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Discord Between Ballad Health and the FTC

Article · March 23, 2017

Hospital mergers have become routine, but few are accompanied by a dedicated website and marketing video. publicizes the proposed merger of the Tennessee-based Mountain States Health Alliance and Wellmont Health System.

The website supports the two systems’ plan to create “a new, integrated, and locally governed health system” called Ballad Health with a trove of information, including Frequently Asked Questions, supporting comments, and regulatory filings.

The website serves a specific purpose, says Mountain States CEO Alan Levine. “Our service area is pretty contained. It is a very Appalachian-oriented culture, a very community-based culture, and when we decided to pursue this merger, we agreed that we needed to be very transparent with the community, and have as much public input as we could,” he says.

William Horton, a health care antitrust attorney with Jones Walker LLP, and head of the law firm’s office in Birmingham, Alabama, observes that the website is unique.

“I suspect one of the parts is to get their story out to the local officials. Those state government departments and agencies probably tend to be more sensitive to public sentiment than the [Federal Trade Commission] and the Justice Department,” Horton says.

While some state agencies have been persuaded of the merger’s virtues, federal regulators have been decidedly negative.

Regulatory Wrangling

According to Horton, the Ballad Health merger is subject to what is known as a state-action exemption. That means if a state appropriately regulates a specific trade, its process can preempt the federal government’s. The exemption dates back to a 1940s U.S. Supreme Court decision involving how California oversaw the cooperative sales of raisins. Thus, both Tennessee and Virginia can provide anti-competitive exemptions to the deal (the former awards a certificate of public advantage; the latter a cooperative agreement). However, the merging parties must prove that the public benefits of a merger outweigh the negatives.

The factors cited for the deal include the fact that neither Tennessee nor Virginia expanded Medicaid under the Affordable Care Act, and the Medicare Wage Index for the region is among the lowest in nation, meaning payments are more than 20% below the nationwide average.

“We’re a rural market that’s sparsely populated with no growth, and not a strong desire by outside parties to enter into the market,” says Wellmont CEO Bart Hove. Although the FTC noted that Wellmont had received as many as eight offers from outside parties, Hove and Levine observe that the communities in their service areas of northeast Tennessee and southwest Virginia — whose largest employers are mostly self-insured — greatly prefer local control.

Mountain States and Wellmont have therefore been pressing their case to Virginia and Tennessee regulators to create a system of 19 mostly rural hospitals with about 15,000 employees. They have received plenty of public input. Many large employer groups in the region have voiced support for the deal (see “Pro and Con Statements for the Ballad Health Merger”). But the FTC has struck a distinctly discordant note.

That agency is adamantly against the merger, which would allow Ballad to control more than 70% of the health care market in its combined service area. It’s a situation FTC officials believe would inevitably lead to higher prices.

The FTC’s lengthy critiques of the deal portray the two would-be Balladeers as dancing around the paramount question to its merger: whether competition in local markets would be diminished, eventually leading to higher prices.

“The parties failed to provide any analysis of available alternative arrangements, whether through collaborations with each other short of a merger, joint ventures or affiliations, or mergers with other hospitals,” says a Jan. 13 joint memorandum from the FTC’s Bureaus of Competition and Economics and the Office of Policy Planning. It added that “if the parties genuinely believe this merger is the best option for residents of Southwest Virginia and Northeast Tennessee, their reticence to discuss alternative arrangements is a surprising and critical omission.”

The two sides have engaged in paper pugilism through hundreds of pages of documents. Mountain States and Wellmont say their rural hospitals lose nearly $20 million a year combined and merging is a way to keep them open; the FTC says they act as ultimately lucrative patient feeders to their larger facilities (both Mountain States and Wellmont have margins in the low single-digits, typical for nonprofit hospital operators) — and did not make any concrete commitments to keep the rural hospitals open. The systems say they will build a dedicated drug treatment center to address the region’s opioid addiction crisis; the FTC says previous attempts to provide such services by other providers were blocked by Mountain States. (Levine says his organization did object to efforts by a for-profit operator because it intended to cherry-pick insured patients.) The systems say a merger would jump-start badly needed population health initiatives for a region plagued by diabetes and obesity; the FTC says either entity could have executed such plans on its own.

As a condition for the merger, the systems agreed to price caps below the medical rate of inflation for hospital-negotiated rates and physician and outpatient services; the FTC contends the agreement omitted such caps for value-based and risk-based contracts. (Levine did note that the number of risk-based contracts taken on by the two systems has been growing in recent years.) The FTC hired Kenneth Kizer, MD, MPH, a health care economist and former Undersecretary of Veterans Affairs, to analyze the deal; the systems say Kizer never bothered to contact them.

“We appreciate the work the FTC does, but we believe this region has very unique challenges no other model can address,” Levine says.

The FTC has issued numerous press releases and public statements outlining its objections, supported by a slew of economists and other academics (see “Pro and Con Statements for the Ballad Health Merger”). As a result of this wrangling, the closing date for a merger first announced in April 2015 is still not quite within grasp. One regional agency, the Southwest Virginia Health Authority, signed off late last year, but Tennessee regulators have asked for more information. Mountain States and Wellmont officials asked both states to allow more time to furnish supplementary materials. The Virginia Commissioner of Health, which also must give its approval, is expected to make a decision no later than mid-June.

The Fate of Ballad Health

Although Levine and Hove say they are just as committed to their corporate courtship as they were nearly 2 years ago, long delays typically sour consummations.

“This is rare, dragging on for this amount of time,” says Bruce D. Sokler, Chairman of the antitrust division of the law firm Mintz Levin in Washington, D.C. While Sokler is not intimately familiar with the deal, he notes that “normally, the longer these things hang around, the greater the chances that they get scuttled.”

If the deal does get state-level approvals, it remains to be seen whether the FTC will take any action. The agency has pursued antitrust complaints against several merging hospital and health plan entities as of late, and it has scored several victories. In the past year it was able to derail a proposed deal between Penn State Hershey Medical Center and PinnacleHealth System in central Pennsylvania, force ProMedica’s divestment of St. Luke’s Hospital in Toledo, Ohio, and just recently prompt Advocate Health Care and NorthShore University HealthSystem in Chicago to call off their merger attempt after those parties suffered a setback in federal court.

But the FTC also backed off on action against a merger between Cabell Huntington Hospital and St. Mary’s Medical Center in West Virginia when that state adopted a state-action exemption law similar to those in Virginia and Tennessee.

Although Sokler notes that antitrust action against hospital mergers has had support in the previous two Presidential administrations, the path a Trump administration may take is far harder to predict. FTC Chairwoman Edith Ramirez, an appointee of Barack Obama, had spearheaded the most recent antitrust efforts, but she stepped down in February. Maureen K. Ohlhausen, a Republican who is an Obama appointee, is now acting FTC Chair. Terrell McSweeny, another Obama appointee, is the other commissioner. President Donald Trump can name three other commissioners — including a permanent chair — but no names have been put forward for Senate approval.

David Argue, a principal with Economists Inc. in Washington, D.C., sums up the agency’s potential stance against hospital mergers, whether it’s Mountain States–Wellmont or future pursuits.

“The FTC might possibly become less aggressive in health care antitrust enforcement, but an accurate appraisal of that would take more time,” he says in an email. “Even if it were less aggressive generally, it could easily view any particular transaction as problematic.”

Pro and Con Statements for the Ballad Health Merger

  • Excerpt from a July 20, 2016, joint letter from the presidents of the Bristol, Kingsport, and Johnson City-Jonesborough-Washington County Chambers of Commerce in Tennessee and Virginia to John Dreyzehner, MD, MPH, Commissioner of the Tennessee Department of Health:
    “…having heard all of the input from the public meetings, from our members, and from our observations of the submitted materials for the state to consider, we are prepared to again reiterate our strong support for the merger, and will add to it our strong wish that the process advance to permit the merger transaction to be completed as rapidly as possible.
    …we do believe the plain language of the merger, along with the commitments made by what will be the new health system, outweigh the disadvantages. Our members have seen this information and support the model. They believe the evidence shows that if either or both health systems were to merger with other entities, it will likely lead to higher pricing and significantly more loss of local jobs. Conversely, with the merger, we believe there are enforceable protections to restrain the cost growth of health care. In fact, we have been unable to find any cases where states or the federal government have cited higher pricing as a consequence of a COPA-related merger, nor can we find where any regulatory action has been taken against another hospital system for acting in a manner harmful to consumers and which has merged under the regulatory structure of a COPA. We have, however, found evidence of higher pricing related to non-regulated mergers and out-of-market acquisitions of systems like Wellmont and Mountain States. Thus, from the perspective of those who are paying a large portion of the bills, and whom are the most affected by the discussion about pricing, we believe the COPA model is superior in its controls on cost growth and ensuring the synergies from the consolidation remain in our communities.
    On behalf of our members, we respectfully encourage your department to work with the two health systems to bring the merger to a conclusion rapidly. As it stands, the merger may not be complete until 2017. We are concerned by this timetable and believe with diligence, the process may be accelerated.”

  • Excerpt from a November 21, 2016, joint letter from 46 academics, led by Leemore Dafny, PhD, Professor at Harvard Business School, to Commissioner Dreyzehner:
    “We, the undersigned, submit this comment in our capacity as professors and academic economists with expertise in the subjects of antitrust, competition policy, and health economics. The opinions that follow reflect our review of public documents related to the proposed transaction, as well as our collective understanding of healthcare organizations and markets (underpinned by academic research, cited below).
    We urge the Department of Health (‘Department’) to reject the COPA application submitted by Mountain States Health Alliance and Wellmont Health System (‘Applicants’). The proposed merger would (by the admission of the parties) eliminate head-to-head competition between rival hospitals in Northeastern Tennessee and Southwest Virginia. An extensive body of economic literature finds that hospital mergers among close competitors lead to higher prices, on average, while evidence of cost savings and quality improvements is scant. The Federal Trade Commission (FTC), which has substantial expertise reviewing healthcare mergers and investigates only a small fraction of these, is in the midst of an extensive review of this transaction. Thus far, the FTC’s staff has publicly stated the transaction raises ‘significant concerns.’ For reasons described below, we believe many of the conditions and commitments in the COPA application before you will do little to offset the harm likely to arise from the reduction in competition between the Applicants….
    1. The proposed COPA agreement is insufficient to curb the exercise of market power that will arise from the merger.…
    2. There is scant empirical evidence that horizontal or vertical integration among healthcare providers leads to cost savings. The Applicants propose to fund ‘hundreds of millions of dollars’ in regional health investments ‘solely based on savings to be realized from merger efficiencies,’ calling into question whether these investments will be realized….
    3. The commitments offered by the applicants will be costly and difficult to enforce.”

Disclaimer: Leemore Dafny, PhD, is the New Marketplace Theme Leader for NEJM Catalyst.

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