of
potentially overused procedures by 1.2 percent among managed-care patients.” Mutter et al., after completing
their own study of 42 within-market consolidations in 16 states during the years of 1999 and 2000, concludes
that any effect of hospital consolidations on quality appears “to be small and to vary according to the
institution’s role in the transaction” (Mutter & al, 2011).
Looking at the issue through the lenses of market competition (as opposed to consolidation) many researchers
have cited evidence that increased competition in healthcare markets results in enhanced quality of care, however
it depended primarily on what the market is most sensitive to – quality or price. “If hospitals can compete on
both price and quality, then when they face tougher competition they will choose to compete by whichever
means is most effective. If buyers are considerably more responsive to price than quality (for example, if price is
easier to measure), then enhanced competition can lead to lower prices, but also less attention to quality. On the
other hand, if quality is particularly salient, then tougher competition can enhance quality” (Gaynor & Town,
The impact of hospital consolidation - Update, 2012).
Generally, the most comprehensive studies showed limited differences in outcomes between consolidated and
non-consolidated hospital systems but concluded that competition did in fact improve health outcomes in a
number of different geographic locations and hospital settings as shown in the chart below. (Gaynor & Town,
The impact of hospital consolidation - Update, 2012)

19
Before reaching any conclusions about the evidence of the positive impact of competition as denoted in the chart
above – as provided by Gaynor & Town, and noted by Mutter et al. - it should be emphasized that there have
been relatively few comprehensive studies of the correlation between hospital market concentration and quality
of care provided. This lack of study has hindered anti-trust authorities efforts to evaluate hospital’s claims of
improvement in quality. “Unless and until economists and health services researchers can produce simple
predictive models of the impact of competition on objectively verifiable dimensions of health care quality, courts
will largely be feeling their way in the dark” as it relates to anti-trust cases (Mutter & al, 2011).
An encouraging development, cogent to the topic of consolidation and quality, is the government sponsored
ACO Pioneer Program.8 There were 32 health systems that consolidated to form an ACO and participate in the
8
Pioneer Program: The Pioneer ACO Model is a CMS Innovation Center initiative designed to support organizations with experience operating as Accountable Care Organizations
(ACOs) or in similar arrangements in providing more coordinated care to beneficiaries at a lower cost to Medicare. The Pioneer ACO Model will test the impact of different payment
arrangements in helping these organizations achieve the goals of providing better care to patients, and reducing Medicare costs.

20
program by July 2013, and the results on quality were quite impressive. “All 32 of the accountable care
organizations in the program improved patient care and patient satisfaction against benchmarks, according to
results shared” (Beck, 2013).
C. Impact on Cost Savings
Going hand-in-hand with price reduction and improved quality, consolidation proponents often tout cost
containment as a central argument in favor of mergers. “Prior to a merger, hospital executives, like in other
industries, often claim that costs will decrease after the merger due to gains in economic efficiency.” While
hospital systems tout the benefits in cost savings, health insurers are not nearly as supportive and there is strong
evidence supporting their skepticism. For example:
“In 2010, Catholic Health Services of Long Island acquired 203-bed New Island Hospital in Bethpage and renamed it St. Joseph’s
Hospital, the same year the North Shore-Long Island Jewish Health System acquired New York City’s Lenox Hill Hospital. Rate
changes followed both mergers. Catholic Health Services realigned rates to match those charged at CHS’s Mercy Medical Center,
while rates at Lenox Hill have increased roughly 50 percent since the North Shore-LIJ merger” (Solnik, 2013).
According to John Caby, Vice President of Provider Engagement and Network Management at Empire
BlueCross BlueShield, “Predictions of lower costs wrought by greater efficiencies just don’t universally pan
out…bigger systems have more bargaining-table power, typically resulting in higher costs for insurers and the
insured” (Solnik, 2013).
Says Robert Zirkelbach, spokesman for America’s Health Insurance Plans, a Washington-based insurance trade
group, “Hospital systems use their negotiating clout to demand higher prices for services that result in higher
cost for consumers and employers” (Solnik, 2013).
While the research supports the premise that prices will rise through the acquisition of more market power, there
is differing evidence on the potential for cost savings as a result of consolidation. According to one study, cost
savings can be significant if the transaction results in reductions in fixed costs through the closing of excess
facilities. In another study, researchers found that of the “two types of merges: consolidations in which the two
merging hospitals continued to operate in two separate facilities, and those in which one facility was closed.
There was no significant reduction in expenses when both facilities were maintained but when one facility was
shut, amalgamation resulted in a 14% savings” (Weil T. , 2010).
In order to study the impact of mergers on cost, researchers say that outcome variables (such as overall expenses)
must be compared to a control group (i.e. merging hospitals unit costs must be compared to a non-merging
hospitals unit cost in a similarly situated market environment). Studying and verifying impact on cost is difficult

21
since it is often not clear whether savings (if achieved) were realized because of the merger or whether they
could have been realized anyway; in addition there are other challenges related to data validity. In discussing the
challenges of assessing whether cost savings were achieved, researcher Teresa Harrison outlines the problem of
studying the matter:
“The American Hospital Association (AHA) identifies a merger when hospital A and hospitalB consolidate to form hospital C,
and similarly denotes an acquisition if hospitalA merges into hospital B. For these operational consolidations,only a single
entity is reported after the merger event, providing only one set of post merger outputs,but two sets ofpre-merger outputs.Using
a traditional difference-in-difference specification, the researchers must either (1) divide the post-merger output into two
separate merging entities or (2) combine the pre-merger output into entity. In this case, the potential scale economies from the
merger are incorporated into the estimation because the pre-merging output levels are aggregated.The economies of scale from
the merger therefore cannot be explicitly identified” (Harrison, 2011).
However, while Harrison does outline these challenges, in her own study, she does provide for methodologies
that can successfully judge whether economies of scale and associated cost-reductions can be achieved.
According to Harrison’s study, “the average potential cost savings from a merger are positive and statistically
different from zero.” She concludes “economies of scale can be exploited to reduce costs from their pre-merger
values…with savings reaching 2 percent of pre-merger costs.” Simply put, Harrison’s research confirms the
existence of economies of scale and thus the potential for cost savings. Unfortunately for proponents, she also
found that those gained efficiencies have declined over time. She postulates that because actual cost savings
were greater than potential cost savings in the first year after a merger and less than potential savings in the
following years that hospitals’ realization of initial savings were only due to changing outputs (e.g. differences in
health service lines before and after; settings of care; volume of care) rather than gains in operational
efficiencies. Her conclusion is that the potential for savings as a byproduct of mergers are there, but evidence of
hospitals taking advantage of those potential savings aren’t – they indicate that mergers that reduced costs in the
short-run are due to other factors (Harrison, 2011).
While the Harrison study highlights that historically, hospitals haven’t taken advantage of potential savings –
perhaps because the market power achieved didn’t pressure them to be more cost conscious, there are programs
that give some hope that consolidation in the future could achieve these goals. As noted earlier, the ACO Pioneer
program which is also very committed to cost control in addition to quality has shown some success as it relates
to cost control. “18 of the 32 (participating health systems) managed to lower costs for the Medicare patients
they treated—a major goal of the effort” (Beck, 2013).
Some are arguing that in today’s environment the potential for cost savings could be more easily realized with
new technology and a greater focus on patient management across a larger continuum of care. Hospitals are now
trying to do work that payers used to do such as “handling actuarial work, building networks, monitoring quality,

22
and managing utilization and claims.” Stephen Rosenthal, an executive affiliated with the prestigious Montefiore
Hospital System in Bronx, NY, noted the differences in achievable cost savings from consolidation now
compared with the late 1990s. In the late '90s he states, consolidation was simply a response to the rise of
managed care - specifically the practice of cutting reimbursement rates as a blunt way to control costs.
Montefiore executives, he said, thought they could do better if it were allowed to take on some risk. "Given the
market constraints at the time, the payers—both government and private insurance—were so dramatically cutting
rates that on a transaction basis it would be difficult to go forward and survive," he says. "If they gave us full
responsibility for the patient, we theorized, overall we would save money in the system and could use the dollars
saved to sustain the infrastructure" (Betbeze, 2013).
According to Rosenthal, Montefiore bears financial risk through its Integrated Provider Association (IPA). The
IPA provides the infrastructure support that an integrated delivery system needs to manage a population. “(They)
do all the data analytics and the contracting between insurance companies, the government, and providers, and
establish network opportunities…(as well as developing) strategies so the sickest patients get truly managed
care.” Before jumping on the bandwagon of consolidation, Rosenthal warns that “it’s critical that (an
organization) joins together in real cultural and behavioral changes with a provider population. When managing
a population, you’re looking holistically.” He adds that the exchange of clinical data and claims data from
insurance companies and the ability to proactively identify the right individuals to apply the right interventions at
the right time is a major challenge (Betbeze, 2013).
Montefiore has been the most successful ACO in the country to date. Earlier this year it announced that “Data
showed monthly Medicare spending per beneficiary among Montefiore ACO participants represented a savings
of $104 compared to monthly spending per beneficiary among a local market comparison group.” According to
the Montefiore, “savings were achieved through increased patient engagement, care coordination and
preventative, patient-centered care provided wherever needed – in the hospital, in doctors' offices, by phone and
at home. Innovative nurse-driven interventions supported patient outcomes and experience” (Montefiore Medical
Center, 2014).
C. Impact on Access
As it relates to access for underserved populations, since mergers tend to increase hospital prices, employer-
based and individual health plans are forced to raise premiums to support those increased costs, and as a result –
prior to the ACA – forced many individuals out of the insurance market (Weil T. , 2010).

23
The matter of price and access are directly linked because lower income individuals and socio-economic
minorities are much more price-sensitive than higher income demographic groups (Town, Wholey, Feldman,
Roger, & Burns, 2007). The higher the price of health insurance, the less inclined patients will be to purchase
insurance.
On the other hand, according to a study published by the Center for Healthcare Economics and Policy, mergers
benefit patients and enhances access to care. A key benefit of consolidation has been that hospitals that might
have otherwise been forced to discontinue an unprofitable service, downsizing staff, or even close would now
remain open and viable because of the improved access to capital and greater revenue (Guerin-Calvert & Maki,
Center For Healthcare Economics and Policy, 2014).
D. Legal Ramifications
From a legal standpoint, there are statutes, specifically within Section 1 Sherman Anti-Trust Act and Section 7 of
the Clayton Act, for preventing high levels of concentration of hospital markets. Consolidation can and often
does lead to increased market power, which results from a rising market share, even if entities are non-profits.
“Mergers have been considered illegal if they resulted in market power increases great enough to allow non-
transitory increases in hospital prices” (Spang, Bazzoli, & Arnould, 2001). The judicial tests most often used for
judging the legality of a merger is either the Rule-of-reason analysis9 which assumes that a merger is not illegal
on its face, but could be considered unnecessary and thus illegal depending on the predicted impact of the
merger. The test is to balance the “welfare-enhancing effects of consolidation, such as increased efficiency, with
the welfare-reducing effects, such as the potential to control prices” (Spang, Bazzoli, & Arnould, 2001). The
other test most often used is the Illegal per se test which deems a merger illegal if it is conclusively presumed
that the transaction would cause “an unreasonable restrain on trade and thus anti-competitive.” Such illegal acts
include price fixing, geographic market division, and group boycotting. The legal test for proving a merger
illegal per se is to:
1. Show the practice facially appears to be one that would always or almost always tend to restrict
competition and decrease output.
2. Show that the practice is not one designed to increase economic efficiency and render markets more,
rather than less, competitive
3. Carefully examine market conditions; and
9
The rule of reason is a legal doctrine used to interpret the Sherman Antitrust Act, one of the cornerstones of United States antitrust law. While some actions like price-fixing are
considered illegal per se, other actions, such as possession of a monopoly, must be analyzed under the rule of reason and are only considered illegal when their effect is to
unreasonably restrain trade

24
4. Absent good evidence of competitiveness behavior, avoid broadening per se treatment to new or
innovative business relationships (Green, Block, & Haper, 2013).
According to the FTC, the greatest antitrust concern arises with proposed mergers between direct competitors,
these are known as horizontal mergers.10 (Federal Trade Commission, 2014) Section 7 of the Clayton Act
prohibits mergers if “in any line of commerce or in any activity affecting commerce in any section of the
country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a
monopoly” (U.S. Department of Justice and the Federal Trade Commission, 2010).
According to the FTC and DOJ, most merger analysis is inherently predictive, “requiring an assessment of what
will likely happen if a merger proceeds as compared to what will likely happen if it does not.” The guidelines
state that a merger is illegal if its’ effect enhances market power by “(encouraging) one or more firms to raise
price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive
constraints or incentives.” In evaluating how mergers’ change hospital behavior, the FTC and DOJ focus on how
it “affects conduct that would be most profitable for the firm” (Federal Trade Commission, 2014).
Until recently, courts had increasingly accepted cost savings as a sufficient basis for allowing a merger.
However, the FTC has recently begun to aggressively prosecute mergers – “The agency is riding high with wins
in three litigated hospital mergers in the last two years.” They successfully prevented mergers in Albany,
Georgia; Toledo, Ohio; and Rockford, Illinois. The victories, according to Melinda Hatton, Senior Vice
President and General Counsel of the American Hospital Association – as reported by the New York Times – is
a “chilling effect” on hospital mergers (Pear, 2014).
What should be considerably worrisome however, in this day and age for government regulators and healthcare
consumers is the sheer complexity of preventing and/or dissolving a merger. “Attempts to prevent hospital
mergers are simultaneously the most visible and the least successful aspect of public antitrust enforcement.”
While there are robust anti-trust laws to prevent horizontal mergers (Hammer & Sage, 2003), regulators, in order
to undertake such a task, must devote substantial time and resources to evaluate transactions in addition to
satisfying legal standards for challenging them; economic experts must study large volumes of claims data and
determine through complex statistical methodologies – the extent to which merging hospitals compete and
whether price increases are likely if hospitals were to merge. The difficulty of breaking up merging parties after
the fact so worried Congress that the Hart-Scott-Rodino Act requiring merging parties to notify agencies in
advance of a mergers was passed into law because of the “difficult and potentially ineffective “unscrambling of
10
A Merger occurring between companies in the same industry, within the same space, and offering the same good or service

25
the eggs” once an anticompetitive merger has been completed (Federal Trade Commission, 2014). Further
complicating the matter is the unquantifiable benefits that merging hospitals provide – through the
aforementioned improved efficiencies achieved through population management. Given the ambiguity of the
effects of such mergers, efforts to halt or block mergers by regulators are very unlikely to occur without
sufficient tools to study impact and clear legal limits.

26
IV. For Profit v. Non-Profit Hospitals
With the very real possibility of 5 non-profit community hospitals being acquired by the for-profit company
Tenet Healthcare in the near future, it is important to discuss the differences between for-profits and non-profit
hospitals, the conversion process and potential impact that such an operational change would have on residents
of Connecticut.
Hospitals, whether for-profit, non-profit, or government-owned, operate under different legal rules depending on
their ownership. For example, for-profits may distribute accounting profits to shareholders, while government
and nonprofit hospitals benefit from income and property tax exemptions (Horowitz, 2005). By definition, a
nonprofit hospital is one that exists to serve the healthcare needs of the community. Nonprofits are often
mission-driven and rooted in culturally rich values; they are uniquely responsible to the community they are
settled in. Often, nonprofit hospitals are “safety net” providers, where they take on a substantial responsibility to
serving the uninsured, Medicaid enrollees, and vulnerable populations facing a variety of barriers to healthcare
access. “All nonprofit hospitals must adhere to a number of regulatory statutes at the federal and state levels in
order to maintain exempt from federal, state, and county taxation – this relationship improves healthcare access
to the underinsured and uninsured while relieving nonprofit hospitals from substantial tax liability” (Bales,
Tiberio, & Tesch, 2014).
Some of the federal regulations nonprofits must follow, for example, include the following:
 Community Health Needs Assessment
 Federal Designations Designedto Assist Rural Safety Net Hospitals
 Excess Benefit Regulations
 Commercial Reasonableness
 Stark Law
 Anti-Kickback Statutes
 EMTALA (Bales, Tiberio, & Tesch, 2014)
While hospitals might have different ownership, they should theoretically treat patients with the same mix of
needs, after all they contract with the same insurers and government payers, operate under the same health
regulations, and employ staff with the same training and ethical obligations (Horowitz, 2005). This however
does not always end up being the case.

27
A. Overview of Process for Conversions
The process in Connecticut for converting a non-profit hospital to a for-profit entity requires an extensive
regulatory review by the State Attorney General and the Commissioner of the Department of Public Health. The
Certificate of Need (CON) approval process for hospital conversions is governed by Connecticut Law and
contains standards that the Attorney General and the Commissioner of Public Health must apply in rendering a
decision for each application. (CT Office of the Attorney General, 2014) According to Connecticut State Law,
“no nonprofit hospital shall enter into an agreement to transfer a material amount of its assets or operations or a
change in control of operations to a person that is organized or operated for profit without first having received
approval of the agreement by the commissioner and the Attorney General (of the state of Connecticut).” The
Statute goes on to grant the CT Attorney General the power to deny an application as “not being in the public
interest” if an application does not meet the statutory requirements for governing non-profit entities; if the
applicant fails to exercise due diligence in deciding to “transfer assets, the selection of a purchaser, obtaining a
fairness evaluation, or in negotiating the terms and the conditions of the transfer” it must be denied. The
application must also disclose whether there is any conflict of interest or if the non-profit hospital will not
receive fair market value for its assets (CT Office of the Attorney General, 2014).
The Commissioner of Public Health also has standards that an applicant must pass before receiving approval of
such a transaction. The applicant must display that the community affected will be assured of “continued access
to high quality, affordable care after accounting for any proposed change impacting hospital staffing and that a
commitment has been made to provide care to the uninsured and underinsured” or else the Commissioner is
required to deny any application. (CT Office of the Attorney General, 2014)
“Because nonprofit hospitals are charitable organizations, they must legally protect their charitable assets in for-
profit conversion transactions.” In other words, when a non-profit converts to a for-profit entity – its once-
philanthropic assets donated to the hospital must not be liquidated into the reserves of shareholders. This has led
to the formation of health conversion foundations, endowed with assets generated by the conversion and charged
with funding only health-related activities for the benefit of the community. (Bales, Tiberio, & Tesch, 2014)
While the process for the conversion of non-profit entities to for-profit companies is regulated and reasonably
transparent, the impact of such transactions is debatable. The impact will be discussed further in in sections C
and D.

28
B. Drivers of Privatization of Hospitals
The primary difference between for-profit and non-profit hospitals is the distribution of accounting profit. “The
latter do not distribute profits to equity holders and enjoy some competitive advantages, including tax
exemptions and the ability to receive private donations” (Sloan, 2000). According to Thomas P. Weil, Ph.D., a
leading researcher on the issue, privatization of hospitals most frequently involves poorly positioned facilities in
need of “additional capital for the replacement of plant and equipment; improved management systems to reduce
the number of their non-direct patient care employees; and, an aggressive physician recruitment effort” (Weil T.
P., 2011). Other researchers have cited other financial and operational hardships as reasons for conversions such
as “burdensome debt service; unfunded pension liability; reduced payer reimbursement; lack of physician loyalty
and inability to successfully recruit new physicians; loss of market position, unfavorable community reputation;
and exclusion from managed care contracts” as major drivers for conversions (Bales, Tiberio, & Tesch, 2014).
The dilemma presented by privatization, according to Dr. Weil, is that if not for private investment, a number of
institutions may shut down resulting in the loss of good paying jobs and diminishing access to care in some
communities. On the other hand, some may say that closures are a good thing as it will lower national health care
expenditures. It is important that communities in those hospitals’ service areas have a say since they are the ones
that may lose access to critical care facilities (Weil T. P., 2011).
According to Peter Karl, CEO of ECHN, besides access to capital that he argues will protect accessibility and
affordability of care, as well as quality and safety, another benefit of aligning with Tenet health is their
“extensive expertise with risk-based contracting” (Eastern Connecticut Health Network, 2014).
Overall, 20 percent of community hospitals in the United States are investor-owned. These hospitals are,
generally, fiscally sound and their parent organizations, usually traded publicly on the New York Stock
Exchange, have shown little hesitation in pursuing further acquisitions (Weil T. P., 2011). Over the last decade,
not-for-profits have achieved an annual 4 to 5 percent excess of income compared to expenses in order to
accumulate the required cash needed to renovate and expand facilities. In Connecticut, the 5 non-profits up for
auction have achieved razor-thin excess incomes, well below the 5% goal, which partly explains the desire and
arguments by these institutions for financial assistance and access to capital. As noted earlier, it is important to
determine which facilities are vital and which are not as there are many cases where privatization “has served
patients and their communities well, while in other localities, their rejuvenation has simply resulted in additional
health care expenditures” (Weil T. P., 2011).

29
Weil argues that the privatization in the United States (as well as in England and Germany) is due to an
oversupply of hospitals and hospital beds that results in many institutions becoming “poorly positioned and
fiscally vulnerable.” As a general rule of thumb, the least competitive institutions frequently: experience the
longest average length of stay; the need for huge sums of cash for recapitalization of plant and equipment;
project weak financial outlooks; employ an excess number of workers; always seem to be searching for
additional, qualified physicians for their medical staffs; and, over the past decade generally see their market
share shrinking. According to Weil, these vulnerabilities end up forcing institutions into responding in one of the
following ways in order to survive: (a) allowing themselves to be acquired by another nearby health system; (b)
merged as a “smaller of two” with another nearby hospital; (c) shut down; or (d) acquisition by an investor-
owned hospital management corporation.
Whether or not it is good public policy to allow conversions to go through will depend largely on three
questions: 1) Are the hospitals being acquired essential to the community they serve? 2) If they are financially
troubled, but essential, is there another way to keep them open? 3) If they are acquired, will changes in the
financial incentives for these hospitals affect access to care in the community, and if so, how?
With regard to how essential hospitals discussed are to the Connecticut communities in question, the evidence
suggests that some non-profit hospitals considering changing their tax status and selling their assets to Tenet
healthcare may have an excess supply of beds, a concern pointed out by Weil earlier. As evidenced in Figure 3
below, hospitals considering changing their tax status have an average occupancy nearly 15% lower than the
other non-profit hospitals operating in the state.

30
Figure 3
*In figure 3, for-profits include Essent-Sharon Hospital and the four non-profits applying to sell their assets to the for-profit company Tenet Healthcare.
Furthermore, while state average occupancy rate of 66.6% is in line with national averages (U.S. Occupancy
rates averaged 67.8% in 2009) the average occupancy for those considering changing their status have steadily
decreased from 2009 to 2012 (Center for Disease Control, 2011). Though a 57% occupancy rate is typical for a
for-profit hospital according to the AHA, that number is misleading as it is buffeted by the strong occupancy
rates shown by 393-bed Waterbury Hospital and the 379-bed St. Mary’s hospital – Rockville and Manchester
Hospitals had occupancy rates as low as 30% and 44%, respectively, in 2012.
Another theory, from the buyer point of view, on why privatization of hospitals has increased in recent years is
the favorable market for debt. According to James Goody, Vice President and Portfolio Manager at Associated
Bank, “the robust debt market will continue to drive mergers and acquisitions…it’s really an opportunistic time
to take advantage of low interest rates.” The debt market, along with healthcare reform – which has been
extremely favorable to for-profit hospital chains, has created a boost in these companies share prices. Tenet
Healthcare Corp., the company applying to purchase several hospitals in Connecticut, closed nearly 30% higher
on the last day of 2013 than it had at the end of 2012 (Kutscher, 2014).
Hospital
Yale-New Haven
John Dempsey Health Center
Saint Mary's Hospital
St. Vincent's Medical Center
Bridgeport Hospital
Danbury Hospital
Stamford Hospital
Rockville General Hospial
Manchester Memorial Hospital
Middlesex Hospital
Johnson Memorial Hospial
Waterbury Hospital
Backus Hospital
Charlotte Hungerford Hospital
Greenwich Hospital
Hartford Hospital
Saint Raphael's
Mid-State Medical Center
Bristol Hospital
New Milford Hospital
Hospital of Central Connecticu
Windham Community Hospital
Griffin Hospital
Connecticut Children's Medical Center
Lawerence and Memorial Hospital
Day Kimball Healthcare
Norwalk Hospital
Saint Frances Hospital
Sharon Hospital
City
New Haven
Farmington
Waterbury
Bridgeport
Bridgeport
Danbury
Stamford
Vernon Rockville
Manchester
Middletown
Stafford Springs
Waterbury
Norwich
Torrington
Greenwich
Hartford
New Haven
Meriden
Bristol
New Milford
New Britain
Willimantic
Derby
Hartford
New London
Putnam
Norwalk
Hartford
Sharon
Tax Status ACO
Non-Profit Yes
Govt. No
Non-Profit No
Non-Profit Yes
Non-Profit Yes
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit N/A
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit Yes
Non-Profit N/A
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit N/A
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit No
Non-Profit Yes
For-Profit No
Mergers/Acquisitions Total Beds 2009 2010 2011 2012
Forming a partnership with Tenet Health 1,571 86% 85% 90% 85%
174 69% 63% 63% 47%
Tenet intends to acquire and convert to for-profit 379 74% 80% 85% 78%
520 81% 80% 79% 74%
383 75% 72% 70% 74%
Acquired by Western CT in 2010 371 72% 72% 71% 68%
330 62% 65% 63% 60%
297 74% 74% 66% 63%
101 52% 51% 46% 47%
233 59% 58% 58% 58%
182 64% 63% 62% 57%
206 67% 71% 70% 69%
867 79% 79% 77% 80%
467 74% 70% 68% 60%
156 83% 74% 78% 75%
Acquired by Western CT in 2010 134 28% 27% 27% 25%
446 64% 63% 59% 55%
144 39% 40% 38% 36%
180 51% 51% 48% 45%
187 69% 69% 55% 65%
308 75% 77% 79% 76%
122 45% 42% 41% 42%
366 61% 61% 62% 58%
682 75% 71% 73% 73%
For Profit Hospital 94 33% 34% 36% 35%
Total 70.2% 69.1% 68.9% 66.6%
For-Profit* 59.4% 58.1% 58.6% 56.9%
Non-Profit 71.9% 70.8% 70.5% 68.1%
Occupancy of Available Beds
CAGR
-0.3%
-9.2%
1.3%
-2.2%
-0.3%
-1.4%
-0.8%
-4.5%
0.6%
-3.9%
-2.5%
-3.3%
-0.4%
-2.9%
0.7%
0.3%
-5.1%
-2.5%
-3.5%
-2.8%
-3.7%
-2.0%
-3.1%
-1.5%
0.3%
-1.7%
-1.3%
-0.7%
1.5%
-1.3%
-1.1%
-1.3%

31
With specific regard to the sale of ECHN, Tenet Healthcare, with its boost in capital from its rise in share prices,
may have offered ECHN a deal they could not refuse – which include promises to maintain community services,
restrict downsizing and cutting of service lines, and an additional seventy-five million dollars of capital funding
for “upgrades to ECHN facilities and projects to improve our services” above the price of purchasing the hospital
group (Eastern Connecticut Health Network, 2014).
C. The Case for Privatization
Privatization advocates say that public or non-profit ownership encourages inefficiencies or unresponsiveness to
meeting population health needs. They say such systems can be too sensitive to political influence and lack the
proper incentives to produce efficient and effective care (Villa & Kane, 2012).
Before delving further into why for-profit hospitals may be more efficient, it would be wise to define what it
means to be inefficient in a healthcare market. According to the World Health Report 2000, technical efficiency
refers “to the extent that resources are being wasted – efficiency is a measure of the degree of producing the
maximum number of outputs from a given amount of inputs.” Examples of these inefficiencies can include:
“excessive hospital length of stay, over-prescribing, over-staffing, use of branded over generic drugs, and
wastage of stock” (Hsu, 2010).
The prevailing theory among those who support for-profit medicine is that under non-profit systems, physicians
and hospital administrators are not incentivized to act in a cost-efficient manner. They argue that the decisions to
purchase highly trained personnel and sophisticated equipment are made “without regard for their need or likely
use…and that costly technologies are adopted and services added that are only marginally beneficial” (Andre &
Velasquez). In addition to the positive economic incentives built within a for-profit system, as outlined
previously, according to Professor Angela Mattie, a management professor at Quinnipiac University, “a for-
profit corporate structure should help bring economies of scale by allowing hospitals to consolidate
administrative functions, which should free up more capital to invest in health care services.” And for smaller
community hospitals the alliance with a larger system could allow hospitals to “tap into the knowledge base and
best practices used by much larger health care networks” (Bordonaro, 2013).
There are several theories that support the concept that “ownership” matters in performance and efficiency of
health systems and that a for-profit system is more efficient than a non-profit or government-owned entity. For
example, a publicly owned hospital might be inefficient because the relationship between the owners and the
managers is mediated by politicians who impose objectives on these firms that might help them to gain votes

32
(e.g. by favoring union’s collective bargaining power, or by seeking patronage appointments for their supporters)
but conflicts with efficiency. A second theory posits that public organizations are required to maximize the well-
being of all patients in a service area, making it more difficult for publicly owned organizations to set shared
performance goals and, consequently, to implement effective incentive schemes that promotes efficiency. (Villa
& Kane, 2012) It is hard however to confirm or substantiate these theories as there is very little literature on the
matter. According to the report from the WHO cited earlier, in the United States it was “determined that non-
profit hospitals were more efficient than for-profit hospitals.” (Hsu, 2010) Further, in a meta-regression analysis
conducted by Drs. Karen Eggleston and Yu-Chen Shen of Stanford University, they found mixed results as it
relates to efficiency claims. “Efficiency studies of a single or limited number of states found for-profits have no
difference or are more efficient than not-for-profits, while the majority of national studies found for-profits to be
less efficient” (Changes in Health Care Financing & Organizations (HCFO), 2008).
Other arguments offered by proponents include the idea that “any community losses from conversions are offset
by financially strengthened institutions, an increase in tax revenues, and the movement of nonprofit assets to
other charitable purposes…they also maintain that in some over-bedded markets where failing hospitals might be
of questionable value to communities, for-profit buyers that own other hospitals in the same markets (are
credited) for shutting down redundant hospitals that nonprofit boards were unwilling to close. (Collins, Gray, &
Hadley, 2001)
There is more research that supports the claims that for-profits are better able to adapt to changes in the
marketplace however. According Larry Van Horn, Executive Director of Health Affairs at Vanderbilt University,
“With a history of operating with business objectives in mind, it makes sense that for-profit hospitals will be
better able than non-profits to adapt to the changing hospital environment, and to reconfigure production under a
new set of constraints.” Dr. Van Horn also notes that for-profits will have easier access to equity capital to
improve facilities and expand their market reach (Van Horn, 2011).
Additionally, as touched on earlier, one of the understated benefits of allowing hospitals to convert their tax
filing status is that those facilities no longer operating under the 501(c)(3)tax exemption would provide the state
and local townships with a windfall in revenues. For example, St. Francis’ conversion could provide a
tremendous amount of revenue for the city of Hartford. “According to the city assessor, St. Francis Care owns 41
buildings in Hartford with an assessed value of $296.3 million…That would generate about $11.3 million in new
property tax revenue for the city at a time when its budget has faced slim margins.” (Bordonaro, 2013)

33
As it relates to Connecticut’s potential conversions, Kevin Gage, Chief Financial Officer for Stamford Hospital,
opines that “there should not be a knee-jerk reaction against conversions of hospitals to for-profit entities as long
as those hospitals act on the same level playing field as other non-profit hospitals and government-owned
hospitals.” Gage believes that innovation and efficiencies can be gained through conversions, as well as access to
capital to improve and upgrade facilities, but asserts that whether a hospital is for-profit or non-profit, “they all
share a responsibility to their community”(Gage, 2014).
Overall, based on the reports that for-profit hospitals have the ability to respond with speed and veracity to
changes in profitability and dynamic market environments, and because of their access to capital to refurbish and
expand facilities, one could easily conclude that the for-profit hospitals have the ability to keep hospital doors
open and remain a critical provider of care in the community.
D. The Case against Privatization
While there are certainly strong arguments for why privatization of struggling healthcare facilities is a viable
solution to preventing closures and maintaining access, there are certainly risks that need to be considered before
the state allows such changes in tax-filing designations.
One of the major risks has to do with incentives inherently built into a for-profit model. For-profit hospitals and
systems have a fiduciary obligation to maximize shareholders’ wealth. This obligation may run counter to the
provision of community benefits, such as care for the uninsured (Thorpe, Florence, & Seiber, 2000). According
to a study published by Jill Horowitz in Health Affairs, For-profits are most likely to offer relatively profitable
medical services and are most responsive to change in service profitability than either government-run or
nonprofit hospitals (Horowitz, 2005). For example, the Horowitz study found that for-profits are more likely
than non-profits to offer procedures such as open-heart surgery, a relatively profitable service, and less likely to
offer psychiatric emergency care, a relatively unprofitable service (Horowitz, 2005). This characteristic –
profitability sensitivity you can call it – was present in more than just surgery and psychiatric care types. “Tests
of more than thirty other services yielded similar results. While for-profit hospitals were only somewhat more
likely than nonprofits to offer relatively profitable services, both for-profit and nonprofit hospitals were
considerably more likely than government hospitals to offer relatively profitable services. For-profits were less
likely than nonprofits, which in turn were less likely than government hospitals, to offer relatively unprofitable
services. For-profit hospitals were more responsive than the other types were to rapid changes in service
profitability.” For-profits responsiveness to financial incentives are noteworthy for its magnitude and speed

34
(Horowitz, 2005). Understandably, these financial motivations can be critically hurtful to patient access for
communities with large patient populations that require access to services deemed “unprofitable.”
Connecticut’s junior Senator, Chris Murphy (D-CT) released a paper in June outlining some of the concerns his
office has relating to for-profit medicine. The report did not offer a strong opinion for or against the conversions
but did provide readers with a series of facts that might be of concern. Some highlights include the fact that for-
profit hospitals are more likely to pursue and offer patients more financially profitable services as discussed
earlier; spending on Medicare enrollees were higher in states dominated by for-profit hospitals; non-profit
hospitals tend to behave differently when sharing a marketplace with for-profit hospitals as there is a tendency
for a “spillover” effect in how services are delivered; these effects include:
 The tendency of non-profits to respond by aggressively seeking revenue-increasing
opportunities
 Adopt profitable services
 Discourage admissions of unprofitable patients
 Reduce resources devoted to patients they do admit (Office of Senator Chris Murphy, 2014)
This “spillover effect” is likely because non-profits attempt to balance their profitable and unprofitable
service lines so that profitable procedures and services help to subsidize unprofitable ones. When a for -
profit hospital enters a marketplace, and begins to dominate the market share for those services it leaves
for-profits with little choice but to follow suit.
Another reason to be hesitant about converting a non-profit to a for-profit entity is embedded within a
report published by the Commonwealth Fund in 2001. For those who argue that conversions are the only
way to keep hospital doors open, in their study of eight hospital conversions, they determined that in “six
of our eight cases, sale to a for-profit owner failed as a permanent solution to the financial decline of
hospitals.” They were particularly unsuccessful for hospitals in over-bedded or urban markets (Collins,
Gray, & Hadley, 2001).

35
V. REVIEW AND GENERAL CONCLUSIONS
A. Reviewof Findings and General Conclusions
The Universal Health Care Foundation of Connecticut (UHCFC) has commissioned a review of the academic
literature, industry narratives, government forecasts and economic impact of hospital consolidation and
conversion trends nationally and locally and provide a narrative for consumers, policy makers, and industry
leaders to better understand the issue. Based on the findings above, there are several areas where the literature
agrees upon a general trend and suggests policy recommendation, and there are also areas where there is still
much ambiguity and in which more research is required.
Generally, what is occurring within the Connecticut hospital system is not unusual and is fairly consistent with
nationwide consolidation and conversion trends. Both urban and rural, community and academic medical centers
are sensing the disruptive nature of health care reform. The primary driver of the consolidation and conversion
movement today appears to be hospital leaders’ generally held belief that revenues will decline in the months
and years ahead. Their efforts are motivated by their oaths to better their institutions and survive in the current
market environment – and if that means following strategies that result in bigger systems – whether through
consolidations of and between non-profit entities or acquisitions and conversions to for-profit health systems,
they will take the action necessary to ensure the survival of their institution; secondary to falling revenues are the
financial incentives built within payment reforms that rewards forming more integrated health systems where
care is coordinated, information is shared, and the continuum of care does not begin and end in an inpatient bed;
finally, the efforts by some in the state to convert their hospitals to for-profit entities are likely caused by worry
from leaders of struggling hospitals and hospital systems that they may not be in a financial position to weather
revenue declines while at the same time offering critical services to their communities.
The literature also heavily warns of the dangers of diminishing market competition. Article after article, expert
after expert, each identify hospital consolidation associated with significant price increases without an equally
proportional benefit in quality of care. This should be extremely concerning phenomenon for policymakers in
Connecticut currently reviewing the series of mergers and conversions being discussed in the state Attorney
General’s Office and Department of Public Health. At the same time, however, there is new evidence that
payment reforms built into ACOs and other integrated health systems support the premise that coordination of
care will increase efficiency and thus lower cost – you need to look no further than the Montefiore example
discussed in section 3C, and the 18 other health systems that showed successful declines in cost through ACO

36
innovation. With regards to for-profit vs. non-profit medicine, the evidence suggests that non-profits are better
incentivized to treat vulnerable populations and allow for access to a larger range of service lines, but at the same
time, not allowing a hospital to convert might result in its financial doom.
B. Policy Recommendations
Upon reviewing the literature, the largest concern for policymakers found in this paper should be the historical
anticompetitive nature of hospital mergers. There is strong historical precedence that concentration of market
power leads to higher prices; reductions in access in the long-run; and negligible differences in quality. The
dilemma with consolidation is the contrasting policy goals set by our leaders in Washington D.C. – on one hand,
coordination of care, sharing of information, and forming larger organizations designed to manage population
health fundamentally conflict with the goals of antitrust law that promotes competition between hospitals and
health systems and believes that less concentration of power will result in greater accountability and better
outcomes.
As it relates to policies to address these issues and reach the goal of greater access, better quality, and lower
costs, the UHCFC must be careful and cognizant of the multitude of forces and the complexity of the issues
facing hospitals in today’s dynamic landscape – I would warn against any taking hard stances for— or against
consolidations and conversions. The issue is too complex, too institution-specific, to judge in a narrow prism of
right or wrong. Each hospital has a story, with a role to play in the community and incentives to respond to that
may or may not be in the public’s best interest. The long-term history does and should give many great pause for
the negative effects of consolidation, but recent examples, such as those at Montefiore Medical Center and other
successful ACO initiatives should temper reflexive judgments against allowing such experiments in care
coordination.
Therefore, my policy recommendations as it relates to these issues is as follows:
1. Developrobust and clear economic and legal standards for judging the likely impact of mergers on
price, access, and quality that allow for more salient enforcement of anti-trust laws
The impact of a hospital merger can have a profound impact on access, patient health, and cost of care. As I
have repeated several times in this paper, the history suggests the danger of allowing a merger to go through
under the ambiguous justification that it will lower costs and improve quality through coordination of care and
improved efficiency of service delivery. There simply does not yet exist a preponderance of evidence that ACOs
or ACO-like programs will effectively control cost. The fact is – there is greater history of evidence that market

37
concentration is and has been a prime driver of the United States status as an outlier in terms of price of
healthcare, and subsequently spending on healthcare compared to other advanced nations. According to Dr.
Thomas Bodenheimer, writing for the Journal of Medicine and Public Issues, “the historical domination of
providers and suppliers over payers has (resulted) in a price structure far difference from that of health care in
most developed nations” (Bodenheimer, 2005). Despite a recent string of success in antitrust enforcement as
discussed in section 3D, the history of hospital antitrust cases had been notable for its lack of success, which
some suggest may have been caused “due to judges and juries holding views of hospital markets as being
different from markets for other goods and services” (Gaynor, 2006).
According to Martin Gaynor of Carnegie Mellon University, “hospitals are an industry with unique attributes,
but nothing about the specifics of the health care industry suggests that the unregulated use of market power in
this industry is socially beneficial. As a consequence, the antitrust laws should be enforced here as in any other
industry” (Gaynor, 2006).
While the perception may be that it is the sole role of the FTC and the DOJ to enforce antitrust violations, under
the legal doctrine of Parens Patriae11 the state attorney general would have the legal standing to bring suit
against an enterprise that harms the public and where victims are unable to defend themselves from that harm.
“During the past roughly 30 years, states have regularly brought parens partriae actions to redress consumer
deception and antitrust violation” (Hines, 2004). Additionally, in Title III of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, Section 4C of the Clayton Act was codified to confer statutory parens partriae
authority to state attorney generals to protect persons injured by federal antitrust violations – meaning, the
federal government has granted the legal authority to states, specifically attorney generals, to enforce federal
antitrust laws (Hines, 2004).
While it is more appropriate to leave the specific standards for enforcement to the state legislature on the advice
and counsel of economic and clinical experts, the standards set should require the strictest and most accurate
economic predictions available based on the counsel and recommendations of a disinterested 3rd party (Theresa
Harrison’s suggested economic models would be a good starting point); that sets clear statutory limits on market
concentration, leaving little room for interpretation from judges and juries trying antitrust cases and which puts
the legal burden on the merging parties to prove how and why a potential merger will not have anticompetitive
effects; and which requires both prospective reviews (as required by the Hart-Scott-Rodino Act) of proposed
11
A doctrine that grants the inherent power and authority of the state to protect persons who are legally unable to act on their own behalf.

38
mergers and periodic retrospective reviews of mergers that have taken place already. These standards are legal,
have been practiced in healthcare and other industries, and should allow for flexibility of institutions to continue
to develop administrative innovations as encouraged under the Affordable Care Act and other state and federal
policies.
2. Require hospitals that enter into a merger to develop a state-approved plan for divesture and/or other
remedies should there be an anti-trust violation
Typically when an antitrust case is found to have merit, meaning when a judge rules that a hospital system – or
any business entity for that matter – is in violation of Clayton or Sherman antitrust acts, there are four
remedies available to courts, the FTC and DOJ in antitrust cases: (1) structural remedies, (2) conduct
remedies, (3) monetary remedies, and (4) criminal remedies. The generally accepted remedy is to “restore
competition” to the marketplace by divesting the assets (structural remedy) involved — “an undoing of the
acquisition is a natural remedy” (Lomax).
According to a legal analysis published by Dionne Lomax, a Partner at Vinson & Elkin LLP, noting the
prevailing Supreme Court Legal approach to these matters “divestiture serves three remedial functions: (1)
ending illegal combinations or conspiracies, (2) depriving antitrust violators of the benefits of their unlawful
action, and (3) breaking up or neutralizing monopoly power.” This structural remedy, as the court sees it, is
intended to ensure that competition is restored to the level at which it existed before the merger and not
to increase competition. “Considerations when determining a proposed remedy’s effectiveness are speed,
certainty, cost, efficacy, and enforceability…and at the same time, the remedy must cause as little harm as
possible to the general public and innocent shareholders of the companies involved in the illegal
combinations.”
By contrast, Conduct Remedies allow merged entities to remain intact while requiring the violating
organization to change their behavior. Courts have typically followed divesture as the primary remedy to
antitrust violations, “It is simple, relatively easy to administer, and sure.” Further, the DOJ identified four
problems with conduct remedies, according to Lomax’s study: “(1) Direct costs of supervising and
monitoring the entity’s activities to ensure compliance; (2) the likelihood that the entity may attempt to
evade the remedy’s ‘spirit’ while remaining technically compliant; (3) the conduct restraints may inhibit
the efficiencies that initially made the merger attractive; and (4) the restraints may prevent the entity
from responding effectively to changes in the market. (Lomax)

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