Ballad of Ballad Health: What 'unique factors' led to this conglomerate?

Zach Vance • Updated Feb 4, 2018 at 2:16 AM

Never before have two states agreed to approve and supervise a merger quite like the one between Mountain States Health Alliance and Wellmont Health System.

Last week, a press release issued by the combined company, Ballad Health, touted the merger as the “largest COPA-governed merger in the country to date” and “the first transaction of its kind to involve approval and supervision from two states.”

Tennessee Gov. Bill Haslam and Virginia Gov. Terry McAuliffe both supported and enacted the legislation in their respective states that enabled state-supervised inpatient healthcare monopolies, just as long as the benefits clearly and convincingly outweighed the disadvantages of a noncompetitive healthcare market.

In that same press release, Ballad Health officials said the governors supported the Certificate of Public Advantage, or COPA, legislation due to “the unique nature of the region.”

So what makes the healthcare environment in Northeast Tennessee and Southwest Virginia so unique that two states would approve and regulate a monopolized essential service, such as inpatient healthcare?

As Ballad Health articulately described in its COPA application, the overall health of the Tri-Cities’ population, especially in rural areas, is extremely poor compared to other regions, due to high rates of obesity, poor nutrition, substance abuse, smoking, below-grade reading levels and teenage pregnancy.

In a Sept. 19, 2017, letter of approval to Mountain States Health Alliance and Wellmont Health System, Tennessee Department of Health Commissioner Dr. John Dreyzehner described the region’s “unique and challenging healthcare environment.”

“This region has a number of health, economic and other factors, which when combined, present a unique and challenging environment for the improvement of the quality and access of health care and health outcomes,” Dreyzehner wrote.

He also cited a recent Appalachian Regional Commission report that found Appalachia is worse than the United States as a whole in seven of the 10 leading causes of death: heart disease, cancer, chronic obstructive pulmonary disease, injury, stroke, diabetes and suicide.

In short, the free-market structure of Mountain States Health Alliance and Wellmont Health System bitterly competing against each another for the larger slice of the inpatient market share was not working.

While it’s true competition between the two hospital systems was not resulting in a healthier population, but the actual catalyst for the merger was more financially motivated, beginning with Wellmont’s search for a partner in 2014.

According to a 2014 interview with HealthLeaders Media, former Wellmont CEO Margaret “Denny” DeNarvaez said the search for a partner was “more with respect to what we know is going to happen in the next few years than it is an immediate need.”

“There is nothing per se today that we are not able to do as a result of our financial position. But we look downstream and we see the significant reimbursement cuts that continue to come and we look at the penalties that will also continue to increase, year over year, for failure to meet certain standards,” DeNarvaez said.

“The reality is the headwinds in healthcare are going to be pretty strong. To combat that, there is going to be a change in the business model for healthcare. Many folks will be taking on risk so they can advance healthcare in a different fashion from what we have traditionally done. To do that, we definitely believe a partner would be a preferred option.”

Four years later, and the merger now completed, Ballad Health CEO Alan Levine said those “headwinds” have yet to subside.

“This is not all going to be milk and honey. This is challenging. Bringing two systems together is tough. Dealing with the challenges, the headwinds in the health system have not gone away. They’re going to get worse,” Levine said.

Cuts to Medicare reimbursements, the 340B prescription drug program and insurance payments were Levine’s reasons for why hospitals are experiencing such financial difficulties in today’s age.

“I think the financial issue for hospitals right now is serious. Both Wellmont and Mountain States have seen, over the last eight months, a substantial decline in our cash flow,” Levine said.

“That obviously concerns me, not because of anything we’ve done. It’s because, you know, the 340B program has been cut back now by HHS (Department of Health and Human Services) and Medicare reductions. Things that, for instance, some of the insurance companies are doing unilaterally.

“A shift from inpatient to outpatient is having an effect on us. So we’re going to file our financials timely like we do every quarter, but I think what you’ll see is a deterioration in the financial performance of both our systems, which is consistent with what’s happening all across the country. It is a concern.”

The entire business model for operating a hospital in the Tri-Cities is failing. As the Tri-Cities’ population shrinks so, too, do hospital usage rates.

“The biggest challenge for us is the fact that we need to grow as a region. (If you have) declining hospital use rates and a population that’s not growing, you have a declining business model. That’s just basic economics,” the CEO said.

But not all the blame can be cast on external factors: Mountain States and Wellmont officials in years past chose to spend millions in duplicate services already provided in the Tri-Cities, just to gain a capitalistic step over their counterparts.

Only capitalism would motivate two corporations to invest in separate hospitals less than three miles apart in a rural area, such as Wise County, Virginia, which boasts a population of less than 40,000.

No other region in all of Tennessee, except the Tri-Cities, operates two costly Level 1 trauma centers. Not Nashville. Not Memphis and not Chattanooga.

Why were the Tri-Cities’ two hospital systems so captivated by competition?

“I think it goes back to the parochial issues between Kingsport and Johnson City. It predates my time. I can’t explain it all, but it makes sense,” Levine said.

“I mean there is a lot of that Friday night football (mentality) and it spills over into what we do. Mountain States is seen as a Johnson City thing and Wellmont is seen as a Kingsport thing. The reality is both of us are all over the place.”

Levine believes it will take at least a year for Ballad Health’s financials to rebound, as the new hospital system begins repurposing facilities and investing in new and innovative services.

“You got to let (the financials) level off. When you look at the deterioration of the financial performance, we’ve chosen not to do anything knee-jerk. We decided to let our turnover help us where it can. So if we have people leave, we’ll think hard about whether or not to replace them,” Levine said.

“My first day here four years ago, I did a reduction in force. My first day. And you never want to do that. That’s always a last resort, but the reality is we have bondholders that expect us ... They gave us the money to capitalize. They invested in us. We have to make sure that we’re performing to their expectations. And so we certainly will not want to do anything to dimish the faith that they have in our team to manage through any cost issues.”

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