A Review by David Dranove,
Consultant to Jefferson County Attorney O’Connell.

In mid-December, The University of Louisville and its proposed partners, under an order from Jefferson County Attorney Mike O’Connell, released some of the previously secret documents underlying the proposed acquisition of University Hospital by Catholic Health Initiatives (CHI). Mr. O’Connell asked Professor David Dranove, a respected faculty member at Northwestern University’s Kellogg School of Management to review at least some of the materials. On December 28, two days before the Governor rejected the proposal, a four-page “Perspective” from Professor Dranove was released to the public. I am unaware if the opinion was circulated in enough time to be considered by the Governor’s or Attorney General’s Offices, but at least one phrase from the report has been seized upon by the University and its partners as a justification to soldier on.

I do not know which documents Professor Dranove looked at nor what aspects of the deal he was asked to consider. In fact, it is not obvious to me that Professor Dranove read the most important documents at all. He seems unaware that the proposed merger also involves St. Joseph’s Hospital System and invents a new name for the merged system: “CHI-Kentucky” instead of “Network-Entity” which is used throughout the documents. He admits that he was not asked to consider church-state issues. There is no mention of any specific financial details, no comment on any of the proposed organizational or administrative structures, and no possible alternatives to merger. The report discusses the current national wave of consolidations as hospitals and their captive employed physician practices face increasing competition with each other. The report seems to assume that the new Patient Protection and Affordable Care Act (Obama-Care) will favor large organizations that can serve as Accountable Care Organizations (ACOs) and be eligible for higher Medicare payments for quality. (Of course it is equally likely that such an organization would receive less money for lesser quality!)

Professor Dranove summarizes several rational factors driving consolidation, but mentions no potential adverse effects, even though a previous wave of hospital consolidations fizzled or failed (including the prior one between Jewish Hospital and Caritas)! An overly simplistic-sounding message seems to emerge from this abbreviated commentary that: “Consolidation good– no consolidation bad!” Surely the matter is more complex than that. The impact of ACOs themselves is speculative, given that both Kentucky’s Senators and most of its Congressional Representatives are trying their hardest to defeat the new health care reforms.

[Professor Dranove makes the same assumption as made in the recent report of the Attorney General that the many millions of dollars promised by CHI will go to clinical services at University Hospital.  Representatives of the University have been very careful not to say how their $200 million or so will be used.  When asked specifically how much of the new money was going to support indigent care, the answer was: “none.”  What I have heard the University say is that the money will go to the “Academic Medical Center” and its cancer program which to me signals that it will all go to the University’s commercial research enterprise.]

The line from the report that the University has focused on is: “Without this deal, the University of Louisville Hospital could lose access to Medicare and privately insured patients and face a dire financial future.” This may or not be so! I cannot conceive that Medicare is going to exclude good hospitals solely on the issue of how large or small they are.

Professor Dranove appropriately identifies a number of risks associated with the merger including:

• that control of the hospital passes from a local board to CHI.
• the new entity “will no longer be committed to the same mission as previously.”
• the level of community benefit of the new organization may be reduced.
• CHI could limit uninsured and underinsured patient access.
• CHI can close down essential but unprofitable services and,
• use excess revenues to fund other activities in the state and elsewhere.

Professor Dranove’s commentary is interesting, but it is incomplete. I would have liked to see an opinion from this business systems expert about the viability or workability of the proposed organizational structure. His analysis reflects an assumption that ACOs will become operational, and that large consolidated systems will be the only way for hospitals to survive. In my opinion, there are too many other fatal defects in the recently rejected acquisition proposal to have a decision hinge solely on how important ACOs might become in the future.

Professor Dranove’s report is available here.  If anyone knows how much the city paid for it, let us know here, or with the confidential “Contact Us” link on the right.

Peter Hasselbacher, MD