Va. Hospital's No-Good Deal Goes Unpunished

Some time in the next few weeks, Prince William Health System, operator of Prince William Hospital, is expected to announce it has hammered out a final agreement to merge itself into the giant Inova Health System, a move that will pretty much snuff out competition in Washington's Northern Virginia suburbs.

Mike Schwartz, the hospital's president, and Mike Dailey, the board chairman, will almost certainly issue a statement claiming this was the best deal they could get for the community and the only way to bring an expanded range of specialized services to residents who now have to trek all the way to Reston or Fairfax for them.

Here's a few things they won't say that the residents and employers of Northern Virginia might want to know.

First, although you are supposed to be thrilled with the agreement, you won't be able to read it. Prince William and Inova are both nonprofits chartered to operate for the benefit of the public, but they consider their arrangement as a "private contract between private parties." They'll tell you what they want to tell you, which won't be much. If you don't like it, you can put your complaints in writing to Prince William's or Inova's unelected trustees, who meet only behind closed doors and answer only to themselves and to God.

Second, Schwartz and Dailey don't know whether the deal with Inova is the best one they could have gotten because they never seriously considered alternatives.

On May 1, for example, days after Prince William announced its proposed hookup with Inova, Universal Health Services, a national for-profit chain that runs George Washington University Hospital, wrote to Schwartz and Dailey offering to enter into a similarly structured arrangement that would offer "more money for capital projects, expansions and new facilities," as well as additional money for the hospital's charitable foundation that "can be spent on community programs." The letter, a copy of which I have here in front of me, went on to say that Universal's aim would be to transform Prince William from a community hospital into a facility that might rival Inova's flagship Fairfax Hospital in the scope and sophistication of its services.

It wasn't until a few weeks ago that Schwartz and Dailey got back to Universal, and then only to say they were in the midst of "exclusive" negotiations with Inova that precluded any other discussions.

Universal, of course, is no stranger to Prince William Hospital. Seven years ago, the Prince William Health System, parent of the hospital, reached a tentative agreement to sell out to Universal for roughly $200 million. But the deal fell apart following a spirited campaign by community activists and the hospital's independent board of trustees, who argued that there was no need for the hospital to give up its independence and lose its community character.

Because of that divisive battle, the hospital's trustees and president were ousted and Schwartz was recruited as chief executive with a mandate to chart an independent course. But after major investments in a new emergency room and birthing center, and pushing ahead with a joint cancer treatment center with Fauquier Hospital, Schwartz concluded that Prince William just couldn't expand fast enough on its own to satisfy the needs of the community. In looking for a partner, however, Schwartz and the board decided to restrict the search for a merger to entities with deep pockets, a good brand name, a commitment to community service and an existing presence in region. It was a set of criteria that made it almost inevitable that they would wind up in the arms of Inova, which not coincidentally had been lusting to extend its near-monopoly in Northern Virginia into Prince William County for more than a decade.

My attempt to discuss the process this week with board chairman Dailey, a utility executive, was rather comical. Dailey refused to say which other hospitals he spoke with, or what they might have offered. Instead, he responded to every question by reading from the same set of talking points that sounded suspiciously like they had been written by the board's lawyers.

That was a big contrast to the earful of spontaneous commentary I got from Louis Dominguez, the Manassas resident and former mid-level manager at Prince William Hospital who led the community opposition to the Universal deal. As Dominguez sees it, what was true in 1999 remains true today: that as the dominant community hospital in one of the fastest-growing counties in the country, nothing prevents Prince William from expanding its services while remaining independent and profitable.

But once a decision was made to seek a merger partner, Dominguez said, the hospital trustees had a fiduciary duty to allow any hospital chain to make an offer, including his old foes at Universal along with hospital chain HCA, which has been waging a fierce legal and political battle with Inova to build a new hospital near Dulles International Airport. Certainly as part of an open bidding process, Prince William could have required that proposals include assurances about preserving some level of local control or maintaining existing levels of indigent care -- key concerns of Prince William residents.

"It's a travesty the way they've gone about it," Dominguez said.

The absence of a truly open bidding process also calls into question the "price" Inova has offered to pay for Prince William Hospital: a commitment to invest $200 million in new facilities and services. That looks to me like a sweetheart deal for a dominant hospital in a fast-growing market that, at the end of 2004, had land and buildings with a book value of $90 million, $140 million in cash and securities, and an annual operating profit of $13 million.

All this should be of keen interest to Virginia's attorney general and the staff of the Federal Trade Commission, in their review of a merger that will give Inova a 75 percent share of the Northern Virginia hospital market. Antitrust regulators generally want to know if there are alternative alliances that might enhance hospital competition in Northern Virginia. The fact that Prince William refused even to talk with willing competitors who could have challenged Inova's market power ought to be enough to disqualify the deal on antitrust grounds.

Steven Pearlstein will host a Web discussion on hospital merger and expansion plans in the Washington area today at 11 a.m. at washingtpost.com. He can be reached atpearlsteins@washpost.com.