Hospital merger process kicks into high gear in Virginia

Photo above: SVHA board members Dr. Dixie Tooke-Rawlins, Dr. Sue Cantrell and Dr. Donna Henry listen during the board’s Oct. 27 meeting.  Photos by Jeff Keeling

 

By Jeff Keeling

We are well aware of the economic and healthcare challenges facing this region. The question for us, and more importantly the question for the Authority, is whether this merger is the only way to address the issues at the cost of displacing virtually all hospital competition in the area.  – Mark Seidman, deputy assistant director, Mergers IV Division, FTC Bureau of Competition

The core issue facing you as board members of the Authority is whether you believe, after reviewing the extensive oral and written information presented to you over many months, that the market for health care in Southwest Virginia presents some significant and uncommon characteristics as to deem it unique enough to necessitate a solution other than pure competition.  – Richard Brownlee, professor emeritus, University of Virginia Darden School of Business

 

In Abingdon, Va. Oct. 26 and 27, a group of men and women from Southwest Virginia wrestled with two questions regarding health care. First, do circumstances in Southwest Virginia – related to factors including demographics, population health, and the economy – warrant replacement of a standard competitive market with what will in essence be a regulated monopoly? Second, can the state, in collaboration with regional leaders, build a regulatory structure that can hold that monopoly to enforceable commitments so the resulting benefits – benefits not achievable without the monopoly – outweigh the disadvantages created by greatly diminished competition?

“The members of the Authority are going to be making a judgment,” Dennis Barry told the men and women, members of the Southwest Virginia Health Authority (SVHA) board, three hours into an Oct. 27 meeting in Abingdon. “I think the members of this authority could make a reasonable judgment that it’s likely that the benefits (of a regulated “cooperative agreement”) exceed the disadvantages.”

But Barry, a retired healthcare attorney and one of three staff members the SVHA hired to help it navigate the application for a cooperative agreement, recognized the decision is not a slam dunk. “Reasonable members of this Authority could say, ‘this is a monopoly, guys. I’m scared, and I don’t want to do it.’ I don’t think that’s an inherently unreasonable position.”

The dual questions outlined above have faced the states of Tennessee and Virginia since April 2015, when Mountain States Health Alliance (MSHA) and Wellmont Health System, two long-competing rival hospital systems that dominate the regional market, announced their intention to merge. The relevant factors surrounding the questions, and the varied opinions about how they should be answered, were displayed and debated at their most developed level yet in Abingdon. SVHA board members will be the first group to move the merger forward or stop it in its tracks.

That made SVHA meetings Oct. 26 and 27 an early crucible for a process that’s being followed not just regionally, but nationwide. If on Nov. 7 the SVHA recommends approval of a cooperative agreement regulating the merger in Virginia, and the Commonwealth and state of Tennessee both follow suit, the resulting system would be the largest such regulated hospital monopoly ever permitted in the United States.

The main benefits, the systems say, would include massive new investments ($450 million over 10 years) into improving community health, enhancing healthcare services and investing in research, among others. The cooperative agreement, and a Certificate of Public Advantage (COPA) in Tennessee, would make these and additional commitments enforceable, they add.

Those commitments include better pricing they say will save consumers around $10 million a year compared to the status quo, a better environment for non-employed physicians and other clinicians, better electronic medical records and more competitive pay rates for employees. Despite its monopoly power, the system could be held to these commitments with a strong regulatory mechanism, system leaders say, while the money to pay for all the advantages would be derived from a consultant-estimated $120 million in annual savings gained by merger efficiencies.

“This application was sent to you because the General Assembly believed you were in a unique position to weigh the benefits and disadvantages of this cooperative agreement because of the very unique backgrounds and the very unique populations that each of you represent,” SVHA attorney Jeff Mitchell told board members Oct. 27.

 

Competition or regulated monopoly?

Federal Trade Commission (FTC) staffers have hinted throughout the process that they question whether such regulation could produce benefits outweighing the disadvantages. They have made abundantly clear that they doubt whether the commitments are enforceable, that they believe prices would be better without the merger, and that they think quality of care and access could suffer, not be enhanced, should the merger go forward.

Within the past month, both in a lengthy written comment (see bjournal.com/ftc93016) and in person Oct. 26, they have been more forceful, urging the SVHA not to recommend approval. And after the Oct. 27 meeting, in the non-committal fashion common to any public pronouncements regarding what its staffers typically deem “hypotheticals,” the FTC’s Stephanie Wilkinson said this regarding any potential challenge if both states approve the applications: “Whatever happens at the state level, the commission would evaluate and decide whether or not to challenge the merger or take some other action.” Given the agency’s approach to date, one given to wagering would likely put odds on a challenge.

The merger would create a 19-hospital system with revenues just shy of $2 billion. It would turn on its head the two-decade paradigm in a two-state, 13-county area where fierce competition between the systems has been the order of the day. In normal circumstances, such a proposal would not just draw the opposition of the Federal Trade Commission (FTC). It would by everyone’s admission almost certainly not be permitted due to the combined system’s market share and resultant market power – power that, unchecked, would likely have highly adverse effects on consumers.

But the region doesn’t face normal circumstances. Even the FTC has admitted as much with respect to Southwest Virginia, where populations are declining, the economic base has been rocked by the collapse of coal and tobacco farming, and poor health factors occur at much higher rates than they do in other parts of the state and nationally. Those challenges led the Virginia legislature to create the SVHA in 2007, “to recommend ways to improve health and health-related prosperity in the far Southwest Virginia region,” according to the SVHA website.

Wellmont and MSHA say the challenges have created a money-losing scenario at most Southwest Virginia hospitals that requires subsidy from their more profitable facilities, which in turn are challenged by decreasing inpatient volumes. That scenario, they say, was a major factor in their decision to seek a regulated merger that would shield them from standard antitrust intervention, using the 73-year-old doctrine of “state action immunity.” For Southwest Virginia, they have said, the result would be transition to a healthcare approach best suited to the area’s unique challenges, with investments that help protect and enhance residents’ health care even as payment models shift toward a focus on value and quality, and inpatient hospitalization rates decline in favor of other clinical settings.

“If you look at the result of negotiations we had with (the SVHA), all of a sudden now we’re working with them to put together long-term plans to then fund, and then we get measured against whether we actually fund what we say we’re going to fund,” MSHA CEO Alan Levine told The Business Journal Oct. 24. “It puts some weight behind what the overall strategy is, whether it’s research, whether it’s population health, enhancement of specialty services – that’s what’s so different as opposed to what exists today, which is a plan on paper.”

The laws enabling a state-regulated cooperative agreement in Virginia and Certificate of Public Advantage (COPA) in Tennessee are meant to shield a merged system from standard antitrust regulation. The states are to determine whether the benefits of a regulated and actively supervised agreement outweigh the disadvantages caused by reduced competition – thus shutting the door on the FTC’s normal path to challenging anticompetitive mergers. The FTC has expressed concern about this path since the systems filed their applications Feb. 16. It fired its strongest written shot in that battle Sept. 30, with the systems responding in kind Oct. 14 (see bjournal.com/ballad101416).

On Oct. 26, those competing viewpoints played out in real time as SVHA board members met with four FTC representatives in Abingdon a day before they began deliberating on whether to recommend that the Virginia Department of Health (VDH) approve or deny the cooperative agreement application. The FTC made clear its willingness to challenge even a state action immunized merger, in a July 6 statement related to a COPA approval in West Virginia. The agency wrote it would, “where appropriate, challenge anticompetitive mergers in the courts and, if necessary, through state cooperative agreement processes.”

 

Whose pen is mightier?

From the time of the systems’ COPA and cooperative agreement application submissions Feb. 16 through late September, the FTC remained relatively low-key in its communications with state and regional authorities.  There were a few letters, and offers to lend FTC expertise as the SVHA, the state of Tennessee and the Commonwealth of Virginia wrestled with the task before them. An FTC staffer, Mark Seidman, offered notes of caution at a June 7 public hearing in Blountville, Tenn. held by the Tennessee Department of Health.

That soft approach changed with the FTC staff’s Sept. 30 submission of a 66-page narrative (plus appendices) that amounted to a point-by-point rebuttal of the systems’ case for a COPA/cooperative agreement. The document claimed that based on FTC research and experience, a Wellmont-MSHA merger, “would likely result in higher prices and reduced quality for healthcare services in Southwest Virginia and Northeast Tennessee,” due primarily to its “near-monopoly” status and the system’s ability to “exercise significant market power.”

The systems provided a nearly point-by-point response to the FTC’s arguments, saying the systems’ commitments to the states, and the proposed regulations, would indeed provide not just an adequate substitute for competition, but a superior one.

 

Talking past each other?

On Oct. 26, four FTC staffers sat in a packed room in Abingdon’s Southwest Virginia Higher Education Center with SVHA board members. The SVHA had prepared an eight-page list of specific questions, but FTC members opened by augmenting the arguments made in their comment.

“We are not here to criticize the policy choice made by the Virginia legislature,” Seidman began. “We respect that choice, and we’ve endeavored to evaluate the applicants’ cooperative agreement application through the lens laid out in that legislation. Indeed, we structured the analysis in our public comment to track the statutory factors laid out in the cooperative agreement.”

He said the FTC was available to help elucidate the risks posed by elimination of competition, “and to identify the challenges, ambiguities and potential shortcomings within the applicants’ claims and commitments.” He called the systems’ request “extraordinary. The burden is on the hospitals to fully describe the benefits from the merger and clearly explain how their commitments will mitigate any harm from the merger,” Seidman said.

Seidman said FTC staff members are “not blind” to the difficult demographic and economic realities facing people and healthcare providers in Southwest Virginia. “The question for us, and more importantly the question for the authority is whether this merger is the only way to address the issues at the cost of displacing virtually all hospital competition in the area.”

He and his colleagues don’t think so, especially given the risk, Seidman said.

“In essence, the applicants are asking this community to take on a tremendous risk that their monopoly power can be effectively constrained by government regulation, and counterbalanced by promises that may be difficult to enforce, will take years to materialize in some cases, and which the Authority and the Department of Health may have limited ability to remedy if the parties fail to fulfill their promises.”

A colleague, Goldie Walker, then said health insurers’ bargaining leverage will remain static should the merger transpire. A merged system, conversely, will see its own leverage greatly enhanced. Without needing to compete to attract patients and payers, Walker said, a merged system may have fewer or even no incentives to improve quality levels, innovate and provide maximum access.

The only non-attorney present for the FTC, displayed a map showing the 2014 hospital inpatient data for the systems’ service area. Analysis of where patients go for care, along with their “second choice” for care, shows two things, Thompson said. One is that between them, the two systems treat a large majority of patients from 13 counties – seven in Virginia and six in Tennessee. The second is that MSHA is the second choice for about 85 percent of Wellmont patients, and vice versa. “That’s a very high degree of competition between the two systems,” Thompson said. Past mergers that have created that degree of market power, she added, have been shown by studies to lead to price increases up to 100 percent.

Thompson acknowledged the presence of regulated pricing present in the cooperative agreement, but said the FTC has concerns about those price caps’ effectiveness. “Even if the price caps are effective, this market power may manifest itself in other ways, through for example a decreased incentive to invest in quality of care initiatives.”

The third FTC attorney present, Stephanie Wilkinson, picked up the price cap thread, saying the agency continues to believe those proposals may not adequately protect consumers. Wilkinson downplayed additional explanation regarding price commitments in the systems’ response to the FTC’s comment.

“Many of the specific terms of the price commitments remain ambiguous and still appear to contain gaps,” Wilkinson said. “As such, we cannot foresee all the possible ways that these commitments could fall short of their intended purpose, could be circumvented, or could result in unintended consequences.”

Wilkinson also raised questions about whether, as newer, value-based contracting models that rely less on negotiated “fee-for-service” reimbursement rates, the proposed price commitments would be applicable. “Competitive environments naturally allow for these kind of changing dynamics, but regulatory environments … may not allow for such adjustments,” she said.

In addition to her criticisms, Wilkinson acknowledged the FTC, “is not in a position to determine what particular price commitments would be adequate to protect consumers.” That statement was one of several – some brought on through exchanges with Barry – in which the FTC seemed to make clear that it had little interest in actually examining in real time the pros and cons of past COPAs and cooperative agreements.

Barry, who has specialized in healthcare reimbursement and compliance issues for more than 25 years, asked: “Are there any circumstances you can contemplate where the FTC staff would not oppose a merger of these two systems?”

Wilkinson said the FTC isn’t aware of evidence establishing that the kind of regulatory scheme being proposed would yield a better outcome than competition, but is aware of many studies “that do establish the benefits of competition in healthcare markets.”

Barry pressed Wilkinson, who responded that the Mission Health COPA in North Carolina – which the systems have touted as an example of a COPA that benefited consumers – and another in Montana had a combined 30 years of existence to provide any evidence that they worked.

“In North Carolina, with prices what happened?” Barry asked.

“I can’t speak to that, because I’m not aware of any robust economic studies that actually fully evaluated the impact on price, cost and quality,” Wilkinson said.

Barry then raised the Montana COPA. The FTC cited post-COPA price increases for that system, based in the Great Falls area, but Barry said those prices remained lower than their peers’.

“If we’re speaking about these other COPAs, the FTC like I said has not conducted an empirical assessment of these COPAs,” Wilkinson said.

 

The practical question: If it’s the right thing to do, can it work?

A day after the FTC meeting, SVHA board members listened as Wellmont and MSHA CEOs Bart Hove and Alan Levine reiterated their cases for the mergers benefits. They spent nearly an hour questioning Levine on specific commitments and how enforceable those really could be.

An initial set of commitments related to health care in Southwest Virginia and proffered by the systems in February underwent significant modification as MSHA-Wellmont representatives and SVHA board members tightened and refined those commitments (see the marked up commitments, with changes, at bjournal.com/svhacommitments). “We spent a lot of time going back and forth,” Barry said Oct. 27. “There were a lot of red line drafts… It was like negotiating an important contract.”

Like Barry, Brownlee, the business professor, said, “these revised commitments are in my opinion substantially improved compared to the parties’ original commitments.”

Dr. Dixie Tooke-Rawlins sat on most of the SVHA’s five working groups: competition, healthcare access, healthcare cost, healthcare quality and population health. The president of the Virginia College of Osteopathic Medicine has been among the more outspoken board members during numerous meetings with hospital system leaders, often pressing them on their claims. Like Barry, she said the dialogue with the systems and the committees’ own research had led to a set of commitments that was much improved over those contained in the original application.

With respect to access, for instance, the systems agreed to a much more specific set of services ranging from primary and preventive care to crucial specialty services. Those negotiations occurred with the recognition that some of the system facilities that are currently hospitals may be retrofitted for more appropriate purposes given changes in health care, even during a five-year period that the systems have guaranteed they’ll stay open.

“We wanted improved primary care and prevention programs, because the challenge is not just will it be the same, but will it be better?” Tooke-Rawlins asked Oct. 27. All told, she said, “the majority of the big things have been addressed under those commitments.”

Dr. Donna Henry, chancellor at the University of Virginia’s College at Wise, chaired the healthcare cost working group. She, too, said negotiations had strengthened and specified the systems’ commitments. The group’s primary concern by late October, she said, was how effectively cost and pricing regulations could be monitored by VDH. “I think we learned today how that can be monitored,” Henry said.

Hospital system leaders say they expect similar “horse-trading” to continue as they enter dialogue with the Tennessee Department of Health (TDH) and VDH prior to state decisions on the merger.

“They (SVHA) have their own health goals for the region and they’ve really not had a structure to work forward and be able to implement a lot of those,” Wellmont CEO Bart Hove said Oct. 24. “Tennessee has a lot of goals as well. We met with the commissioner last week and part of the discussion we had with the commissioner is, ‘how can we work together to begin to implement some of those goals in Northeast Tennessee that are in synch with their long-range plan as well?’

“We’re actually working in partnership with these two agencies to implement, and benefit the region with these different ideas and different approaches to health care.”

In the same meeting, Levine said bringing in other perspectives has helped create a stronger set of commitments.

“Having their viewpoint from their perspective helped,” Levine said. “There were some things where we thought we were saying something that was interpreted differently. That dialogue was really important, and I think it will help in Tennessee as well… I think it will help when you’re sitting in the room and you get some real time dialogue about what our intentions were and what we hope to be.

“I think what everybody wants to see, is that as a major health system with the reach that we have, we will be a strong backbone for population health and for public health in the region. We want to be a reliable partner for both the Commonwealth and for the state of Tennessee. I think the commitments will help guide us in that direction.”

 

The hired guns say yes – but understands why ‘no’ would be reasonable

Brownlee, the business professor, told the board Oct. 27 he had come to the process with a pro-market background, having as a business school professor, “understood and advocated for the virtues of competition in the market.” Brownlee added that experience had taught him most markets were, “imperfect in a variety of dimensions.

“That in fact is the issue in the case with Southwest Virginia: Is the market for health care there so filled with imperfections that the traditional market solution simply can’t be expected to function properly and meet the serious needs of the people in the region?”

In Brownlee’s case, the answer is yes, as it is in Barry’s and that of the third professional the SVHA hired to help it in its work.

Dr. Thomas Massaro, a pediatrician now affiliated with U.Va., sounded perhaps the most emphatic positive tone.

Massaro has worked around the world in a number of regions where market forces and regulation commingle. He said when “balances of competition and regulation” are managed well, they can be extremely beneficial to the populations they serve. A cooperative agreement in this case, he said, “can deliver population health, public health benefits to this community that will not be available in any other way.”

Using a familiar example for him, Massaro said he believes collaboration in an effort to deliver better subspecialty pediatric care, “will be better, more efficient, and more effective to those children than if they stay apart or if they are acquired, merged or in some other way deal differently with the region.”

More broadly, he said, the plan contains elements that could become models for other distressed regions of the country as trends in health care continue to create cost pressures.

“Our experience with the merger applicants, people of good faith, and organizations committed to this region, has the ability not only to survive and to bring benefit here. I think it has the ability to be a paradigm, an initiative that might influence health policy in other similar environments around the country.

“If I lived here, I would enthusiastically support this merger, and I would do everything I could to bring about the best parts of the intent and the goals of this.”

Barry was more equivocal. He said the FTC’s root concerns were valid. “But for the commitments in monitoring and supervision by the Commonwealth of Virginia, this would be a bad idea,” Barry said.

He added, though, that most of the FTC’s contentions could be debunked, provided the board believes in the regulatory structure. SVHA would have ongoing involvement through a four-member committee – two health system representatives and two SVHA representatives, including the chair – that will meet with VDH representatives. “The Commissioner of Health has … the ability to exert an immense amount of power and influence over these parties,” Barry said.

With the information and opinion from more than six hours of recent testimony in front of them, SVHA board members opted to take a little more time and reflect before voting on the application. When they do so Nov. 7 – just a few days before their statutory deadline – they won’t have any more guarantees that they’re making the right decision than they did at the close of their Oct. 27 session, Barry said.

“There have been very few COPAs out there, or cooperative agreements. The limited experience, the anecdotal evidence is positive. But we don’t have a great deal of peer-reviewed analysis of the pros and cons of these agreements, so to some extent there’s guesswork here that’s inherent in what you’re doing.”