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State law requires Attorney General oversight of healthcare transactions involving non-profit health facilities
SACRAMENTO – California Attorney General Xavier Becerra today conditionally approved the affiliation of Huntington Memorial Hospital (Huntington) in Pasadena with Los Angeles-based Cedars-Sinai Health System (Cedars-Sinai). Under California law (Corporations Code section 5914-5920 et seq., and California Code of Regulations, title 11, section 999.5), any transaction involving the sale or transfer of control of a nonprofit hospital must secure the approval of the state Attorney General. The statutory charge of the Attorney General is to determine whether the transaction may impact the accessibility and availability of healthcare services, including to substantially lessen competition or create a monopoly. The Attorney General’s conditional consent provided in today’s letter seeks to protect access to care for the Los Angeles communities served by these hospitals.
“Not-for-profit hospitals receive significant tax breaks and legal concessions from California taxpayers to operate their facilities because these hospitals commit to a mission of serving in the public’s interest. It’s our job at the California Department of Justice to oversee that not-for-profits fulfill their mission to Californians. Today, we have provided conditional approval to Cedars-Sinai Health System and Huntington Memorial Hospital, two major not-for-profit hospitals in Los Angeles County, to consolidate while they maintain their mission of service to the public,” said Attorney General Becerra. “As our hospital systems get bigger by affiliating with one another, it is critical that they continue to provide quality services at affordable prices to the families that count on them in times of crisis. The conditions we have attached to the proposed affiliation of Huntington with Cedars-Sinai serve to keep our healthcare market competitive and ensure that this affiliation will be a benefit to the people and taxpayers of greater Los Angeles who depend on the critical services at these hospitals.”
The Attorney General’s conditions are based on experts' in-depth analysis of the health and medical needs of the communities that surround and utilize the subject hospitals. Among other things, these conditions call for Cedars-Sinai and Huntington to:
Today’s conditional approval includes a report titled: “Competition Impact Analysis of the Cedars-Sinai and Huntington Memorial Transaction”. Among many things, the report highlights that Cedars-Sinai Medical Center and Huntington Memorial Hospital “likely have substantial market power” and that post-affiliation, Cedars-Sinai Health System could increase healthcare prices at Huntington by as much as 32 percent.
Numerous stakeholders, including Health Access, health plans, and others have expressed concerns that after the affiliation, Cedars-Sinai Health System could raise prices due to the risk of “cross market effects”. As a result, according to the report, this could mean that post-affiliation, Cedars-Sinai Health System “might then condition its willingness to contract at Cedars Sinai Medical Center (either its full set of services or its tertiary/quaternary services) or at Huntington Medical on a payer’s willingness to contract with the entire Cedars Sinai [S]ystem “bundle” (with that bundle potentially including [other] Cedars Sinai physicians or non-inpatient care providers).” Employers in Los Angeles County depend on having both hospitals in their networks for their employees, which allows for further cross-market risks.
In terms of the risk of cross-market effects, the change in control of Huntington to Cedars-Sinai may also cause an increase in prices. For example, changes in control may lead to a new owner with weaker community ties who is, as a result, less susceptible to community pressure to keep prices low. A new owner may also face stronger pressures to increase short-term profits or may exhibit a greater willingness to fully exercise market power at the other hospitals the owner operates. Economic literature confirms that “hospital prices are higher for hospitals that are part of or, through a merger, became part of a cross-market system.” Based on those national studies, price increases from the cross-market effects of Huntington affiliating with the Cedars-Sinai Health System may be as “high as 17 percent.”
A copy of the conditional approval letter and expert report is available here.