Four years ago, when the two dominant health care systems in the mostly rural region of the United States where I live announced their intention to merge, there was understandable concern. The resulting single, not-for-profit entity would become the area’s only hospital system — a monopoly.
Representatives of the two systems, Mountain States Health Alliance and Wellmont Health System, both of which served counties in Tennessee and Virginia, argued that the merger was necessary for their survival. The Federal Trade Commission (FTC) strongly opposed the merger but did not have final say in the matter. Both Tennessee and Virginia have established procedures for issuing Certificates of Public Advantage (COPAs). COPAs shield such monopolies from antitrust enforcement by replacing FTC oversight with state regulation and supervision.
In late 2017, after lengthy reviews by both states, Tennessee and Virginia each granted COPAs to Ballad Health, the new not-for-profit corporation. When the merger was finalized, Ballad owned 21 hospitals spread across 21 counties in upper east Tennessee and southwest Virginia. Consolidations like this have the potential to increase patient costs and lower quality of care, and a year after the merger, the controversy over the Ballad approval has only intensified. Yet if the monopoly proves to be detrimental to the region’s health, it will be nearly impossible to reverse.
In originally proposing the merger, Mountain States Health Alliance (MSHA) and Wellmont offered several arguments for why it was advisable, if not necessary. Most had to do with the competitive health care marketplace that exists today. Perhaps the most compelling argument put forth was that each of the existing systems was at risk of being acquired by larger entities, possibly for-profit corporations, from outside the region.
Officials from both systems warned that without the merger some of their existing rural hospitals might be forced to close, and that access to some services in outlying areas would likely be diminished. They also asserted that consolidation would result in smaller and slower cost increases than if the systems remained separate or merged with outside organizations. According to the systems’ shared website prior to the merger:
“We believe that by working together in an integrated system, we can redirect spending away from unnecessary duplication that has not added value, and invest in what evidence has shown will help make our region healthier while controlling costs and making health care more affordable.”
It further asserted that:
“ … our patients and our region will have access to more choices and health care options than they do today. By combining our resources, we can draw more specialists and add new services for which people now have to drive hours to find.”
Another argument for the merger was that it would improve the financial stability of the regional hospitals by consolidating, thus increasing their bargaining power with third-party payers, primarily private insurance companies. The fact that this was a very real issue was reflected in comments opposing the merger made by insurance lobbying groups at some of the public hearings prior to the merger.
Despite MSHA and Wellmont’s touted benefits, FTC staff objected to the merger for multiple reasons. Their primary concerns: Costs would rise unacceptably and services would suffer, especially in outlying areas. They also questioned whether the states, as part of the COPA process, could adequately oversee and regulate the monopoly long term.
There is indeed strong evidence that consolidation of hospitals results in higher health care costs. According to a report from the Robert Wood Johnson Foundation authored by Martin Gaynor and Robert Town, this is especially true when direct competitors (like MSHA and Wellmont) merge. Prices often increase on the order of 20% to 30%, largely due to the loss of insurers’ bargaining power when contracting with hospital systems.
Whether consolidation of hospital systems has an impact on quality of care is less clear. According to Gaynor and Town, there is good evidence that, when prices are administered (for instance by Medicare or Britain’s National Health Service), less competition is associated with worse quality — that is to say, more concentrated markets lead to poorer outcomes. When prices are more market driven (largely by competing private insurance companies) the evidence is more equivocal; some studies indicate that consolidation leads to lower quality, while others show the opposite, or no impact.
There is also evidence to suggest that consolidation may lead to overutilization of some intensive procedures, resulting in higher costs and poorer outcomes. Hospital systems with regional monopolies may also tend to limit patient options for care by focusing on more profitable procedures and services rather than offering a broad array of alternatives. This is especially likely when multiple diagnostic or treatment options for similar conditions, varying in cost and invasiveness, are more generally available.
Additional impacts, though less well documented, are certainly conceivable. When services such as trauma centers and neonatal intensive care units are consolidated, critically ill patients may have to travel longer distances to receive care, as is now happening in my region. Most mergers result in the layoff of staff as duplicate services are consolidated or eliminated. This, in turn, may have negative ripple effects on the workforce and area businesses, thus impacting the local economy.
All of the above concerns were addressed by MSHA and Wellmont in their negotiations with both states. The final COPA agreements impose strict limits on future price increases, and mandate that Ballad meet certain requirements for the extent of services and quality of care provided. Another important component of both COPAs was a focus on community health, both in terms of financial commitments and population health measures. All of the requirements have metrics that Ballad must meet to avoid penalties, such as fines up to $1 million and prohibiting executive bonuses. To document compliance, they must submit extensive financial and quality of care data on an annual basis. However, the agreements are only as effective as the states’ ability to enforce them.
The most drastic penalty that either state could impose would be the dissolution of the merger. However, mergers of this sort are extremely difficult to undo. Attempting to undo health system mergers has been described as similar to trying to unscramble eggs; it becomes virtually impossible to do without causing even further damaging disruption. If such a highly consolidated health system fails, it risks being consumed by an even larger health care conglomerate. Worse yet, it could leave the impacted region with only limited hospital services. Despite the promise of government oversight of health care system consolidations, the prospect of systems becoming too big to fail is a major concern. In reality, a monopolistic regional health care system wields tremendous political advantage over any regulatory bodies.
Health system mergers are fraught with dangers and complications. But they are only one aspect of consolidation impacting our health care system today. In my next column for Tarbell, I’ll examine the merger mania affecting the health insurance industry.
Dr. Raymond H. Feierabend is professor emeritus in the Department of Family Medicine at Quillen College of Medicine, East Tennessee State University.