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In Depth: How A Bill That Helped Hospitals Merge Could Cost Patients

Shannon hospital in San Angelo
Photo Michael Barera
Wikimedia Commons; background photo TBIT.
Shannon Health Systems, which is trying to buy another hospital in San Angelo, promises savings to patients once the hospitals merge. But health care economists say mergers often raise prices and insurance premiums.

Hospital mergers in Abilene and San Angelo could lead to more expensive care with little recourse, experts say.

From Texas Standard:

In the spring, Austin King caught wind of big news in his hometown of Abilene.

King is an ear, nose and throat doctor there, and the former president of the Texas Medical Association. He learned that Hendrick, the city’s biggest hospital, had plans to acquire its smaller competitor, Abilene Regional. Hendrick and Abilene Regional were the only two hospitals in town, so a merger would really shake up local health care. And King was concerned about that.

“Most people thought that was really odd that that would be allowed to go forward because of the obvious monopoly that would be massive,” King said.

Hendrick also planned to buy the hospital in Brownwood, 80 miles to the southeast, which would give them control over the hospital business in a large swath of central Texas. Something similar was happening in San Angelo, too, where Shannon Health System planned to buy San Angelo Community Medical Center.

The three hospitals being acquired were all owned by Community Health Systems, a Fortune 500 Company based in Tennessee. And the deals seemed to be moving fast. It seemed fishy to King.

“To me it just doesn’t really pass the smell test,” he said.

But there was a reason the deals were moving quickly: House Bill 3301. The Texas Legislature passed it in 2019. According to one of its authors, it wasn’t exactly one of the marquee measures of that session.

“We might have had two or three other legislators contact our office to ask ‘What, what’s going on with this bill? Help us understand what this bill is about,’” said Rep. Stan Lambert, a Republican from Abilene.

Lambert wrote the bill with another Republican representative, Drew Darby of San Angelo, who declined to comment for this story. They crafted it with help from lawyers and administrators for the merging hospitals, Lambert said.

House Bill 3301 passed easily, with only six votes opposed. That could be because the law only applies to eight counties in Texas – including Taylor and Tom Green Counties, where Abilene and San Angelo are located.

“By limiting it to a smaller number of communities that were going to be impacted by this, frankly it made it legislation that was easily passed,” Lambert said.

Usually, mergers like these need the approval of the Federal Trade Commission. But the bill changed that. Instead, the merging hospitals would only need the OK from a state agency – no FTC approval required. This makes the regulatory process cheaper and easier to navigate.

“The purpose of doing this at the state level was to circumvent and to bypass federal trade regulations, and antitrust regulations. I mean it was solely for that purpose, to avoid having to try to explain to someone in Washington, D.C., why it was important in Abilene, Texas, or San Angelo, Texas, or Nacogdoches, Texas – was really going to be beneficial for the consumer,” Lambert said.

Savings From Scale?

To get approval for the mergers, the hospitals sent an application to the Texas attorney general’s office, which then made a recommendation to the state Health and Human Services Commission. No federal approval required.

To merge without federal approval, the hospitals had to get something called a Certificate of Public Advantage, or COPA for short. To get it, the hospitals had to prove that benefits from the merger outweigh the negatives that come from losing competition.

Representatives from the two hospitals making the acquisitions – Shannon and Hendrick –– turned down requests to comment for this story. But the applications they sent to the attorney general said that patients would benefit from the savings that came from combining hospitals. King, the Abilene doctor, wasn’t sold on that.

“These mergers, you know, they tout all this savings due to scale,” King said. “And as far as we can tell this has never passed onto insurance companies decreased premiums or the hospitals decreasing charges to patients.”

King said as much to antitrust lawyers from the Texas attorney general’s office, who reached out to him after he started asking for details about the deal. They interviewed him as part of their evaluation of the mergers, and he told them his concerns.

The state also got a letter from the Federal Trade Commission, which weighed in on the deals even though it had no power to do anything about them. In the letter, the FTC urged the Texas Health and Human Services Commission not to approve the certificates. It said they’d likely to do more harm than good since buying out the competition could disincentivize high-quality care. The letter was evidently unpersuasive.

“Despite the intense opposition of the Federal Trade Commission, [Attorney General Ken] Paxton’s office said ‘Yeah, we’re signing off on this deal,’” said King.

At the end of September, the attorney general’s office recommended granting a Certificate of Public Advantage for each merger. The Health and Human Services Commission did so on Oct. 2.

‘There’s Nothing Anyone Can Do About It’

The hospitals say there are many benefits to these mergers. They’ll help lower operating costs, for one, which would allow the hospitals to invest in better technology, expand capacity and decrease wait times.

But health care economists generally have a dim view of these kinds of mergers since they reduce competition. Instead of lowering health care costs for consumers, they tend to do the opposite, according to Vivian Ho. She’s a health economist at the Baylor College of Medicine and the Baker Institute at Rice University.

“As we have more consolidation it raises prices, and that leads to higher insurance premiums for individuals buying insurance and for employers buying insurance for their workers,” said Ho.

There are systems in place to ensure this doesn’t happen. The law requires the hospitals to send the state regular updates on quality and efficiency. They also must get approval from the Health and Human Services Commission before raising rates.

They can do so at any time, as long as they give 30 days notice to the HHSC.

“It’s shameful because it says that the merged entity can terminate the COPA by just giving HHSC 30 days notice,” Ho said.

So the bill describes in detail how these merged hospitals would be regulated, and also lets the hospitals opt out of those regulations.

Christopher Garmon is a COPA expert and an assistant professor of health care administration at the University of Missouri – Kansas City. Before entering academia, he worked for the FTC for 20 years, evaluating deals just like the ones in Abilene and San Angelo. He’s never seen a provision quite like this, but he’s confident about what will happen because of it.

“I would bet anything this is what’s going to happen: The parties are going to merge here. They’re going to combine their assets in such a way that you can’t undo the merger. And then once they do that, they’ll unilaterally end their COPA, as they’re allowed to under Texas law. And then there’s nothing anyone can do about it,” Garmon said.

Lawmakers in other states have written expiration dates into Certificates of Public Advantage bills. But Garmon said he’s unfamiliar with any other measure that allows the hospitals themselves to leave the deal.

Rep. Lambert said the bill’s reporting requirements will protect consumers, and they included the opt-out provision in the bill because this is new to Texas.

“I think you want to have a little bit of an opt-out provision in the bill or the legislation in case something got grossly misunderstood or misrepresented or something that just wasn’t very clear going in but has now become much clearer,” Lambert said.

What’s clear at the moment though is that administrators at the newly merged hospitals hold all the cards. They can cancel the Certificate of Public Advantage at any time. After that, if costs for patients go up, or if quality goes down, if staff are laid off or have their hours reduced, if insurance companies balk at proposed reimbursement rates, the legislature has ensured there’s little anyone can do about it.

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Michael Marks
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