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Show vestiture, existing excluded hospitals such as the University of Utah and Salt Lake Regional Medical Services, and the divested hospitals, must themselves find the appropriate vehicle to form a new network. The Ability of a Third Network to Compete Opponents of the ordered divestiture contended that any divestiture was doomed to failure. A third network could not survive, they argued, and the only result would be to dilute the ability of the new Columbia/HTI network to successfully compete with IHC, the largest network in the state. While little substantive support was ever supplied for this widely echoed claim, the economic argument must be that the divestiture would have increased Columbia/HTTs costs, rendering it less competitive. This is evident because, if the divestiture left costs unchanged, it would also leave Columbia/HTI's ability to compete with IHC unchanged. Thus, hidden in the argument by the opponents of divestiture must be the claim that divestiture would diminish Columbia/HTI's ability to achieve economies of scale and scope (i.e., costs would increase). While IHC undoubtedly maintains a dominating presence in the market, it does not necessarily follow that divestiture would undermine Columbia/HTI's competitive position. In fact, available data appear to refute any economies of scale argument. There are very few economic studies of the impact of hospital mergers on costs. Probably the most extensive study was done by the Health Care Advisory Board (HCAB). Their study surveyed the experience of numerous mergers in several countries. One overarching conclusion of the study was that "[m]eaningful economies of scale run out after four to six hospitals in a system" (HCAB, 1994: 7). Applying these conclusions, there should be no impact on Columbia/HTI costs following the divesture. Even after the ordered divestiture, Columbia/HTI will continue to own eight hospitals in the state of Utah and four along the Wasatch Front. Thus, the Columbia/HTI network will exhaust any economies even without the divested hospitals. Moreover, IHC's competitive advantage does not derive solely from its size; IHC's strong position also results from its dominance in Utah County, Cache County, and Washington County. Perhaps in partial recognition of this situation, Columbia/HTI has announced the building of a hospital in Utah County (Salt Lake Tribune, 1995). The ordered divestiture also will not materially affect Columbia/HTI's geographic access to Utah's health care market. The hospitals designated for divestiture in large measure overlap with other Columbia/HTI hospitals. For example, absent divestiture, Ogden Regional, and Davis North hospitals would both be a part of the Columbia network. These hospitals, however, are located within ten miles of each other and offer substantially identical services. Finally, available historical data also belie the critics' argument that any third network would be doomed to failure. Indeed, the hypothesized third network would essentially mirror the old Holy Cross network, replacing Ogden Regional with Davis Medical, while adding Jordan Valley Hospital. According to the administrators at Salt Lake Regional Medical Services (formerly downtown Holy Cross), the Holy Cross network achieved an average of 3.7 percent profit margin from 1990 to 1994, a margin consistent with the national average. Furthermore, HealthTrust and the smaller Columbia networks were themselves relatively successful. As of the time of this writing, Champion Healthcare Corp., a Texas corporation, and Columbia/HCA have filed application with the FTC for approval to allow Champion to purchase Jordan Valley Hospital. Columbia/HCA and Paracelsus, a California corporation have filed a similar application to purchase Pioneer Valley and Davis North hospitals. A third network consisting of a joint venture among Paracelsus, Champion, and the University of Utah would appear to have all the objective factors necessary for success: geographic access, a complete set of complementary services (primary, secondary, and tertiary), and sufficient size to garner the available economies of scale. In addition, the presence of three strong networks should enhance competition with attendant benefits to health care consumers in the form of increased choices and efficiencies. Conclusion Given Utah's unique health care market, where concentration is high and managed care is pervasive, competition was threatened by the proposed merger between Columbia and HTI. The FTC's decision to require the divestiture of three hospitals was appropriate given existing and potential market conditions. While the legal and economic propriety of the FTC's decision cannot seriously be challenged, the proverbial jury is still out with regard to the ultimate success of the order. That success will depend on whether a third network is in fact forged among the remaining hospitals. Utah's Health: An Annual Review 1995 |
