MERGERS AND ACQUISITIONS

Between 1980 and 2002 there were an unprecedented number of healthcare mergers and acquisitions in the United States, affecting hospitals and hospital systems, nursing facilities, clinics, physician group practices, pharmaceutical manufacturers, and managed-care and other health insurance providers. Predictably, this headlong rush toward consolidation and concentration has triggered increased scrutiny of such transactions by those state and federal agencies responsible for antitrust and tax regulation. It has also spurred increased reflection on the ethical issues at stake in these merger and acquisition decisions. Such issues include concerns about fidelity to organizational mission; effects of organizational restructuring upon community access to services and other benefits; impact upon the welfare, working environment, and overall culture of affected employees; and the prevention and resolution of conflicts of interest among involved parties.

The number and frequency of hospital mergers and acquisitions increased dramatically during the 1980s and early 1990s. The trend peaked in the period 1994–1997, according to data from Irving Levin Associates, with 163 deals completed in 1996 and a record 197 deals in 1997. During that period the number of hospitals belonging to health networks or systems also increased significantly, from 56.2 percent in 1994 to 70.9 percent in 1998. By the beginning of the new century, the frequency of deals had declined somewhat, to 86 in 2000 and 83 in 2001, yet these numbers remain much higher than pre-1990 levels. Among the factors apparently driving this high rate of merger and acquisition activity are reduced Medicare reimbursement rates, significantly increased managed-care pressures to provide more services at lower prices, and a declining market for inpatient hospital services.

Benefits and Burdens of Consolidation

Hospital mergers and acquisitions can provide substantial benefits for institutions, their employees, and the communities they serve. They can bring needed capital into a healthcare organization, providing economic vigor and repositioning in a difficult marketplace; offering opportunities for new or expanded service lines; and even ensuring survival and the capacity to provide services to those in need. They can strengthen an organization's bargaining power and provide economies of scale and increased efficiency, all of which could lead to decreased costs to consumers. And they can bring standardization to, and better assessment of, the quality of care delivered.

A 2002 study by Bazzoli and colleagues examined the self-reported reasons for merger cited by involved hospitals during the periods 1983–1988 and 1989–1996. For both groups, the top three reasons for merger were identical: to strengthen the institution's financial position, to achieve operating economies, and to consolidate services. Expansion of market share was another reason cited by a majority of respondents. Yet there were also certain changes in emphasis between the two study periods. Those citing expansion of visibility and service availability across the hospital's service area as a significant reason for merger increased from 33.3 percent in 1983–1988 to 53.2 percent in 1989–1996, while those citing expansion of provided service areas as a reason for merger decreased from 63.9 percent to 44.3 percent. In addition, respondents in the more recent period indicated an increasing emphasis upon nursing-staff downsizing as an intended cost-saving outcome of merger activity.

While the potential benefits of hospital consolidations via merger and acquisition can be manifold, these transactions can also create concerns about potential burdens for various stakeholders. One such concern has to do with the consequences of giving up local hospital control. When a community-based hospital merges with or is acquired by an organization or system headquartered elsewhere, especially out of state, what will the loss of local control mean in terms of the new organization's responses to the local community's specific needs? And what will be the postconsolidation status and level of service at the community-based hospital? Many consolidations, especially those involving a for-profit organization, include plans to increase profitability and market position by phasing out unprofitable service lines in favor of more profitable specializations. This can create hardships for communities—access to much-needed yet unprofitable services becomes more difficult, or the burden of providing these services is shifted to others. Another potential service limitation emerges when a merging or acquiring organization takes a strong religious or other principled position against providing certain services. Such consolidations raise understandable public concerns about whether reasonable access to those services will remain available within the community after consolidation.

Further, an increase in the price of services can be another potential community burden resulting from hospital merger or acquisition transactions. While consolidationrelated efficiencies may allow for price reductions, or at least a hold on price increases, the newly consolidated and concentrated hospital organization will also have stronger market positioning and greater market power, and that power may be expressed through price increases. A 2000 study by Young and colleagues examined the relationship between market concentration and pricing patterns for three types of nonprofit hospitals: independent hospitals under local control, members of local hospital systems, and members of nonlocal hospital systems. The study showed that, in more concentrated markets, all three types of nonprofit hospitals exercised market power in the form of higher prices—and that hospitals that are a part of nonlocal systems were more aggressive in exercising this market power than either of the other hospital types.

Yet another community concern regarding hospital consolidations is their effect on the provision of charity care. According to American Hospital Association data, overall U.S. hospital expenses for uncompensated care (bad debt and charity care) were $18.5 billion in 1997, up from $6 billion in 1980 (Hall). Yet access to needed care remains difficult for many of the more than 42 million uninsured Americans who cannot afford that care. Thus, communities are often concerned about the effect of consolidation upon a local hospital's willingness to continue providing charity care, especially when a nonprofit community hospital is merging with or acquired by a for-profit hospital or system. There is evidence that for-profit hospitals are less likely to be accessible to the medically indigent and uninsured than nonprofit hospitals are, and that they tend to carry a smaller indigent-care load (Darr). One study of California nonprofit hospitals that were consolidated into for-profit organizations found that charity care declined in almost all cases analyzed. Moreover, in none of the deals did the sale proceeds, usually set aside in a foundation to provide charity care and other community benefits, sufficiently replace the community benefits provided by the former nonprofit hospitals (Mateo and Rossi).

One final area of community concern has to do with how consolidation might affect particular groups of internal stakeholders, namely hospital staff, trustees, and executives. Merger and acquisition activity can, and often does, involve downsizing and the loss of employment for some staff members. It can also lead to negatively perceived changes in working conditions, mission loyalty, and overall organizational culture. On the other hand, hospital executives and trustees, who are responsible for negotiating any possible consolidation, may be subject to various positive inducements, financial and otherwise, for their support of a transaction. Such a possibility appears all the more threatening to a community in which the actual details of a proposed consolidation have not been made public during the planning process.

Moral Obligations of Hospital Leaders

Community concerns have led to some significant changes in legal oversight of hospital consolidations at both state and federal levels, including transactions among nonprofit hospitals and between nonprofit and for-profit hospitals (Peregrine). Yet it is clear that legal regulation cannot and will not ensure the fulfillment of healthcare leaders' moral obligations to the community as hospital consolidations are contemplated, planned, and executed. Nonprofit hospital trustees and executives, who are accountable for more than 80 percent of U.S. hospital beds, have particular fiduciary responsibilities to the communities served by their institutions, and there are specific moral obligations that should govern their participation in merger and acquisition activities.

MISSION PROTECTION. First, trustees and executives are responsible for upholding and protecting the mission and values of the institution they are already serving. According to the American Hospital Association Board of Trustees, a hospital's mission includes both caring for the sick and injured and improving community health, and any decisions regarding consolidation should thus emphasize the community's future health needs and the best overall organizational arrangements for meeting those needs. Trustees and executives, therefore, bear the moral obligation of participating in any proposed merger or acquisition as representatives of the community and its interests (Wilkins and Jacobson). They must ask how any proposed transaction would affect access to and delivery of health care in the community, seek independent assistance in assessing the impact of the transaction on the community, and work to avoid any unnecessary harmful effects upon quality of life in the community.

A critical aspect of a hospital's mission that should be protected, of course, is the provision of uncompensated care. Trustees and executives must consider the community's future health needs by ensuring that access to charity care will not be diminished or eroded by a merger or acquisition transaction, particularly when a nonprofit hospital is contemplating consolidation with a for-profit hospital or system. Further, as Leonard Weber points out, if a generally beneficial consolidation will also entail certain new community burdens, such as less-convenient location of services, then those segments of the community already experiencing greater social ills (such as poverty and environmental degradation) have a greater claim to be spared new social burdens than do better-off segments of the community.

In some instances a hospital's mission and values will involve specific principle-based exclusions from certain practices, as in the case of most Catholic hospitals' refusals to provide various reproductive services. When such an institution seeks a merger with or acquisition of another community hospital whose mission and values do not entail these service exclusions, then the obligation to consider the community's overall future health needs becomes somewhat more complex. Certainly the conscientious refusals of hospital leaders and sponsors to engage in certain practices should be respected. Yet the general obligation of hospitals to ensure adequate community access to those services normally and legally available in other communities places a potential limit upon the moral right of hospitals to restrict permissible practices (Weber). This becomes an especially strong concern where the postconsolidation institution would be the community's sole provider. In such circumstances, the costs of consolidation may simply be too high.

AVOIDING CONFLICT OF INTEREST. Second, trustees and executives have a moral obligation to disclose any potential conflict of interest and to avoid any private benefit in a proposed consolidation. They should not receive money during a consolidation process—nor should they accept any other incentive offered as a means of securing support for the transaction, such as promises of a job or board membership after consolidation. Any such offers should be disclosed to all involved parties, and negotiation practices should be utilized that will fully separate decisions about the transaction from decisions about positions in the post-transaction institution (Weber). Trustees and executives must be able to assure the community, which they serve as fiduciaries, that personal gain incentives have been removed from the negotiating table, and that the community's best interests are represented there.

PUBLIC DISCLOSURE AND HEARINGS. Third, hospital leadership should make the consolidation process fully public. Trustees should ensure that all objectives and processes of the transaction are made available to the general public and the state attorney general, and they should require public hearings and suitable waiting periods so as to hear and respond to community concerns about the transaction. Community-based consumer organizations should also be consulted in order to assess implications of the proposed consolidation that may not be immediately apparent to trustees and executives (Wilkins and Jacobson).

FAIR MARKET VALUE. Fourth, nonprofit trustees and executives are responsible for ensuring fair market value for their institution in the transaction, particularly when a nonprofit hospital is being acquired by a for-profit hospital or system. This requires, among other things, ensuring independent valuation by a third-party firm with experience in the healthcare field. In addition, the methodology used in determining fair market value should be made a part of public disclosure of the negotiations. A significant portion of a nonprofit hospital's value that must be included in any assessment of fair market value is the community benefit it provides: the hospital's value to community members (as owners of it), the value it provides in uncompensated care, and the value it holds from past publicly funded investment are all part of its value.

Trustees and executives, as fiduciaries of the community, must ensure that community-benefit value is not lost in consolidation transactions and that community benefit in the form of charity care and other community health initiatives is guaranteed into the future. In the sale of a nonprofit hospital to a for-profit, this usually involves using that portion of the sale price designated as the communitybenefit value to establish a nonprofit charitable foundation or trust whose assets will be used to fund charity care and community health ventures. Nonprofit executives and trustees should require that the terms of the foundation—particularly regarding who will control its assets and the specific purposes for which they may be expended—be detailed and clear before consolidation can be completed, and that the foundation will provide regular public reports on its efforts to promote community health (Wilkins and Jacobson).

STAFF AND EMPLOYEE INTERESTS. Fifth, in addition to their community-oriented fiduciary responsibilities, hospital trustees and executives also have responsibilities to their institutional and medical staffs. When any consolidation is considered, staff and employees must be fully informed and educated about its perceived need and its intended goals and processes—and their responses and concerns must be heard. Just as a community assessment is necessary to determine the community interests that are at stake in any proposed transaction, an organizational assessment is necessary to recognize specific organizational cultures and how they may or may not fit with the cultures of other merging or acquiring facilities. The employees and staff in each facility should be oriented to the culture, history, and mission of the other facility or system.

Further, employees of institutions facing consolidation may have concerns not only about postconsolidation culture and working conditions, but also about the prospect of staff downsizing and loss of employment. Quite often these concerns are well founded. If the organization's ability to continue serving the needs of the community will necessarily require staff downsizing, then the trustees and executives have an obligation to ensure, among other things, that: (1) all employees to be laid off will be given advance notice that includes detailed explanation of the necessity of and criteria for their selection; (2) employees to be laid off will have opportunity to appeal their selection if they have reason to believe the criteria were inappropriately applied; and (3) laid-off employees will be provided with significant outplacement services and interim benefits (Weber).

Exit Provisions

Perhaps predictably, the large number of hospital mergers and acquisitions have produced not only many successes, but also quite a few organizational and financial failures. As Michael Peregrine has noted, this reality may suggest a final obligation of nonprofit hospital trustees negotiating a consolidation—namely to incorporate termination provisions (known as exit or unwind provisions) within the transaction terms. These terms might specify what particular events would indicate a failure of the consolidation's objectives and thus trigger an unwinding, any required mediation or arbitration related to the implementation of the unwinding, the time period during which the trigger would remain effective, and the actual mechanisms for implementing the unwinding if the consolidation fails to achieve its objectives.

Hospitals are, as Kurt Darr notes, "social organizations with an economic dimension, rather than economic organizations with a social dimension." The recent history of U.S. healthcare offers many examples of how the economic dimension of hospitals may be enhanced through mergers and acquisitions. Yet a recognition of the primary social dimension of hospitals illuminates a variety of communityoriented moral responsibilities and obligations that must not be ignored in such transactions, even for the sake of economic enhancement.

james b. tubbs, jr.

SEE ALSO: Access to Healthcare; Healthcare Systems; Profit and Commercialism

BIBLIOGRAPHY

Bazzoli, Gloria J.; LoSasso, Anthony; Arnould, Richard; et al. 2002. "Hospital Reorganization and Restructuring Achieved through Merger." Health Care Management Review 27(1): 7–20.

Boyle, Philip J.; DuBose, Edwin R.; Ellingson, Stephen J.; et al. 2001. Organizational Ethics in Health Care: Principles, Cases, and Practical Solutions. San Francisco: Jossey-Bass.

Darr, Kurt. 1997. "The Social Responsibility of Hospitals." Hospital Topics 75(1): 4–7.

Hall, Robert T. 2000. An Introduction to Healthcare Organizational Ethics. New York: Oxford University Press.

Hofmann, Paul B. 1996. "Hospital Mergers and Acquisitions: A New Catalyst for Examining Organizational Ethics." Bioethics Forum 12(2): 45–48.

Hofmann, Paul B. 2000. "Incentive in Mergers and Acquisitions." Healthcare Executive 15(5): 61–62.

Kassirer, Jerome P. 1996. "Mergers and Acquisitions—Who Benefits? Who Loses?" New England Journal of Medicine 334(11): 722–723.

Peregrine, Michael W. 2001. "Legal Issues in Mergers and Acquisitions." Health Progress 82(3): 57–61.

Rubin, Susan, and Zoloth-Dorfman, Laurie. 1996 "Health Care Consolidation Raises Ethical Questions." Modern Healthcare 26(32): 76.

Weber, Leonard J. 2001. Business Ethics in Healthcare: Beyond Compliance. Bloomington: Indiana University Press.

Werhane, Patricia H. 1990. "The Ethics of Health Care as a Business." Business and Professional Ethics Journal 9(3/4): 7–20.

Wilkins, Aaron S., and Jacobson, Peter D. 1998. "Fiduciary Responsibilities in Nonprofit Health Care Conversions." Health Care Management Review 23(1): 77–90.

Wolff, Marie. 1993. "'No Margin, No Mission': Challenge to Institutional Ethics." Business and Professional Ethics Journal 12(2): 39–50.

Young, Gary J.; Desaum Kemal R.; and Hellinger, Fred J. 2000. "Community Control and Pricing Patterns of Nonprofit Hospitals: An Antitrust Analysis." Journal of Health Politics, Policy and Law 25(6): 1051–1082.

INTERNET RESOURCES

American Hospital Association Board of Trustees. 1997. "Community Accountability with Changes in the Ownership or Control of Hospital or Health Systems." Available from <http://www.hospitalconnect.com/aha/advocacy-grassroots/advocacy/position/ownership.html>.

Irving Levin Associates. 2002. Press releases regarding Health Care Mergers and Acquisitions. Available from <http://www.levinassociates.com/pressroom/>.

Lahiri, Indra, and Sedicum, Austin. 2000. "Mergers and Acquisitions as a Diversity Issue for Health Care—WDG." Workforce Development Group. Available from <http://www.workforcedevelopmentgroup.com/>.

Matteo, Julio, and Rossi, Jaime. 1999. "White Knights or Trojan Horses? A Policy and Legal Framework for Evaluating Hospital Consolidations in California." Consumers Union. Available from <http://www.consumersunion.org/health/>.