Healthy Competition

Sometime this summer, Judge Claude Hilton of the U.S. District Court in Alexandria will have to answer a seemingly simple question:

Is it in the interests of consumers for a dominant hospital chain to swallow up a pretty good community hospital if the merger will raise prices but offer the prospect of improvements in the quality of care?

In a nutshell, that is the issue presented by last week's decision by the Federal Trade Commission and Virginia's attorney general to challenge to Inova Health System's planned acquisition of Prince William Hospital.

For Northern Virginia, Hilton's answer will determine whether Inova will be allowed to use its handsome profits to buy up the 25 percent of the Northern Virginia hospital market it does not now control.

More significantly, the decision will determine whether the FTC can once again begin enforcing the antitrust laws in the hospital and health markets after suffering an embarrassing string of adverse court rulings over the past two decades.

Inova and Prince William laid out their rationale for the transaction in a white paper prepared by their lawyer, Robert Pitofsky, a former chairman of the FTC, who was brought in after a previous legal team failed to deliver on the expected regulatory approval.

In the white paper, and in conversations with commissioners, Pitofsky acknowledged that Inova could well raise the rates at Prince William Hospital to match those at its other hospitals -- the gap between the two remains a secret, but the FTC characterizes as "significant." Because no health insurer can do business in the Washington area without including Inova in its hospital network, these insurers will have no choice but to pay the higher fees at Inova Prince William and pass the increases on to every employer and privately insured household in the region in the form of higher premiums.

Cost, however, ought not be the only consideration. The hospitals argue that by investing a promised $200 million in Prince William, Inova will expand bed capacity, add services and improve the quality of care, just as it did when it took over Loudoun Hospital two years ago in a similar deal. The result there was a decrease in mortality rates of 32 percent and a dramatic reduction in pneumonia, staph and bloodstream infections contracted by patients while in the hospital.

You can just hear Pitofksy's argument: "The antitrust law, your honor, does not require this court to impose an unnecessary death sentence on a couple of innocent patients at Prince William Hospital each year just to shave a couple of bucks off the region's health insurance premiums."

Powerful stuff. But, of course, that's exactly the kind of false choice that clever lawyers conjure up.

In fact, there are any number of recent studies that show there are other ways to improve hospital quality without investing $200 million or merging with a dominant chain. The government could legitimately argue that by reducing what little competition is left in Northern Virginia, the merger with Prince William would result in less pressure on Inova to maintain the quality of care it now offers.

Moreover, even if it were true that money and mergers are the key to improving hospital quality, there were other quality hospitals that were interested in Prince William, and their entry into the market would have increased competition in the Northern Virginia rather than reduced it. But for various reasons, they were rejected or never even considered by the Prince William directors.

While the FTC will take the lead in arguing the case for quality through competition, the decision by Virginia Attorney General Robert McDonnell to join in was significant.

Until now, the attorney general's office has shown little interest in antitrust enforcement. And Inova has pretty much had its way with all branches of state government, using its influential board of directors and hiring the best lobbyists and lawyers to get what it wanted in Richmond. That a Republican attorney general running for governor has stepped forward to challenge Inova's empire building suggests a sea change in its political fortunes.

McDonnell might also consider looking south from Richmond, where Sentara Health Care is looking to do for the Norfolk and Virginia Beach region what nonprofit Inova has done in Northern Virginia.

Already, Sentara controls 59 percent of the beds, 68 percent of the patient revenue and 76 percent of the operating profit in the regional health planning district, and it's squeezing hard on its two remaining competitors, Bon Secours Health System and the Chesapeake Regional Medical Center.

Sentara has masterfully manipulated the state's certificate-of-need program to open hospitals, ambulatory surgical centers, urgent care centers and diagnostic centers close to its rivals and skim off some of their most profitable businesses. It has moved aggressively to buy up the leading physician practices in order to steer more business to its hospitals and diagnostic centers and away from competitors. And it has used its leverage as the largest HMO in the region to put the financial squeeze on competing hospitals and physician groups -- in the case of Bon Secours hospitals, for example, paying rates even below that of the state Medicaid program.

More recently, Sentara has begun to use the same tactics and some of its considerable operating profits -- $158 million last year -- to move north from its base into Hampton Roads, Newport News, Williamsburg and the Northern Neck.

"I sort of feel like Great Britain after the collapse of France" in 1940, jokes Richard Pearce, the chief executive of Riverside Health System, which has three hospitals in the area.

In Churchillian style, Riverside and Bon Secours have launched a political counterattack, pushing through legislation that requires state regulators to consider competitive impact when approving new hospital beds, outpatient clinics and imaging machines. Now they are agitating to get McDonnell to investigate whether Sentara's expansionist impulse has turned into predatory behavior.

It would all be for naught if, later this summer, Judge Claude Hilton cuts the legs out from under the competition police and gives the green light to Inova's takeover of Prince William Hospital. In much of Virginia, like much of the country, the practical effect of such a ruling would be to put the hospital business out of the reach of antitrust laws and into the hands of regional monopolies.

Steven Pearlstein can be reached atpearlsteins@washpost.com.