Attorney General Lockyer Files Antitrust Suit to Block Merger of Summit-Sutter/Alta Bates Medical Centers

(Oakland) - Attorney General Bill Lockyer today filed suit in federal court to block the merger of Summit Medical Center in Oakland with Alta Bates Medical Center, which is owned by Sutter Health in Berkeley. The action is aimed at preventing one hospital chain from dominating hospital services and dictating health care prices in the East Bay.

The U.S. District Court in Oakland was asked to issue an temporary restraining order after discussions to resolve the state's antitrust concerns stalled, and the hospitals set August 11, 1999, as the date for completion of its merger.

"In California, we are faced with increasing needs for health care by aging baby boomers and rising health care premiums," Lockyer said. "Consumers already are bracing for premium hikes averaging 10 percent next year - which means families could be paying $30 or more a month. With health care costs on the rise and a void in regional health care planning, I want to prevent adding fuel to the fire. This antitrust action is necessary to promote healthy competition needed to keep costs reasonable and bring attention to regional health care planning needs."

The federal complaint is the first antitrust action seeking to block a corporate merger brought by the new attorney general. Earlier this year, Attorney General Lockyer held an unprecedented all-day public meeting in the antitrust case to hear from hospital officials, health care workers and individuals of the affected East Bay communities. The testimony included vocal concerns about how the merger would result in reduced health care services for working families, businesses, the poor and uninsured.

The state action was filed under Section 7 of the federal Clayton Act, which prohibits any merger or acquisition where the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly.

Summit Medical Center, which operates the East Bay's largest hospital, is a not-for-profit California corporation formed in 1992 by the merger of two Oakland hospitals, Providence and Merritt Peralta Medical Center. Summit Medical Center is the closest competitor to Alta Bates Medical Center, located about three miles away. With the proposed merger, Sutter would become the largest provider of hospital services in the East Bay.

"We need to preserve competition, choice, quality and availability of affordable health care," Lockyer said. "As health care delivery systems rapidly morph through mergers, consolidations and closures, it is clear that California policymakers need to re-establish rational regional health care planning to protect the health care services available to working families, businesses and other health care consumers."

The Attorney General's investigation concluded the Sutter-Summit merger would create an unacceptable concentration of hospital ownership in one health care organization. Among other things, the two medical centers would be under a single board of directors controlled by Sutter, which operates another neighboring hospital. Such domination of hospital services could result in increased prices, cut back in services and reduced choices for patients either directly or through their health care plans, without fear of losing business to competitors.

The investigation determined that the two full-service acute care hospitals are each other's best substitute in the relevant market. Third-party health plans, self-insured union trust plans and physician group practices that contract with health plans and hospitals would not be able to substitute another hospital or combination of hospitals so as to defeat post-merger price increases of at least 5-10 percent, or a decrease in service quality, or a combination imposed by Sutter if it is allowed to acquire Summit.

Managed care plans reduce health care costs by encouraging hospitals to compete vigorously on price and quality. This in turn permits managed care plans to offer health insurance to consumers at lower prices. Reduced competition also could have an major impact because outpatient services are not considered a substitute for acute inpatient hospital services. Acute care hospitals could profitably increase the price of acute inpatient hospital services without causing a significant number of health care purchasers or enrollees to switch to outpatient services. Over 70 percent of the commercial in-patient acute care services are purchased or otherwise provided by managed care plans that contract with hospitals on behalf of plan enrollees.

The hospitals now draw over 85 percent of patients from the geographic area, which encompasses western Contra Costa County and central and southern Alameda County through Hayward. With the often-congested Caldecott Tunnel forming a boundary, the geographical territory is no larger than the area along the eastern shore of the San Francisco Bay, bounded by the Carquinez Strait in the north, Hayward in the south, and the Oakland-Berkeley Hills in the east. For most patients in Berkeley and Oakland, this results in a preference for staying in the area because of convenience, accessibility and quality.

The federal court was asked to enjoin Sutter from acquiring, directly or indirectly, any stock, assets or other interests in Summit, or taking any other steps to consummate the transaction proposed by the two hospitals in November and December 1998. Under the agreement, Sutter proposed to become the sole corporate member of Summit, assume $152 million in Summit liabilities and acquire Summit assets valued at approximately $257 million. The planned merger would consolidate Summit and Alta Bates Medical Centers into a single hospital facility with two campuses.