Continued FTC scrutiny likely despite merger’s proposed structure
By Jeff Keeling
If the legal community’s blogosphere is close to being on target, the Federal Trade Commission (FTC) could exert significant influence as Tennessee and Virginia officials consider the proposed Wellmont Health System-Mountain States Health Alliance merger. Tennessee’s Certificate of Public Advantage (COPA) law and its Virginia counterpart are intended to shield the states from federal antitrust action – providing them “state action immunity.” The systems’ proposal also caps annual price increases at a quarter percent below the national annual hospital price index. The FTC, though, has written letters to both states urging them to provide rigorous competitive analysis as they consider the applications. The agency’s recent antitrust actions, too, suggest it’s not shy about attempting to intervene even in state-regulated mergers designed to keep the FTC at bay.
“You don’t know what the FTC is going to do here,” said Dionne Lomax, a Washington, D.C. attorney who has worked on both sides of the healthcare antitrust divide. Currently in private practice with Mintz Levin, where she represents large health systems among other clients, Lomax previously served as a trial attorney at the U.S. Department of Justice Antitrust Division’s Health Care Task Force. There, she analyzed and investigated health care mergers among other duties.
In a Feb. 23 interview with the Business Journal, Lomax offered her thoughts about matters ranging from recent FTC activity surrounding healthcare mergers to the agency’s model for assessing competition in the sector (it may be outdated, she said). Lomax expects the states will lean heavily on FTC-type standards as they consider whether to approve the merger – and that even if they do approve it, the FTC may intervene.
“They’ve been surprising a lot of folks in a lot of places,” Lomax said. “They challenged that one hospital merger in West Virginia after the state AG had already approved it. So they don’t necessarily take their cues from the state.”
Lomax referred to an administrative complaint the FTC filed Nov. 6 concerning Cabell Huntington Hospital and St. Mary’s Medical Center in West Virginia. An FTC news release noted the hospitals, which would have acute inpatient market share of more than 75 percent (the Wellmont-MSHA merger would create 73 percent share), had entered into temporary agreements with the state’s attorney general and the area’s largest health plan, but the agency claimed those agreements, “fall far short of replicating the benefits of competition.” The FTC, which voted 4-0 to seek a temporary restraining order should the West Virginia Health Care Authority and the Catholic Church approve the deal, also claimed, “potential cost savings and purported quality improvements are speculative, not merger-specific, and insufficient to outweigh the likely competitive harm…”
The local merger’s purported benefits are clearly delineated in the COPA application and the Jan. 7 pre-submission report, and include a major emphasis on merged company-funded population health measures. It’s possible none of that will matter to the FTC, as another healthcare attorney, Beth Vessel of Nashville’s Waller, Lansden Dortch and Davis wrote Nov. 13 in a post comparing the two premerger proposals: “Although at this point, the states are in charge of regulating the merger there is still the possibility the FTC could get involved formally. The FTC’s willingness to get involved in state rulemaking may be a sign of future challenges to state action immunity in healthcare transactions.”
That FTC stance comes in spite of a recognition on the agency’s part that mergers, “can result in significant efficiencies, and they can help to lower prices and improve quality and enhance services,” Lomax said. The rub comes in when the agency determines whether those benefits are “merger-specific.”
“Even if the parties in this case have really good information as to all that they can do from an efficiency standpoint to benefit the community,” Lomax said, “if it doesn’t pass muster under this clear and convincing standard that seems to be the standard that the Tennessee Department of Health is going to use – which is a standard that the FTC discusses in its letter to the Department of Health – then I suspect that it may be difficult for the parties to show that these efficiencies will outweigh whatever harm someone might try to claim the merger will bring to the community.”
But what about the ACA?
Combined with other healthcare reforms, the Affordable Care Act has led to massive shifts in healthcare payment models, and a greater emphasis on population health. For her part, Lomax is doubtful the FTC’s standards for review have caught up with the shifts. The studies the agency relies upon for judging the competitive effects of mergers are dated, Lomax said, including the FTC’s own decade-plus old study. Those studies commonly show that mergers in concentrated markets result in higher prices and are bad for consumers.
“Because of the Affordable Care Act, the dynamic of how providers are being paid has really been changing,” Lomax said. “You have these alternative payment models – risk-based contracting, the quality is factored into things a lot more, it’s not just price.” Lomax mentioned a recent Ninth Circuit case that struck down a merger in Idaho that, in her opinion, ignored quality as a competitive factor that should be evaluated in a merger analysis.
“Given the way the industry is moving and changing, I think that that’s the wrong way to look at it,” Lomax said. She said some studies are emerging that try to account more for a broader set of data in the post-ACA environment. “At least one study that I’m aware of had basically come to the conclusion that the economic model that the agencies are relying on and have previously used mispredicts the competitive effect of mergers because they’re not taking into account these current competitive dynamics.”
Lomax said even the head of the federal Bureau of Competition has acknowledged it’s difficult to weigh quality improvement efficiency claims against anticompetitive price increases.
“My whole point is, we’re going to get there, you need to figure it out instead of just deeming all of these mergers anticompetitive, and, ‘oh the efficiencies aren’t merger-specific, or they’re not extraordinary, they’re not large enough’ – we need to figure out how to get there because that’s the world that providers, practically speaking, are operating in right now.”
Leaders at Wellmont and Mountain States are standing by the advantages they say the merger would create, and by their contention that costs to consumers will be better under the merger than they would have been otherwise. MSHA CEO Alan Levine said at a news conference Feb. 16 that in the event of merger approval, the states will, “wield a pretty big gavel” when it comes to pricing, and that, “it’s important that we comply or we face the repercussions from that.”
Whether the FTC leaves it to the states to decide remains to be seen. Another article from Beth Vessel and a colleague, Ashley VanLandingham, noted that COPA regulations in New York have drawn FTC scrutiny. “The FTC stated that it will continue to challenge defenses based on asserted state action immunity where the state fails to provide adequate active supervision,” the article stated. It also suggested an FTC “emboldened by recent successes,” is “poised to resist provider achievement of state action immunity through a reliance on COPA statutes.” Lomax did not disagree.
“It will be interesting to see here, say for example if the COPA is approved, will the FTC try to go after this,” Lomax said. “The only way they would be able to do it is if somehow they really believed that state action immunity still didn’t apply here. That could be an uphill battle for them, but let me tell you, they’re very aggressive, they’re not afraid to ligitate, they’re on a winning streak when it comes to challenging hospital mergers, and so if they see a clear way through or a credible argument that they think they could make that this doesn’t pass the state action Supreme Court’s test, they might challenge it. It will be interesting to see how that plays out.”
Merger model projects $92 million extra margin by 2020
Mountain States Health Alliance and Wellmont Health System’s merger hopes rest largely on the expectation that efficiencies of a merged system will free up money – lots of it.
The systems’ application for a Certificate of Public Occupancy (COPA) provides detail into the group behind projections that a merged system will throw off an extra $120 million or so in annual cash flow once it’s fully integrated.
The systems hope to reinvest margins into efforts to improve population health, attract the best physicians and workers, and prime the pump for research efforts and the outside dollars those can bring, among other goals.
Last month, Wellmont’s chief financial officer, Alice Pope, and MSHA’s chief operations officer, Marvin Eichorn, discussed the financial projections developed by FTI Consulting. The COPA application includes a seven-page narrative description of the work FTI did to develop two financial models.
The first is a “baseline” combining anticipated total numbers of the two systems with no efficiencies gained, the second a “preliminary efficiencies” model projecting different expenses due to efficiencies gained. Those savings are projected to begin in the fiscal year ending June 30, 2017, and the models shown in the COPA application project through 2020.
The systems’ COPA application estimated $120 million of annual efficiency savings at full integration. By fiscal 2020, that amount is already projected at $92 million, with baseline expenses of $2.044 billion and a preliminary efficiency estimated expense of $1.95 billion. Projected income from operations is $141.5 million, compared to a baseline model of $49.1 million.
Of that difference, $49 million is projected to go into “expense related to COPA,” a line item not present in the baseline model. For 2017-2019, COPA-related expenses total about $81.5 million. Ultimately, the merged system intends to invest about $450 million in the first 10 years of integration in mental health, children’s health, research and combatting chronic conditions.
Many people have raised questions about employment levels since the merger announcement. By 2020, the “salaries, wages and benefits” line item totals $944.9 million – $40 million less than in the baseline model.
It’s likely, Pope said, that the $49 million in expenses related to COPA will include salaries for new jobs related to the COPA’s endeavors.
“Just to give an example, if we’re going to be expanding services into the behavioral health area, there is a dollar amount allotted to the cost of that expansion … while it’s not 100 percent employment, there’s certainly a very large component of the investment that comes back to the area as employment,” Pope said.
Eichorn said some of the COPA-related expenses could lead to job creation outside of the merged company, for instance at area colleges and universities in the form of graduate medical education and research.
Pope and Eichorn both said they were happy with FTI’s work (the comparative income statements can be found at bjournal.com/FTI).
“At the end of the day we’re going to be held accountable … by the state and the community (for) generating the kind of resources it’s going to take to provide these levels of commitments,” Eichorn said. “We feel very good about the work that FTI did.”