In the face of the Federal Trade Commission’s (FTC’s) string of litigation successes over the last several years challenging hospital mergers on antitrust grounds, there has been an increased focus on the potential use of state Certificate of Public Advantage (COPA) laws to gain approval for hospital merger transactions. COPA laws effectively supplant federal antitrust oversight of hospital transactions with a state regulatory review process, typically overseen by the state Department of Health. While competition concerns are factored into a COPA review, they may be overshadowed by perceived public benefits to the local community in terms of enhancing quality of services and addressing particular public health concerns. COPAs are still relatively rare: They have permitted hospital mergers to proceed in Montana (Benefis Health System, 1996) and North Carolina (Mission Health, 1995), as well as more recently in West Virginia (Cabell Huntington/St. Mary’s, 2016).

The most recent COPA in the spotlight is for the combination of Mountain States Health Alliance (Mountain States) and Wellmont Health System (Wellmont) to form Ballad Health. After more than two years and six public hearings—as well as multiple public statements and written comments submitted by the FTC opposing the transaction—the Tennessee Department of Health (TDH) granted a COPA on September 19, 2017. The systems await a decision from the Virginia Department of Health on its COPA approval before they may consummate their transaction.

The Parties and the COPA Application

Wellmont provides healthcare services in Northeast Tennessee and Southwest Virginia through six acute care hospital facilities and one critical access hospital. It also directly or indirectly owns, controls, or is affiliated with various nonprofit and for-profit corporations and organizations that provide healthcare and related services throughout its geographic area. Mountain States is comprised of 14 hospitals in the same geographic area. It also provides an array of outpatient and post-acute care services and has an ownership interest in several joint ventures, primarily providing ambulatory surgical services. There are few other hospital competitors in the region: Wellmont and Mountain States are currently the only full-service hospital systems for many patients and combined have significant shares of inpatient and several outpatient services and physician specialty service lines in the region.

Although the Tennessee COPA law had been on the books since 1993, the Wellmont/Mountain States merger prompted a revision of the law and the introduction of detailed implementing regulations (the Permanent Rules). The Permanent Rules contain several interesting elements, including the requirement that the applicants include in their application a “Plan of Separation” (which must be updated annually) for unwinding the transaction in the event that the COPA is subsequently withdrawn.

The systems filed a letter of intent in September 2015 and their full COPA application in February 2016. It took another 14 months for the application to be deemed complete following further information requests, and the TDH held six public hearings that included testimony both for and against the transaction from interested parties, including the FTC, which strongly opposed the transaction on antitrust grounds. The final decision granting the COPA came two years from the initial letter of intent and several years from initial discussions about the affiliation.

The FTC’s Concerns: Reduced Competition Could Lead to Higher Costs and Lower Quality

The FTC conducted its own investigation into the proposed merger and participated in the TDH’s COPA application process. The FTC determined that the transaction would substantially lessen competition in relevant healthcare markets and that the benefits claimed by Wellmont and Mountain States would not exceed the likely harm to competition. The FTC emphasized its determination of likely competitive harm, reinforced by numerous economic studies demonstrating that substantially reduced competition results in increased prices for healthcare services, as well as diminished quality.

The FTC dismissed the parties’ efficiency claims, noting that the greater the potential anticompetitive effects from a merger, the greater the cognizable efficiencies need to be to outweigh the harm, and that efficiencies almost never justify a merger that results in a monopoly or near-monopoly. The FTC also cautioned against reliance on the Plan of Separation, noting the difficulty of unscrambling merged entities. Finally, the FTC found that the reports submitted by the two systems did not contain sufficient analysis or evidence to conclude that the transaction’s benefits would outweigh its harms.

The TDH’s Conclusions: Benefits Outweigh the Downsides

The TDH, in consultation with the Tennessee attorney general, disagreed with the FTC, finding that the benefits to the residents of Northeast Tennessee would outweigh any downsides of creating a monopoly in certain healthcare services. In order to ensure these benefits, the COPA included certain conditions that increased state supervision, accountability and transparency (the Terms of Certification) and substantially lessened the autonomy of the systems.

Underpinning the TDH’s findings was the fact that the geographic service area impacted by the transaction presents a uniquely challenging environment for improvements in quality, access, and outcomes, due to health, economic and other factors. These factors include a higher percentage of smokers and obesity, an insufficient number of primary care physicians and mental health providers, lack of education, a high percentage of children in poverty, low per capita personal income and median household income, a high percentage of residents over age 65, and a mostly rural population. As a result, the geographic service area disproportionately suffers from serious health issues that carry an unsustainable cost.

The TDH’s approval describes the systems’ goals as reducing cost growth, improving the quality of healthcare services and access to care, and enhancing overall community health in the region, by reinvesting the savings the transaction would yield in new services and capabilities. Some specific initiatives include:

  • Standardized management and clinical practice procedures and policies to promote efficiency and higher standards of care;
  • Expanded quality reporting on a timely basis for the public to evaluate system performance easily;
  • Optimized service locations and staff to improve productivity and ensure access; and
  • Integrated clinical programs to establish centers of excellence that coordinate and optimize care.

Other than avoidance of duplication of hospital resources (on which the TDH took no position), the TDH found that the systems’ purported benefits were likely to occur, at least with the additional protections of the Terms of Certification. These benefits include:

  • Enhancement of hospital and hospital-related care quality;
  • Preservation of hospital facilities close to the communities they traditionally service;
  • Gains in cost containment and cost-efficiency of hospital services;
  • Improvement in the utilization of hospital resources and equipment;
  • Population health improvement in the region served;
  • Investments in programs and partnerships to address and ameliorate behavioral and addiction problems; and
  • Acceleration of risk-based contracts.

The TDH also acknowledged several potential disadvantages to the transaction, but found that these would not likely occur with the Terms of Certification.

COPA Conditions

The Terms of Certification are a 50-page document with numerous addenda and appendices containing provisions designed to counter any anticompetitive impacts of the transaction. Notable provisions include:

  • Restrictions on health plan negotiations and limitations on managed care pricing;
  • Prohibitions preventing Ballad Health from restricting suppliers, vendors or other contractors from contracting with competitors;
  • Prohibitions preventing Ballad Health from opposing the award of Certificates of Need in the region;
  • Prohibitions on restricting nonemployed physicians from performing services outside Ballad Health;
  • Various aggregate and annual spending commitments tied to specific services, research, education and population health improvement;
  • Employee benefits and protections;
  • Quality of care requirements; and
  • Procedures to ensure access to healthcare services, by requiring certain facilities to remain hospitals; TDH approval to remove or repurpose other hospitals, facilities or service lines; discounts for under- or uninsured patients; and a charity care policy.

Most importantly, the Terms of Certification contain a regulatory regime for active supervision by the TDH, including provisions related to structure, monitoring, reporting, auditing and noncompliance. TDH also explicitly maintained the ability to modify the COPA with notice.

What’s Next?

The Ballad Health COPA experience illustrates the potential of the COPA process in providing avenues to merge when an FTC review is unlikely to be favorable. The FTC has consistently opposed state protections for hospital consolidations and questioned the effectiveness of ongoing state regulation of merged systems. However, the COPA process does permit a state to judge for itself whether consolidation and rationalization may be in the best interests of its residents, taking into account a broader array of public benefit concerns than might otherwise be considered by the FTC.

But the COPA route is not for the fainthearted. Clearly, the process took considerable time and demanded substantial efforts by the parties and their advisors. The Ballad Health COPA process makes clear that applying for a COPA does not exclude FTC involvement, including detailed FTC review, which would have required the parties to cooperate with the FTC in supplying documents and data in the same manner as if they were in a traditional FTC merger review. Finally, the detailed conditions and intensive reporting and oversight requirements will impose an ongoing regulatory burden on Ballad Health for as long as it remains subject to the COPA.