Hospital rivals freeze out federal regulators in three-year merger marathon
Story updated July 21, 2017.
JOHNSON CITY, Tenn.—Looking out a fourth-floor window of his hospital system's headquarters, Alan Levine can see the Appalachian Mountains that have defined this hardscrabble region for generations.
What gets the CEO's attention, though, is neither the steep hills in the distance nor one of his 14 Mountain States Health Alliance hospitals just across the parking lot. Rather, it's a nearby shopping center where his main rival—Wellmont Health System, which owns seven hospitals—runs an urgent-care and outpatient cancer center. Mountain States offers the same services just up the road.
"Money is being wasted," Levine said, noting that duplication of medical services is common throughout northeastern Tennessee and southwestern Virginia where Mountain States and Wellmont have been in a healthcare "arms race" for years, with each trying to outduel the other for the doctors and services that will bring in patients and money.
The two not-for-profit systems now desperately want to end their fight and merge their 21 hospitals in a 13-county region that's among the sickest and poorest in the country. To do it they are asking permission to form what is essentially a state-sanctioned monopoly. In exchange, Mountain States and Wellmont promise to use money saved from the merger to offer mental health and addiction treatment services and attack public health issues such as obesity and smoking—areas previously neglected by the systems because they don't increase hospital admissions and bring in big revenue.
In recent years, hospital mergers and acquisitions have created behemoth health systems that have used their near-monopoly status to demand high payments from insurers and patients. Studies by health economists have repeatedly found that consolidation means higher prices.
Federal antitrust regulators have become increasingly suspicious and have even blocked mergers deemed anti-competitive.
Mountain States Health Alliance and Wellmont Health System both face daunting financial challenges. Executives say creating a single system is the best option for their communities.
But the same calculus may not apply here and in other poor regions where a preponderance of patients are poor or uninsured, officials from both Mountain States and Wellmont say.
Since 2014, they've spent millions of dollars on legal costs, publicity campaigns and lobbying efforts to traverse an obscure process under state law called a Certificate of Public Advantage, or COPA. Their prize: A cooperative agreement that they say will be good both for their survival and for consumers and employers paying the bills. If Tennessee and Virginia regulators sign off, the Federal Trade Commission could not try to block the merger under U.S. antitrust laws. State regulators would supervise the merged company for at least 10 years to ensure the public gains more than it stands to lose from reduced competition.
The states could rule on the matter as soon as this month.
While President Donald Trump and Republicans in Congress stress the value of free market principles in healthcare, both hospitals argue that, in their part of Appalachia, the market has led to unnecessary spending, driven up health costs and forced them to focus on services that produce the highest profits rather than meet the community's most pressing health needs. In this deeply conservative region where death rates from cancer and heart disease are among the nation's highest, the hospitals say only a state-sanctioned monopoly can help them control rising prices and improve their population's health.
"The question that needs to be asked is whether tight state oversight of a monopoly is better than failed competition," said Robert Berenson, a health policy expert at the Urban Institute.
Without their proposed merger, Levine said, both hospital systems would likely have to sell to an out-of-market chain, eliminating local control of the facilities and leading to massive layoffs and the closure of hospitals and services.
Opponents such as the FTC and insurance giant Anthem are pressing regulators to reject the merger, arguing that less competition will lead to higher health costs and reduced quality of care. The FTC contends a full merger is unnecessary for the hospitals to accomplish the benefits they say one will bring. The FTC even says the hospitals' market probably would be no worse off if one chain merged with a company outside the area.
The systems are making big promises to sell their deal. They say no hospitals would close for at least five years, although some could be converted to other types of health facilities with fewer services. After the merger, all qualified doctors would have staff privileges at any of the hospitals involved so they could treat patients. No single insurer would pay lower rates than others. The new hospital system would spend at least $160 million over 10 years to improve public health, expand medical research and support graduate medical education for work in rural areas.
The FTC maintains the systems' pledges are unreliable and dismissed them as having "significant shortcomings, gaps and ambiguities" in a detailed analysis filed with state regulators in January.
Levine said it's the best deal for the community given the factors that handicap hospitals. They include declining populations and lower Medicare reimbursement rates (due to lower average wages). Another is the cost of caring for uninsured people—neither Virginia nor Tennessee expanded Medicaid under the Affordable Care Act, which would have lowered uninsured rates.
"Competition is and should be the first choice, but in an area where competition becomes irrational and there are limited choices, there has to be a Plan B. If not this, then what?" Levine said.
The federal antitrust exemption made possible through a COPA dates to a 1940s U.S. Supreme Court decision and has only been used about a dozen times to allow hospital mergers, mostly decades ago. There's little scholarly research on their results.
But COPAs could be on the upswing. Last summer, the FTC dropped its challenge to a merger of two West Virginia hospitals after the state adopted a COPA law and permitted the deal.
Blue Cross and Blue Shield of Tennessee, the state's largest health insurer, is not opposing the Mountain States-Wellmont combination, a spokesman said. But its counterpart in Virginia, Anthem, hasn't been persuaded.
"Anthem does not believe that there are any commitments that will protect Southwest Virginia and Northeast Tennessee healthcare consumers from the negative impact of a state-sanctioned monopoly," the company said in a statement.
The proposed COPA has strong support among large employers in the region, including Kingsport, Tenn.-based Eastman, a chemical company with $9 billion in annual revenue that employs more than 7,000 people locally. "We get local governance, input and control .?.?. and that's a lot better situation for us," said David Golden, a senior vice president at Eastman.
Still, walking around the Johnson City—the region's largest city with almost 67,000 people—it's easy to feel an unease among small employers and residents about a merger. Many worry about possible job cuts.
"Eliminating duplication of services means eliminating people," said Dick Nelson, 60, who runs a coffee and art shop downtown and has lived there for 27 years. "I don't care how much healthcare costs because my insurance will pay it," he said.
In Kingsport, where Wellmont and Mountain States each has a hospital, Thom Thorp is leery about a merger, too. "It's an economic move, not an enhancement of medical care," said Thorp, who runs a newsstand downtown. "We pride ourselves here for having good education and healthcare. They say there won't be any services or jobs cut, but if that's the case then what's the point of the merger?"
Together, the two hospital systems employ about 17,000 people.
Levine said no place better supports the case for a hospital merger than Wise County in southwestern Virginia, a scenic area with 40,000 people whose three hospitals all operate below half their capacity. Mountain States and Wellmont each own a hospital in Norton, the county seat with 4,000 residents. Despite few patients, the hospitals still bear hard-to-cut costs for buildings, equipment and adequate staffing levels, Levine said.
On a recent weekday morning, Wellmont's facility, Lonesome Pine Hospital, looked nearly deserted. No volunteers or staffers were visible inside its main entrance and less than a fifth of its 70 acute-care beds were being used.
A five-minute drive away, Mountain States' Norton Community Hospital's 129 beds are about a quarter filled. Its maternity unit delivers fewer than five babies a week. The hospital offers hyperbaric oxygen therapy—a treatment that pays well under Medicare's reimbursement rates—to help diabetics heal their wounds. But it has no endocrinologists to help diabetics manage their disease to avoid such complications. Despite a high rate of heart disease in the community, there's no cardiologist on staff.
Whether a state-approved merger will resolve the incongruities—here or in other poor regions—depends how firmly regulators hold hospitals to their pre-merger commitments. If the merger plan is rejected, Mountain States and Wellmont will resume arch-competitive business practices that do not always put community interests first, said Bart Hove, Wellmont's CEO.
"It's about competing for the dollar in any way you can and extracting a dollar from your competition," Hove said. "You do what you can to drive patients to your hospital."
Kaiser Health News, a not-for-profit health newsroom whose stories appear in news outlets nationwide, is an editorially independent part of the Kaiser Family Foundation.
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