Hospital systems’ future top of mind throughout region
Growing array of outside voices weighs in
By Jeff Keeling
“We’re talking about things in this region that we never thought possible. We’re having these conversations because there was the disruption of Wellmont saying, ‘we really need to ask difficult questions.’ I applaud Wellmont’s board for the conversation that has begun because they had the wherewithal to say ‘we have to do something differently.’”
East Tennessee State University President Brian Noland
The amount of water that has passed under the local health care scene bridge since September’s Business Journal went to press Sept. 5 could submerge a small town. On Sept. 10, Wellmont Health System CEO Denny DeNarvaez abruptly resigned. The move came eight months after Wellmont publicly launched a strategic process aimed at seeking an “alignment partner.” It came less than two months after Wellmont narrowed its list of potential partners to three, all of them unnamed not-for-profit systems and one of them regional. And it came 23 days after metro area leaders convened a community forum in Kingsport, during which they advocated for Wellmont’s board of directors to make its strategic process more transparent, and to consider a merger with traditional rival system Mountain States Health Alliance that would also include a formal role for ETSU’s health sciences programs.
A who’s who of movers and shakers was present, and speakers included longtime area banker Bill Greene, ETSU President Brian Noland, Holston Medical Group founder Dr. Jerry Miller, Kingsport Mayor Dennis Phillips and attorney Bruce Shine. The main message was that merger with an outside-the-area system and a resultant loss of local governance would have negative long-term impacts on the region. A local merger, with prices regulated by a state-approved “certificate of public advantage,” (COPA), could allow efficient allocation of health care resources, with resultant cost savings potentially driving an increase in research funding for ETSU’s academic health sciences center, including its colleges of medicine, pharmacy, nursing and public health.
Since that Aug. 18 forum, the chorus of voices across the greater Tri-Cities advocating a COPA-regulated Wellmont-Mountain States merger has swelled. Local governments have passed resolutions in favor of keeping health care governance local. Wellmont board representatives have met with some civic groups, named former Bristol Regional Medical Center CEO Bart Hove as interim CEO, and met at least twice with ETSU representatives.
The Tri-Cities’ three largest Chambers of Commerce have collectively solicited, and received, letters from Mountain States and Wellmont regarding their respective positions on the issue. Mountain States CEO Alan Levine has spoken increasingly frankly about his contention that a local merger and end to the competition that has characterized the systems’ relationship for two decades could produce the best long-term outcomes for the region’s economy and the health of its population. Noland has said the same. On Oct. 1 he laid out for the Journal how he believes the university could double its externally sponsored research, improve the regional economy and help improve health care as part of “an academic and research-centered hospital system.” As two potential legs of a three-legged stool (four if one counts the VA), Noland and Levine also have shared their findings on costs and charges in areas where competition has been eliminated through mergers but regulated by COPAs. They have claimed the evidence points to lower cost increases in those cases, and perhaps unexpectedly higher increases where competition has been maintained but large systems have purchased smaller ones.
But Wellmont’s 17-member board will make the final strategic decision. Aided by a 12-member “strategic options committee” that includes four non-board members, leadership continues moving toward a decision it could announce before the end of the year. Seemingly in keeping with the board’s close-to-the-vest approach its chairman, Roger Leonard, declined to say who was on the committee, though he said the non-board members included a doctor, a former board member from Johnson City and a CPA from the region. Committee members have been touring the three remaining prospects “to explore what clinical and administrative attributes each alignment partner can bring to our footprint,” Leonard told the Journal in a Sept. 30 interview. He said management and board members from those potential partners will present their cases in person to Wellmont’s board and the rest of the committee by mid-November. He also opened the door, if just slightly, to the possibility that Wellmont’s strategic process could end with the system remaining independent. A website Wellmont launched in early August, forwardwithvision.org, contains a growing list of frequently asked questions (and answers) as well as other information related to the strategic process.
The ‘governance’ question
Leonard acknowledged others’ concerns about governance and control in the interview, which came a day after his second meeting with Noland, a meeting that also included Hove.
“Control is the issue that’s getting the most publicity in the region,” Leonard said. “It is not in and of itself the only factor, but it’s a very important one.” He named the others as “the ability to drive clinical excellence to higher levels,” the financial wherewithal to make significant capital investment, and a “clinically-centric culture,” not a business-centric one, “where physicians and nurses are central and the focus is on patient care both at the bedside and in the community.”
“Without financial strength and capital investment, control doesn’t mean a whole lot,” he said, nonetheless adding that “we’re being very careful to negotiate certain reserve powers so that significant decision-making authority is retained in the region for some extended period of time.”
In his Journal interview the next day, Noland didn’t sound any less concerned about the prospect of an outside system owning Wellmont.
“We’ve built on our own,” Noland said of the region’s institutions. “We built the med school regionally, we built the pharmacy school regionally, we built these hospitals regionally. To think that we’re going to up and transition to some outside entity, I really struggle with.
“If local control is lost there’s nothing that prevents that new partner from, two, three, four years down the road, selling to a larger partner and then we’re three steps removed from governance. Governance is the most critical element in this entire equation.”
Levine also weighed in on governance in a presentation Sept. 30 to a Johnson City Rotary club. He told club members that a non-disclosure agreement (which would apply if Mountain States is Wellmont’s regional merger candidate) “does not relegate Mountain States Health Alliance to the sidelines when we’re talking about the health care in our region.”
Levine related a recent Florida merger he was involved in, representing a buyer of two hospitals.
“Once I acquired those hospitals, guess what happened?” Levine said. “Our company got bought. Those hospital boards didn’t have any say in that. Our corporate board made that decision and those hospitals today are part of another company they had dismissed from the process.
“So when you talk about governance, governance is the most important thing. Once it’s gone, it’s gone.”
The competition question
The thought of a hospital system monopoly in the greater Tri-Cities leads, rather naturally, to fear of inflated prices with no recourse available for payers. Anticipating that argument, Bill Greene and others introduced the idea of a COPA to act as a governor and prevent price gouging, which unchecked could eradicate any community benefits gained through efficiencies. Tennessee is one of a number of states with a COPA law (see the full statute at bjournal.com/copalaw). Virginia, where both systems operate hospitals, doesn’t have a COPA law, but its Secretary of Health and Human Resource, Dr. Bill Hazel, addressed the Wellmont situation in an interview with the Journal Sept. 22.
Hazel said what happens to the Southwest Virginia hospitals operated by both systems “is a big deal” for Virginia. He added that with the typical advantages of competition highly questionable in health care, “it would not be unusual to say, ‘well what are our other choices?’ In Virginia we are typically market/competitive-based and that’s what I think the General Assembly thrives on. It would be an interesting argument to make that we should substitute a market-based economy, or a perceived market-based economy, with one that is highly regulated. That doesn’t mean that it shouldn’t happen and it doesn’t mean that it won’t happen, but someone’s going to have to make the case for why it would be good.” A full story on the Hazel interview is available at bjournal.com/hazel.
Since late August, Levine, Noland and others have pointed to what they say is a highly successful COPA governing Asheville, N.C.’s Mission hospital system. Mission’s own reports do show that its cost increases have been significantly lower than those of its peers. Another COPA governs Palmetto, a South Carolina system. And both Levine and Noland have mentioned research suggesting that in cases where large systems have bought individual hospitals, or smaller systems, in areas where there is a competing system, the results from the continued competition haven’t always included lower costs for patients.
In its own research, the Journal found a study, released early this year, from two economists: Clemson’s Matthew Lewis and the University of Alabama’s Kevin Pflum. The pair studied “the impact of hospital system membership on negotiations between hospitals and managed care organizations (MCOs). They build on previous studies showing that hospital systems that add hospitals within their region increase their bargaining position with payors, due to the MCOs losing a piece of leverage due to the merger.
It is when Lewis and Pflum add data and analysis on bargaining power, and not just bargaining position, that the issue of whether costs to payors are more favorable even if an outside buyer takes over a hospital, or system, in a competitive market. That would be the case were Wellmont to sell to either of the two non-local candidates. “Such effects could be very important as roughly one third of all hospital mergers and system acquesitions between 2000 and 2010 involved hospitals in completely different markets,” the authors wrote. They added that most studies, including antitrust analyses on mergers, “have focused exclusively on the effects of system membership that arise through changes in bargaining position only.”
In other words, bargaining power such as Wellmont may gain from affiliation with a large system can be a driver in higher reimbursements from payors. In fact, the authors write that higher bargaining power trumps stronger bargaining position, with their study finding “additional markup in per diem reimbursement for the average system hospital created by the system’s additional bargaining power $855, in contrast to the additional $150 that is created by the stronger bargaining position derived from system membership for hospitals that have partners in the same patient market” (ie, Wellmont and Mountain States as they stand today). While Wellmont already is a system, its merger into a larger one would presumably increase any bargaining power it already holds.
Further, Lewis and Pflum note, the paucity of data surrounding this effect “indicates that the approaches currently used (by academics and antitrust authorities) to analyze hospital mergers may substantially underestimate the impact of a hospital merger or system acquisition on prices – particularly when the system has minimal presence in the same market as the acquired hospital.”
After many charts, formulas and case studies, the authors conclude that more such studies would be useful given the rising number of mergers and the prevailing method of studying those that involve systems purchasing hospitals in an area where they don’t already have a footprint. “(R)ecent antitrust analysis has ignored how system affiliations outside the local market may impact prices. For example, an acquisition of a hospital by a large national chain may not increase concentration in the local market, but could increase prices if that hospital now has greater bargaining power due to its affiliation with the national system.”
The authors suggest that the larger system could threaten to leave the MCO network entirely, for instance, if the payor won’t agree to increased prices at the newly acquired hospital(s): “Additionally, system hospitals would have a bargaining advantage when negotiating with a risk averse MCO if they can more credibly signal a willingness to terminate negotiations or threaten to exclude all system members from the MCO’s network.”
In his Oct. 1 interview with the Journal, Noland expressed confidence in two things regarding competition: that health care competition historically does not hold down prices – “you see an escalation in costs because it’s an arms race to provide services” – and that a COPA can adequately protect payors.
“A COPA places price protection for businesses and industries across the region,” he said. “It will say that prices cannot exceed inflation. Things are pegged. The beauty of the COPA is it outlines with clarity for employers and potential businesses looking to relocate to the area, ‘here are the rules of engagement.’ You would have a locally controlled governance, (plus) governance by an annual review by the state attorney general.
“I know it’s worked well in Asheville. As with anything, there’s going to be detractors, but it was reaffirmed by the legislature in North Carolina.”
What ETSU wants (and why)
Since speaking at the August forum, Noland hasn’t wavered from his contention that a local merger would not only serve ETSU’s interests, it would be best for the hospital systems and the region as a whole. If anything, Noland has grown increasingly outspoken – something he attributed in the Journal interview to his study of the issues pointing ever more convincingly to the benefits of an academic and research-centered hospital system. And while he credits the Wellmont board for inspiring the current conversations and praises the system’s longtime contributions to ETSU’s health sciences’ success, Noland remains concerned about the prospect of a sale/merger with someone other than Mountain States.
Noland focused on two major areas of concern or opportunity, research and medical residencies, with the difference in his view depending on the outcome of Wellmont’s process. The most game-changing opportunity, he said, comes in the area of research. ETSU’s health sciences schools and its other departments have steadily built externally funded research through the years, Noland said. The total amount, with the National Institutes of Health and National Science Foundation being large contributors, tends to run between $38 and $50 million per year subject to shifts in NIH and NSF windows and other variables.
ETSU is focused on increasing productivity “through our faculty hires and research plans,” Noland said, and the university is focusing on “areas where we have traditional strengths.” Those include cardiovascular disease, diabetes, neuroscience and trauma, hypertension and prescription drug abuse – most of which plague this region inordinately, contributing to high health care costs, economic hardship and other problems.
While the focus precedes the Wellmont situation, Noland said that situation “provides an opportunity, if the stars align, for us to take what is a rich base at the university and build upon it.”
That base is part of what gives Noland confidence that as part of an academic-based system with roughly 100,000 hospital admissions annually, ETSU could double its research funding within 5-10 years.
“It’s not as though we’re looking to hatch something from the sky. We’re looking to take our strengths that are focused on the health care needs of the region and build on them.
“You’re seeing academic health centers and hospitals around the country examining mergers, and things are working well in those areas in which universities and health care delivery entities are working in tandem. You see that in places like (Virginia Commonwealth University), which is an academic-focused hospital. Cutting edge research. Physicians who are trained in the newest technologies. Destination places for treatment. We have the potential to develop that here.”
And with some health care jobs likely to disappear as acute care admissions continue declining and reimbursements drop, Noland said the economic boon a burgeoning research economy would create might help mitigate that. Economic studies point to a 2.2x “economic multiplier” for research funding.
“If we bring in a faculty member with a focus on diabetes and they have x number of grants, they’re going to bring with them bench scientists, researchers, folks who are going to run the operations. For every additional $10 million we bring in externally sponsored research, there’s a $22 million downstream impact.”
But it goes much further than that, Noland said. That research, and the effect it has on hospital systems and primary care, helps improve health care and quality of life for area residents. He pointed to the very recent hiring of Dr. David Wood, to be both chair of pediatrics at Quillen College of Medicine and chief medical officer at Mountain States’ Niswonger Children’s Hospital, as an example that could be replicated in a combined system.
“By looking at this jointly, we’re able to attract a world-class faculty member to the university who, in addition to teaching, research and service, will lead patient care,” Noland said. “You’re bringing the best of technology, education and research together for patient care, and that improves outcomes, which is what we’re striving for.
“Imagine if you could replicate that across the entire spectrum, from oncology to cardiology to family medicine to psychiatry, on down the line. That’s an academic-centered model that builds if you have a solid foundation of research.”
Set in a combined Wellmont-Mountain States system, Noland said, another advantage would be a compatible electronic records platform. “If everything’s talking together, that improves health care outcomes, and increases research opportunities from the population health perspective (due to a larger population sample for research studies).”
Partnerships, promise and hope?
Listening to Noland discuss health care, one can be forgiven for thinking of ETSU’s recent centennial slogan. He lauds both hospital systems for their tradition of going the extra mile to place provide medical residencies and fellowships. The VA Medical Center at Mountain Home also provides residency slots. The federal government funds a number of such slots for each hospital system, but for the past decade both systems were self-funding additional slots. The benefit to the hospital systems, he said, came in the high percentage of residents who ended up choosing to practice in the region. “They recognized the net benefit to the region,” Noland said.
Buffeted by health care reform, both systems announced last year they would taper back their self-funding of slots not funded by the government and through the Accreditation Council for Graduate Medical Education (ACGME). Federally supported slots total 70 for Mountain States and 70 for Wellmont. That tapering commenced in the current fiscal year that began July 1. In the 2013-2014 year, Mountain States placed 108.5 residents, subsidizing roughly 38 of them. Wellmont placed 79, self-funding nine of those. This year, each system is self-funding six fewer positions.
This trend means the university is leaving potential (but not federally funded) residency and fellowship slots on the table, and more of them than before. ACGME would allow 279 such slots this year, and ETSU has 263. With enough funding from the local systems, the university could place two more psychiatry residents, two more surgery residents, another ob/gyn resident, eight internal medicine residents and an additional fellow in both oncology and pulmonary/critical care, among others.
Noland said he believes a merger of the two systems could free up money to resume the tradition of funding slots, as duplicated services established through years of unhealthy competition are shed.
“This would present opportunities to grow residency positions in an academic and research-centered system, which would help grow specialties and subspecialties that don’t exist at this point,” Noland said.
If, on the other hand, Wellmont sold to an outside-the-area system “we will look to partner with them because they’re now part of the region, even though they’re not from the region. But I don’t know what the values are. There are so many dynamics at play. Folks may call it a partnership, but it’s a sale.”
Noland did say he was impressed when he met Hove Sept. 30.
“He was very well-spoken, knowledgeable, and understands the region and our history. I really enjoyed the opportunity to speak with him and learn from him. As someone who worked for a board, I understand that CEOs play a critical role in shaping the vision for a board, and I really look forward to seeing the vision Mr. Hove outlines for the board in the months to come.”
For his part, Leonard said the meetings with ETSU have impacted the board’s approach, but he also downplayed the magnitude of Hove’s role in the strategic process. He said the board has met with Noland in response to community concerns about ETSU.
“We wanted folks to know that we are listening to the community,” Leonard said. “As we had those discussions, I think we realized how important it was to us to convey to all of our (potential) alignment partners the importance of continuing the relationship with ETSU’s medical school. We want to get that information out to them so we can determine their level of commitment to maintaining that relationship going forward. That will be a key factor in our decision.”
As to Hove, when asked whether his role in the strategic process would be less hands on than DeNarvaez’s had been, Leonard said even during DeNarvaez’s tenure the board had driven the process. “Denny has been an observer, and Bart will be an observer just like Denny and contributing based on his experience.”
Levine leaves the sidelines
The conventional wisdom is that the “regional system” left in the running for Wellmont’s alignment is Mountain States. Neither system has publicly acknowledged such, but it seems unlikely that so many influential Tri-Citians would be touting the benefits of a local merger otherwise.
Within days after the Aug. 18 meeting, Levine – who replaced longtime Mountain States CEO Dennis Vonderfecht in January following Vonderfecht’s retirement – had begun framing the system’s stance on its current and projected fiscal strength, and its position on selling to an outside system. He and Mountain States board chairwoman Barbara Allen penned a letter to the community making it clear that Mountain States had no interest in selling, and believed it could operate effectively without “scaling up” in size through a merger. The missive was an indirect reference to one of Wellmont’s primary stated reasons for seeking a partner: that systems needed to be at least $3-$5 billion in size (annual revenue) to adequately navigate the reimbursement and other challenges posed by health care reform. Combined, the two systems have revenues just shy of $2 billion. When Levine spoke to the Washington County Economic Development Council in late August, he reiterated many of those points. He reviewed financials past, present and projected, talked about debt load, and placed it all in the context of the region’s overall health and hospital usage rates (they’re far higher than the national average).
Through much of September, though, Levine was careful to remain deferent to Wellmont’s process, mainly dancing around the edges of local merger pros and cons. By late September, his approach shifted somewhat. In an address to a Johnson City Rotary Club Sept. 30, after his standard review of Mountain States’ internal situation and some general talk about health care reform trends, Levine said this:
“Wellmont, as you might know, has said that there are non-disclosure agreements that prevent certain conversations from taking place. I believe in keeping my word and I will keep my word. That having been said, a non-disclosure agreement does not relegate Mountain States Health Alliance to the sidelines when we’re talking about the future of health care in our region. It’s an important issue for us, and we’re going to talk about it.”
Levine then planted a stake in the ground, calling unequivocally for intra-system dialogue aimed at a local collaboration that includes ETSU. He argued that hospital system competition in the Tri-Cities has hurt, not helped, the region.
“I do believe there is an overcapacity problem,” Levine said. “I believe there are too many hospitals. People see hospitals and instinctively, we like to believe in competition … but when you’re heavily regulated by the government, when individuals that are buying the good, patients, aren’t the ones who are necessarily paying the bill but it’s a third party payor, you have disruption to the free market.
“Those things can combine to create a lot of redundancy and waste that historically the system’s been willing to pay for. But the employers are no longer willing to pay for it, and they shouldn’t, particularly in this region. You walk in front of some of these hospitals, and within a line of sight you can see strip centers where there used to be a small business that’s gone. That small business belonged to a family who lost everything because of this economy, and it’s our role as a health system to recognize that while we do deliver high quality, we also represent a major cost to the people who are trying to create jobs. Our mission and our objective is to do everything we possibly can to help reduce the cost so our employers can go about creating jobs – and that’s the kind of healthy collaboration we really do seek with our partners at Wellmont and with our partners at ETSU.”
Levine reiterated and amplified earlier points about the potential benefits of an academic-based system, noting that together “our systems are the same size as New York Presbyterian (the nation’s third-largest academic hospital system) … yet we do very little in the way of medical research.” He touched on the importance of residency slots to the hospital system, the region and the university.
Levine said Mountain States spends almost $15 million annually supporting ETSU’s academic programs. He lauded Noland’s leadership and vision, and promised Mountain States’ partnership with ETSU would “never change or go away.”
The region’s leaders, Levine said, must have a vision with respect to health care.
“The vision is to lay down the swords, stop with the silliness, and let’s have an adult conversation about where health care in this region needs to go. Anytime, anywhere, Mountain States Health Alliance is prepared to have that discussion.”
Circling back to Wellmont
Leonard focused on a merger partner’s contributions to clinical excellence, backed by financial strength, in his Sept. 30 interview with the Journal. Asked about a comment he had made a week before that when hospitals and systems undertake similar processes, fully a quarter of the time they end without change, Leonard didn’t demur.
“It’s a documented fact that 25 percent of these attempted health care mergers end up not being consummated,” he said. That’s always a factor. That’s why we continue to run the system just as we would if we weren’t going through the process … but we do believe that we’ve done all the work running a great process, so we believe that we’ll be successful in consummating an alignment.”
Asked whether the board might simply walk away if the final offers from all three remaining suitors contained significant red flags, Leonard said it was possible but highly unlikely.
“The fact is we’re not going to make a bad deal. We’re in pretty decent shape, and we have elected to pursue this alignment option right now while we can negotiate a good deal, but we’re only going to accept a very strong proposal.
“We definitely would not be afraid to walk away from a deal that isn’t beneficial to patients and the employees within the Wellmont platform, but right now, all three alignment partners are still enthusiastic and have put some very intriguing proposals in front of us. We now are just in the process of unpacking those proposals and determining which one has the most positive long-term impact for clinical excellence.”