Nonprofit hospitals are facing more questions over whether they're living up to their charitable missions as tax-exempt entities, and consolidation may be forcing the hand of state regulators.
Last week provided the latest example, as Pennsylvania's Attorney General Josh Shapiro alleged UPMC was flouting its obligations as a charity as it refuses to contract with its rival Highmark, potentially leaving Highmark members shut out from in-network access to UPMC's hospitals and physicians after June 30.
Municipalities and regulators in recent years have become more critical of whether nonprofit hospitals provide enough free or subsidized care to poor patients to warrant not paying taxes. In Illinois, a hospital lost its tax-exemption for not providing enough charity care to low-income residents, and the Illinois Supreme Court later upheld the decision in 2010. In New Jersey in 2015, a hospital lost its tax-exempt status after a judge ruled it operated similarly to a for-profit entity.
The common thread in those cases was the desire to find the bare minimum of what nonprofit hospitals should provide in exchange for their tax-exempt status. Or, in other words, what's enough?
Unlike those cases, though, UPMC is tangled up with the attorney general over using its market dominance — refusing to contract with its rival and depriving Pennsylvanians choice and access, some legal experts said.
Tim Greaney, former assistant chief in the Department of Justice's antitrust division, called the case "remarkable," in the amount of ground it covers.
"I think the bottom line is: The AG is not going to be satisfied with a duopoly in which one firm is clearly dominant and is going to be able to have its way," he said.
Greaney, now a law professor at UC Hastings College of the Law in San Francisco, said that currently, one firm can be so dominant that it's impossible for rivals to compete.
"It is the paradigm case of what happens when you allow concentration to go forward little by little and some day you wake up to two competitors," he said. "That is exactly the bottom line lesson: eventually incremental drip, drip, drip concentration results in an untenable position for the AG."
Shapiro's motion against UPMC cites "exorbitant" executive salaries as one example of how the integrated health system is in violation of the state's charity laws. It even points to the use of corporate jets by executives and asks the judge to "make structural changes to the Board of Directors and Executive Management of UPMC," according to the petition.
Other legal experts say Shapiro's use of charity laws to go after the Pittsburgh-based system is not prudent.
"There is not much precedent whatsoever that the charity care laws can dictate who is and is not in network," David Balto, an antitrust lawyer and former policy director at the Federal Trade Commission, told Healthcare Dive. "Competition in the healthcare system is entirely based on the ability to have selective networks and that's all that's going on here."
Plus, forcing a network to accept every doctor means providers could then demand any prices they want, Balto said.
"Competition has worked in the way that people hoped it would. You have two systems that compete aggressively with one another," he said of the Pittsburgh market.
Back in 2012, the DOJ acknowledged the Pittsburgh hospital market was highly concentrated with UPMC as the dominant firm. Still, the DOJ declined to block Highmark's affiliation with the second largest hospital network, West Penn Allegheny Health System.
After a thorough review of the deal, the DOJ said it would "not reduce competition" for hospital, physician services or health insurance services.
Instead, the DOJ said, the vertical affiliation "holds the promise of bringing increased competition" to the area. The regulator added that the capital Highmark could provide to its new hospital arm "increases the incentives of market participants to compete vigorously."
As mergers and acquisitions have continued in the healthcare sector, academic literature has thrown cold water on the notion that horizontal hospital mergers create synergies that benefit patients by lowering costs. Instead, research shows that horizontal consolidation can leads to price hikes.
State lawmakers rally around AG in opposition to UPMC
The attorney general isn't alone in challenging UPMC. Pennsylvania Lieutenant Governor John Fetterman, the former small-town mayor who was famously arrested in 2010 for protesting UPMC after it shuttered a local hospital a year prior, promised the full support of the state during Shapiro's press conference last week.
The state chambers have also taken action.
State Sen. Jay Costa last week began circulating a memo that would require integrated health systems to either contract with all insurers or enter mandatory arbitration if they cannot come to terms. "It's time to undo the damage caused by the divorce of these two companies," Costa said in a statement. "Disputes between enormous, profitable companies cannot get in the way of patients and their care."
Democratic state Rep. Frank Dermody has announced his intentions to introduce a constitutional amendment that would require tax-exempt hospitals like UPMC to accept state-regulated payments from out-of-network and uninsured patients.
That may be a well-intentioned for patients, but its "a really high bar," Erin Ninehouser, a consumer advocate with Pennsylvania Health Action Network, told Healthcare Dive.
Instead, Ninehouser said her group is "very encouraged and hopeful" about the attorney general's case, pointing to the list of specific instances alleging UPMC violated laws governing tax-exempt organizations. "There really are no rules of the road when a hospital and insurance company merge as far as what the responsibility is to the community in terms of access," Ninehouser said. It can have advantages in terms of coordinated care, she said, but there need to be protections in place to ensure access.
Correction: This story has been updated to correct the name of Pennsylvania's Attorney General.