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BAXTER BID FOR AMERICAN HOSPITAL SUPPLY GETS ENDORSEMENT FROM TWO LARGEST NON-PROFIT HOSPITAL CHAINS; GOODWILL GAINS COULD AID BAXTER

Executive Summary

Baxter Travenol's bid for American Hospital Supply Corporation is being endorsed by the major not-for-profit hospital networks. On July 8, the second largest not-for-profit chain, American Health Care Systems, publicly supported Baxter's 11th hour attempt to buy American Hospital Supply away from a planned merger with Hospital Corporation of America. Voluntary Hospitals of America, the largest not-for-profit network, followed suit with a similar endorsement on July 11. American Health Care Systems expressed its moral support in a telegram to Baxter President Vernon Loucks. The not-for-profit's president, Charles Ewell, told Loucks, "I want you to know that American Health Care Systems supports Baxter Travenol's initiative because we believe it can result in a strong and independent source of supply for all hospital and health care providers." Similarly, Voluntary Hospitals of America said, "We believe that strong, independent manufacturers can be more effective in cost containment, research and development, and productivity." VHA further commented that "from a pro-competitive standpoint, American as an independent company or in combination with Baxter would be better than if merged with Hospital Corporation of America." The endorsements from the not-for-profits indicate that Baxter is winning one of the key side battles in the merger struggle: the enhancement of goodwill within the hospital trade. Prior to the announced HCA/AHSC merger plan, AHSC held a preeminent position with a large majority of hospitals based on its reputation as well as its broad product line and volume bid prices. Perhaps the most dangerous fall-out from the merger proposal, from AHSC's point-of-view, could be lingering ill will with customers. AHSC has substantial power in the market to offset that ill will, but it represents a chink in its business position which did not exist before the HCA plan. The endorsements from the not-for-profits also underline a fundamental issue in the battle between Baxter and AHSC/HCA: whether the consolidations in the health care industry will continue to be primarily of a horizontal nature or will switch to vertical arrangements. Beneath the machinations of the merger bidding, the maintenance of a firm line of ownership separation between suppliers and hospital operators is the crux of the dispute. Despite its statement in support of AHSC independence, VHA appears to be playing both sides of the issue. While supporting Baxter's bid as a way to maintain independent suppliers, the not-for-profit group is simultaneously developing its own in-house distribution system, VHA Supply Company. The catalyst for the recent support from the not-for-profits was HCA's decision to cancel a three-year $120 mil. I.V. products supply contract with Baxter. In its letter to Baxter, American Health Care pointed out that Hospital Corporation of America "controls less than 3% of the hospital market." The not-for-profit sector of the market represents about 85% of the hospital business. "I feel sure," American Health Care's Ewell said, "that the goodwill Baxter Travenol is generating among not-for-profit hospitals will in the long run more than compensate for the loss of Hospital Corporation's business." Hospital Corporation of America announced its intention to cancel the Baxter contract based on "serious questions conceming the legality and ethics of Baxter's conduct" in the merger bidding. The for-profit hospital chain will continue to buy I.V. supplies from Baxter through mid-October.

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