Just for fun, pretend that you are the attorney general of Virginia. One of your jobs is to enforce state antitrust laws, which are designed to prevent mergers that substantially lessen competition and prevent companies from using market power to overcharge consumers. You are presented with the following facts:
Inova Health System, a nonprofit hospital group, has gained a dominant position in Northern Virginia due to a series of mergers as well as its undisputed reputation for running fabulous hospitals. Depending on how you measure it, Inova's market share is between 60 and 80 percent. Because no other hospital group can match its size, scope and quality, no private insurer or health plan can do business in the Washington area without including Inova in its network.
Inova's dominance has two practical effects. One, it enables it to drive large numbers of patients through its facilities, improving quality and lowering unit cost. It also gives Inova the negotiating leverage to charge premium rates. That combination has allowed Inova, nominally a nonprofit, to post operating profit margins ranging from 3.1 percent to 5.8 percent from 2000 to 2003 -- results that, after taxes, most profit-making hospital chains would find respectable.
Last fall, Inova announced its intention to take over the nonprofit Loudoun Hospital on the western edge of its market, the only hospital in one of the fastest-growing counties in America. For reasons never explained, Inova's was the only offer considered by Loudoun Hospital's directors. And under the agreement the directors negotiated, Inova would pay nothing for the relatively new facility, promising instead to invest $200 million to expand and improve services, establish community health centers and eventually build a second hospital near Dulles airport.
As a result of the merger, Inova would also take charge of Loudoun Hospital's efforts to prevent HCA, a large national hospital chain, from building a $250 million hospital near Dulles. HCA, as the owner of Reston and Northern Virginia Community hospitals, is the only hospital operator that might conceivably challenge Inova's dominance in Loudoun County and Northern Virginia markets.
So here's the question: Does the takeover of a monopoly community hospital by a dominant regional chain substantially lessen competition, or the likelihood of future competition, in Northern Virginia?
If you were an attorney general with half a brain, you'd immediately see the need for an extensive review before going to court to challenge the deal or, at a minimum, you would impose extensive conditions to ensure that Inova does not use its dominant position to quash competition.
But if you were former Virginia attorney general Jerry Kilgore, you gave the deal the green light without so much as an explanation. After all, with a campaign for governor to run and issues like abortion, the death penalty and gun control to demagogue, why bother with a minor issue like the spiraling cost of health care?
Things have only gone from bad to worse. Ever since Kilgore and the sleeping watchdogs at the Federal Trade Commission declined to intervene in the Loudoun Hospital takeover, Inova has stepped up the campaign against HCA.
When the state health commissioner ruled that Loudoun County needed a second hospital and approved HCA's proposal, Inova filed an appeal in circuit court alleging all manner of undue political influence. Its proof consisted of -- hold on to your hat -- supporting letters, e-mails and phone messages from local politicians to the governor's office, some of which were routinely forwarded to the commissioner's office but not included in the hearing record.
After ruling that the commissioner's decision was reasonable on the merits, the judge nonetheless sent the case back to the commissioner for rehearing. The hearing officer duly took note of the communications, declared them of no effect, and recommended that the commissioner approve the project again. After the commissioner reissued his approval, Inova immediately filed another frivolous appeal based on the same flimsy, procedural objections.
In the end, it may not matter. In August, the Loudoun County Board of Supervisors denied HCA the approval it needed to move ahead with its new hospital on land zoned for commercial use. Reliably, the local neighbors were against it, arguing (I'm not making this up) that a hospital posed a public safety risk. And behind the scenes, Inova called in every chit to press its novel economic argument that competition would be detrimental to consumers, eroding quality and increasing costs and prices.
As it happens, an exhaustive study by the FTC and the Justice Department last year came to exactly the opposite conclusion -- namely, that markets characterized by limited competition and concentrated market shares suffer from higher prices. And that's just as true if the dominant hospital, like Inova, is "nonprofit."
My guess is that that more robust competition in Northern Virginia's hospital market could, in time, trim at much as 10 percent off prevailing rates. And with hospital charges reaching roughly 30 percent of health care costs, that means Northern Virginians and their employers are paying at least $300 a year more than necessary for a $10,000 family health insurance policy.
What shall we call this annual hit to the pocketbooks of Northern Virginia voters? How about the "Kilgore Tax"?
Steven Pearlstein can be reached at email@example.com.