Marriages made in heaven? Health care consolidation heats up

When hospital CEOs look at current reimbursement rates, don’t be surprised if they think, “It’s never going to be better than this.” They have good reason to think this way, as the ramifications of the forthcoming low-reimbursement environment sink in and a wave of health care consolidation intensifies.

Consolidation is considered a matter of survival as health care transitions from volume-based payments to value-based reality. The result is hospitals merging with insurers, hospitals merging with health systems, health systems merging with other health systems, and “a lot of OWAs — other weird arrangements,” noted St. Mary’s Hospital President Frank Byrne.

With everybody literally talking to everybody, the subject of consolidation, and the enabling investment, was the topic of a program titled “Consequences of Falling Re-imbursement: Here Comes Wall Street” held during the 2013 Digital Healthcare Conference produced by WTN Media.

Mark Grube, managing director of the consulting firm Kaufman Hall, said the level of consolidation is not only accelerating, it’s shifting. Whereas the past decade has seen independent community hospitals joining larger systems, the current environment features megadeals like the Texas-sized merger of Scott & White and Baylor Health Care System. “Those are the types of deals where you are not merging a $300 million hospital into a $2 billion health system, but merging a $5 billion system with a $6 to $8 billion system,” Grube said. “It’s creating a whole new scale of health care provider organizations.”

Each deal is somewhat unique, and creating economies of scale is part of the equation, but the primary rationale is strategic. Organizations are trying to build a network broad enough so their service distribution system has access across many, if not all the major markets within a state, Grube noted. In addition, since the accountable care model stresses good population outcomes, providers and systems are also trying to scale up to create that population health responsibility.

“They are looking to advance core competencies related to care management and fill other gaps in core competencies,” Grube said. “Baylor has been operated as a hospital-centric system, whereas Scott & White is more physician-centric with an integrated delivery network. They brought a lot to the table for Baylor in terms of care management experience, risk management, and health plan experience.”

Reimbursement limbo

How low could reimbursement go? Low enough that nibbling at the margins will no longer cut it, and adjustments to business structure — eliminating duplication and dropping financially unsustainable services — will be paramount.

Phil Loftus, CIO and vice president of information systems for Aurora Health Care, said most people in the industry believe reimbursement is going to fall to Medicare levels because commercial payers understand what the government is doing. “The payers are saying, ‘Well, what’s sauce for the goose is sauce for the gander, and if the government can get lower rates, we want lower rates as well,’” Loftus stated. “Most of us believe there is going to be that gradual convergence.”

Loftus said another worry is that Medicare reimbursement eventually will fall to the even-lower Medicaid rate. In five years, he said, the “big winners” will be health care organizations that can run profitably at “what will be” Medicare reimbursement rates. That means they will have to reduce their cost of operation anywhere from 10% to 25%, depending on where they started.

The merger of SSM Health Care, the parent of St. Mary’s Hospital in Madison, with Dean Health Plan was pursued as protection against such downward price pressure from a large insurance group. “If a provider doesn’t have a health plan, all the financial benefits, or a significant portion of them, accrue to the commercial insurance companies,” Byrne noted. “So providers have got to figure out their glide path to thrive in the value-based world.

In 1995, St. Mary’s had purchased 47% of Dean Health Plan, so the full merger will continue to provide the hospital with financial and clinical accountability. Byrnes believes it’s the kind of synergy that health organizations must find in what is essentially a transformational era. “Where you would not want to be is in a standalone hospital that does not have a strong physician partnership because you’re on the hook for readmissions, and yet if you are a standalone hospital, what control do you have over it? Not much.

“Standalone is a tough place to be right now, and I don’t know how you sustain that, so people are looking to be part of something else,” Byrne added. “People want to make sure they are not looking at a chair when the music stops.”



Investor reality

DHC panelists noted that anytime there is a disruption of an industry’s business model, it piques investor curiosity about earnings per share and margin opportunities. One of the worst-kept secrets in Wisconsin is that local hospitals and health plans are being pursued by private equity firms. If so, health care providers had better understand the dynamics of that relationship, warns Kevin Hayden, CEO of Group Health Cooperative-South Central Wisconsin and formerly of WellPoint, a publicly traded health benefits company.

Hayden noted that as Wall Street equity investors become involved in a new market, their primary concern is a return on their investment, so the performance and delivery expectations of any group that partners with them must change to a bottom-line mentality. “While you might not feel that in the first few months of the relationship, these folks didn’t invest money out of benevolence, they invested it for a return on investment,” he stated. “It’s very important that people understand that.”

Hayden said that in the ACA regulatory environment, it’s especially important for potential investors to know that spending on electronic medical records and other health IT is not a one-time thing, but a constant requirement. “My personal hunch is they don’t fully appreciate the depth of that investment,” Hayden said. “They have got to understand, on the front end of the investment, what it’s going to take to complete that work.”

During the DHC panel discussion, there was some disagreement about the most important element of successful mergers — a good cultural mesh or a sound business strategy. The verdict was mixed. “I see culture as being extremely difficult, yet the business case might be so compelling, those things might work,” stated Peter Christman, executive vice president and chief operating officer for UW Medical Foundation. “Those issues are going to be hard to deal with because people have grown up in a culture where they are not worried about that quarterly report. It’s a different mindset.”

Fate of the small fries

In a quality-based environment, the survivability of Wisconsin’s critical access hospitals is an open question, especially if they cannot gain access to an electronic medical record without partnering with a larger organization. Christman believes the state’s small hospitals will survive as outpatient treatment centers that are part of a larger entity. “This is not about inpatient treatment anymore,” he stated.

This article originally appeared on the WTN News website.

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