Seth Higgins: House Bill 1460 is the wrong answer to hospital closures

Few events rock a community like a hospital closure. When this happens, residents quickly turn to their elected representatives to see what can be done. This is a laudable impulse, but it can generate legislation that ultimately exacerbates the problems it seeks to solve.

This brings us to House Bill (HB) 1460. 

Despite its promises, this bill would stifle innovation and competition in the healthcare industry, erect new regulatory barriers that favor large and well-connected incumbents, concentrate discretionary power in the Office of the Pennsylvania Attorney General, and inadvertently favor nonprofit healthcare systems despite their role in many recent hospital closures and reductions in services.

HB 1460 passed the Pennsylvania House of Representatives last summer when a sizeable number of Republicans joined the slim Democratic majority. Now that Pennsylvania’s months-long budget impasse is resolved, the bill is being considered by the Pennsylvania Senate.

The impetus for this legislation was the closure of the Crozer Health System in Delaware County. This happened when Prospect Medical Holdings, the for-profit parent company of Crozer Health System, declared bankruptcy about a year ago. 

In a public statement, the company explained that the bankruptcy “does not mean that Prospect Holdings is going out of business,” but rather “Prospect Holdings is utilizing the Chapter 11 process to facilitate its organizational realignment as expeditiously as possible.”

Understandably, this infuriated local residents and officials. A joint statement by the Delaware County state legislative delegation and County Council fired back, alleging that “Prospect acquired the Crozer system and it used leverage to extract value from the system for the benefit of its investors at the expense of the system’s patients and staff” and that the “bankruptcy is the direct result of Prospect’s financial decisions and the private equity playbook.”

This led a group of legislators from southeastern Pennsylvania to introduce and push for the passage of HB 1460.

If it were already law, HB 1460 likely would not have prevented the Crozer Health System’s closure. Instead, the goal is to ensure firms like Prospect Holdings cannot enter Pennsylvania’s healthcare sector in the first place.

And it is here that the problems start. 

In essence, HB 1460’s goal is to ensure that any for-profit entity’s acquisition or merger of a healthcare facility does not harm the public interest by reducing competition or the availability of healthcare in a community. It seeks to accomplish this by increasing scrutiny before such transactions occur and overseeing outcomes after completion.

Part of this process means that any business transaction covered by this law must submit an extensive package of information to the Office of the Pennsylvania Attorney General for review, including “internal and external reports and studies, bearing on the effect of the proposed transaction on the availability or accessibility of health care in the affected community.”

The business transaction then undergoes a review period, which may include opportunities for public hearings and input from state healthcare agencies. Then, if the Attorney General determines there is evidence the transaction would harm the public interest, the Attorney General may attempt to block the transaction in court. Alternatively, the Attorney General and for-profit entities involved may enter into an agreement that places conditions on the proposed merger or acquisition. Those conditions are then monitored for a few years at the expense of the businesses involved.

On the surface, this seems well and good, but HB 1460 is riddled with assumptions about how such legislation should work while ignoring recent history. Like so many other well-meaning government interventions, HB 1460 will only intensify the problems it hopes to address.

Legislative efforts at the state and federal level have sought to restrict healthcare models that explicitly consider profit and financial incentives while stifling models that claim to do the opposite. The prime example of this is the Affordable Care Act’s (ACA) restrictions on most new doctor-owned hospitals. 

The theory behind this ban was that physician-owned hospitals respond primarily to financial incentives rather than their patients’ needs. As a result, such hospitals order unnecessary tests, provide medical interventions of dubious benefit, and are more likely to exploit Medicaid and Medicare. Meanwhile, hospital systems–particularly nonprofit ones that pay their doctors a salary–lessen such financial considerations.

As a result of this ban on doctor-owned hospitals, mergers and acquisitions have risen since the passage of the ACA, often creating regional healthcare monopolies. Subsequent analyses found that mergers tend to increase healthcare costs.

But doesn’t HB 1460 discourage hospital mergers and acquisitions? Only for for-profit entities while ignoring the 800-pound gorilla: nonprofit healthcare systems.

I’ve written on a few occasions about my hometown’s struggles since Penn Highlands Healthcare–a nonprofit healthcare system in central and western Pennsylvania–acquired our local hospital more than a decade ago. In short, Penn Highlands went back on its promises, cut and reduced services in its rural and disadvantaged service areas, while expanding and acquiring new hospitals in saturated healthcare markets. I’ve also noted before how powerful nonprofit healthcare systems, such as UPMC, exploited a Covid-19 era law intended to support rural health systems. 

My hometown’s experience is not a one-off. A recent article in City Journal cited a study by the U.S. House Ways and Means Committee that found nonprofit urban hospitals “are exploiting a Medicare definition that allows them to be considered both ‘urban’ and ‘rural’ simultaneously, letting them draw down generous benefits and reimbursement models specifically intended for rural communities.”

The study went on to note, “Hundreds of sophisticated urban hospitals have gamed Medicare’s wage index to get the financial benefits of being urban facilities, while, at the same time, posing as ‘rural’ to receive the significant benefits Congress intended for truly rural hospitals.”

Studies have also found that executive compensation for many nonprofit hospital systems is tied to financial performance and growth, rather than healthcare outcomes for their communities.

This is exactly the sort of behavior the proponents of HB 1460 supposedly loath. So why do nonprofit healthcare systems get a free pass?

My best guess is that many people automatically assume that “for-profit equals bad” and “nonprofit equals good” when it comes to healthcare. A more cynical explanation is that nonprofit healthcare organizations are such a powerful constituency in some corners that many politicians wouldn’t dare pass legislature that hinders them in any way. Despite the tough rhetoric, HB 1460 is actually going after minor players and non-incumbent organizations in the healthcare industry, not the powerbrokers.

Speaking of minor players and non-incumbents, this leads to another issue with HB 1460: it doesn’t prevent for-profits from acquiring hospital systems, it simply makes it more difficult by erecting bureaucratic obstacles. This will have foreseeable consequences.

Recall HB 1460 requires parties subject to the bill to produce “internal and external reports and studies, bearing on the effect of the proposed transaction on the availability or accessibility of health care in the affected community.” Additionally, acquisitions by for-profit entities can survive the review by the Attorney General by entering into a voluntary agreement and by undergoing “monitoring, evaluation and assessment,” to be paid by the entity.

In other words, wealthy and connected for-profit entities can fund reports and studies that show their proposed transactions will be a net benefit for the local communities. Similarly, such organizations have the resources to navigate the bureaucratic labyrinth inherent to the voluntary agreement.

Simply put: the big players can survive HB 1460; entrepreneurs, innovators, and local businesses simply hoping to save a community hospital cannot.

Lastly, HB 1460 places extraordinary discretionary powers in the Office of the Attorney General. This means well-funded industry groups will be incentivized to put financial resources behind future candidates for Attorney General. It will also inevitably lead to an explosion of lobbying efforts as different factions fight over a favorable interpretation of this vague bill. In addition, some organizations—particularly entrenched nonprofit healthcare systems—may exploit the public comment provisions of HB 1460 to dog potential competitors under the guise of community concern.

This is entirely predictable. I’ve written before about how trial lawyers and their lobbyists expanded the reach of medical malpractice lawsuits by currying favor with Pennsylvania’s judicial branch. This environment of extreme litigiousness causes physicians to practice defensive medicine and leads to ballooning medical malpractice premiums.

What makes the drafters of HB 1460 think a similar dynamic won’t occur should this bill become law?

The collapse of the Crozer Health System was a tragedy. The effort to legislate this disaster after-the-fact will not only fail to fix the problem, but instead further degrade healthcare access and affordability for millions of Pennsylvanians. The Pennsylvania Senate must reject HB 1460.

Seth Higgins is a native of Saint Marys, Pennsylvania. He currently resides in Philadelphia.