In early 2013, Hoag Memorial Hospital Presbyterian in Orange County, California, joined with St. Joseph Health, a local Catholic hospital chain, amid enthusiastic promises that their affiliation would broaden access to care and improve the health of residents across the community.
Eight years later, Hoag says this vision of achieving “population health” is dead, and it wants out. It is embroiled in a legal battle for independence from Providence, a Catholic health system with 51 hospitals across seven states, which absorbed St. Joseph in 2016, bringing Hoag along with it.
In a lawsuit filed in Orange County Superior Court last May, Hoag argues that remaining a “captive affiliate” of the nation’s 10th-largest health system, headquartered nearly 1,200 miles away in Washington state, constrains its ability to meet the needs of the local population.
Hoag doctors say that Providence’s drive to standardize treatment decisions across its chain — largely through a shared Epic electronic records system — often conflicts with their own judgment of best medical practices. And they recoil against restrictions on reproductive care they say Providence illegally imposes on them through its adherence to the Catholic health directives established by the United States Conference of Catholic Bishops.
“Their large widespread system is very different than the laser focus Hoag has on taking care of its community,” said Hoag CEO Robert Braithwaite. “When Hoag needed speed and agility, we got inadequate responses or policies that were just wrong for us. We found ourselves frustrated with a big health system that had a generic approach to health care.”
Providence insists it wants to stay with Hoag, a financial powerhouse — even as the two sides engage in secret settlement talks that could end the marriage.
“We believe we are better together,” said Erik Wexler, president of Providence South, which includes the group’s operations in California, Texas and New Mexico. “The best way to do that is to collaborate.” He cited joint investments in Hoag Orthopedic Institute and in Be Well OC, a kind of mental health collaborative, as fruits of the affiliation.
“If we are separate,” Wexler added, “there is a chance we may begin to cannibalize each other and drive the cost of care up.”
Research over the past several years, however, has shown that it is the consolidation of hospitals into fewer and larger groups, with greater bargaining clout, that tends to raise medical prices — often with little improvement in the quality of care.
“Mergers are a self-centered pursuit of stability by hospitals and hospital systems that hope to get so big that they can survive the anarchy of U.S. health care,” said Alan Sager, a professor at Boston University’s School of Public Health.
Wexler argued that price increases linked to consolidation are less of a worry in Orange County, geographically small but densely populated with 3.2 million residents and 28 acute care hospitals. Given the proximity of so many hospitals, Wexler said, counterproductive duplication of medical services is more of a concern.
Unlike many local community hospitals that seek larger partners to survive, Hoag, one of Orange County’s premier medical institutions, is financially robust and perfectly able to stand on its own. It has the advantage of operating in one of Orange County’s most affluent areas, with two acute care hospitals and an orthopedic specialty hospital in Newport Beach and Irvine. It is the beneficiary of numerous wealthy donors, including bond market billionaire Bill Gross and thriller novelist Dean Koontz.
In 2020, Hoag’s net assets, essentially its net worth, stood at about $3.3 billion — nearly 20% of the total for all Providence-affiliated facilities, even though Hoag has only three of the group’s 51 hospitals. Hoag generated operating income of $38 million last year, while Providence posted a $306 million operating loss.
But Providence is hardly a financial weakling. It is sitting on a mountain of unrestricted cash and investments worth $15.3 billion as of Dec. 31. And despite its hefty reserves, it received $1.1 billion in coronavirus relief grants last year under the federal CARES Act, and millions more from the Federal Emergency Management Agency.
Providence does not own Hoag, since no money changed hands and their assets were not commingled. But Providence is able to keep Hoag from walking away because it has a majority on the governing body that was set up to oversee the original affiliation with St. Joseph.
Hoag executives also express frustration at what they describe as efforts by Providence to interfere with their financial, labor and supply decisions.
Providence, in turn, worries that “if Hoag disaffiliates with Providence, it has the potential to impact our credit rating,” Wexler said.
Despite its insistence on the value of the affiliation, Providence officials are said to be willing to end the affiliation in exchange for payment of an undisclosed amount that Hoag considers unwarranted. Wexler and Hoag executives declined to comment on their discussions. A trial start date has not been set, but on April 26 the court will hear a motion from Hoag to expedite it.
While its financial fortitude distinguishes it from many other community hospitals tied to larger partners, Hoag’s experience with Providence is hardly uncommon amid widespread consolidation in the hospital industry and the growing influence of Catholic health care in the U.S.
“The bigger your parent organization becomes, the smaller your voice is within the system, and that’s part of what Hoag has been complaining about,” said Lois Uttley, director of the women’s health program at Community Catalyst, a Boston-based patient advocacy group that monitors hospital mergers.
“Compounding the problem is the fact that the system in this case is Catholic-run, because then, in addition to having an out-of-town system headquarters calling the shots, you also have to contend with governance from Catholic bishops,” Uttley said. “So you have two bosses, in a sense.”
Hoag is not the only hospital seeking to flee this dynamic. Last year, for example, Virginia Mason Memorial hospital in Yakima, Washington, said it would separate from its parent, Seattle-based Virginia Mason Health System, to avoid a pending merger with CHI Franciscan, part of the Catholic hospital giant CommonSpirit Health.
Mergers and acquisitions have led to the increasing dominance of mega hospital chains in U.S. health care over the past several years. From 2013 to 2018, the revenue of the 10 largest health systems grew 82%, compared with 45% for all other hospital groups, according to a recent study by Deloitte, the consulting and auditing firm.
Researchers expect the trend to accelerate as large health systems swallow smaller facilities economically weakened by the pandemic, and a growing trend toward outpatient care reduces demand for hospital beds.
Four of the 10 largest U.S. hospital systems are Catholic, including Chicago-based CommonSpirit Health, St. Louis-based Ascension, Livonia, Michigan-based Trinity Health and Providence. A study by Community Catalyst found that 1 in 6 acute care hospital beds are in Catholic facilities, and that 52 hospitals operating under Catholic restrictions were the sole acute care facilities in their regions last year, up from 30 in 2013.
“We need to make this a national conversation,” said Dr. Jeffrey Illeck, a Hoag OB-GYN.
He was among a group of Hoag OB-GYNs who signed a letter to then-California Attorney General Xavier Becerra in October, alleging that Providence frequently declined to authorize contraceptive treatments, such as intrauterine devices and tubal ligations — in breach of the conditions imposed by Becerra’s predecessor, Kamala Harris, when she approved the original affiliation with St. Joseph in 2013.
Wexler said he is confident the attorney general’s probe will provide “clarity that Providence has done nothing wrong.”
A particularly bitter disagreement between the two sides concerns a rupture last year within St. Joseph Heritage Healthcare, a physician group belonging to Providence that included both St. Joseph and Hoag doctors. In November, the group notified thousands of patients that their Hoag specialists were no longer part of the network and that they needed to choose new doctors.
Wexler said that was the inevitable result of a decision by the Hoag physicians to negotiate separate HMO contracts, an assertion Braithwaite contested. The move disrupted patient care just as the winter covid surge was gaining momentum, he said.
Perhaps the biggest frustration for most Hoag administrators and physicians is Providence’s desire to standardize care across all 51 hospitals through their shared Epic electronic records system.
Hoag doctors say Providence controls the contents of the Epic system and that the care protocols in it, often driven by cost considerations, frequently collide with their own clinical decisions. Any changes must be debated among all the hospitals in the system and adopted by consensus — a laborious undertaking.
Dr. Richard Haskell, a cardiologist at Hoag, recalled a dispute over intravenous Tylenol, which Hoag’s orthopedists prefer because they say it works well and furthered a concerted effort to reduce opioid addiction. Providence took IV Tylenol off its list of accepted drugs, and the Hoag orthopedists “were very upset,” Haskell said.
They eventually got it back on that list, but with the condition that they could order it only one dose at a time. That meant nurses had to call the doctor every four hours for a new order. “Doctors probably felt, ‘Screw it, I don’t want to get woken up every four hours,’ so they probably just gave them narcotics,’” Haskell said.
He said that before agreeing to adopt Providence’s Epic system, Hoag had received written assurances it could make changes that included its preferred treatment choices for various conditions. But it quickly became clear that was not going to happen, he said.
“We couldn’t make any changes at all, so we were stuck with their system,” Haskell said. “I don’t want to be in a system bogged down by bureaucracy that requires 51 hospitals to vote on it.”
Wexler said Hoag understood exactly what it had signed up for. “They knew full well that there would be a collaborative approach across all of Providence, including Hoag, to make decisions on what standardizations would happen across the entire system,” he said. “It is not easy if one hospital wants to create its own specific pathway.”
Despite Hoag’s concerns about lesser standards of care, Braithwaite could not cite an example of an adverse outcome that had resulted from it. And Hoag’s strong reputation seems untarnished, as reflected in the high rankings and awards it continues to garner — and tout on its website.
Still, the affiliation’s days seem numbered. Hoag is no longer on the Providence website or in its marketing materials, and in many cases — such as the St. Joseph Heritage schism — the two groups are already going their separate ways.
“They are certainly acting like we are competitors, and I assume that means they know the disaffiliation is imminent,” Braithwaite said.
Wexler, while reiterating that Providence wants to maintain the current arrangement, was nonetheless able to imagine a different outcome: “What we would do post-affiliation,” he said, “is to continue to look for opportunities to collaborate.”
Cancer Treatment Centers of America is selling its hospital in Philadelphia and will lay off the facility’s 365 employees, according to a closure notice filed with the state.
Boca Raton, Fla.-based Cancer Treatment Centers of America signed an agreement in March to sell the hospital to Philadelphia-based Temple University Hospital. The deal requires approval from the Pennsylvania Department of Health.
In the notice filed with the state, Cancer Treatment Centers of America said some displaced Philadelphia workers may be offered jobs at affiliated entities outside of Pennsylvania, according to the Philadelphia Business Journal. The company’s other hospitals are in Chicago, Atlanta, Phoenix and Tulsa, Okla. In March, the company announced it will close its hospital in Tulsa June 1.
Cancer Treatment Centers of America said it anticipates the layoffs in Philadelphia will begin after May 30, according to the Philadelphia Business Journal.
Temple Health CEO Michael Young told the Philadelphia Business Journal that the system wants to hire as many CTCA workers as possible if the deal is finalized.
In our work over the years advising health systems on M&A, we’ve been struck by how often “social issues” cause deals that are otherwise strategically sound to go off the rails.
Of course, it’s an old chestnut that “culture eats strategy for breakfast”, but what’s been notable, especially recently, is how early in the process hot-button governance and leadership issues enter the discussions.
Where is the headquarters going to be? Who’s going to be the CEO of the combined entity? And most vexingly, how many board seats is each organization going to get? That last issue is particularly troublesome, as it’s often where negotiations get bogged down. But as one health system board member recently pointed out to us, getting hung up on whether board seats are split 7-6 or 8-5 is just silly—in her words, “If you’re in a position where board decisions turn on that close of a margin, you’ve got much bigger strategic problems.”
It’s an excellent point. While boards shouldn’t just rubber stamp decisions made by management, it’s incumbent on the CEO and senior leaders to enfranchise and collaborate with the board in setting strategy, and critical decisions should rarely, if ever, come down to razor-thin vote tallies.
If a merger makes sense on its merits, and the strategic vision for the combined organization is clear, quibbling over how many seats each legacy system “gets” seems foolish. No board should go into a merger anticipating a future in which small majorities determine the outcome of big decisions.
Doctors and health systems with a significant portion of risk-based contracts weathered the pandemic better than their peers still fully tethered to fee-for-service payment. Lower healthcare utilization translated into record profits, just as it did for insurers.
We’re now seeing an increasing number of health systems asking again whether they should enter the health plan business—levels of interest we haven’t seen since the “rush to risk” in the immediate aftermath of the passage of the Affordable Care Act a decade ago.
The discussions feel appreciably different this time around (which is a good thing, since many systems who launched plans in the prior wave had trouble growing and sustaining them). First, systems are approaching the market this time with a focus on Medicare Advantage, having seen that growing a base of covered lives with their networks is much easier than starting with the commercial market, where large insurers, particularly incumbent Blues plans, dominate the market, and many employers are still reticent to limit choice.
But foremost, there is new appreciation for the scale needed for a health plan to compete. In 2010, many executives set a goal of 100K covered lives as a target for sustainability; today, a plan with three times that number is considered small. Now many leaders posit that regional insurers need a plan to get to half a million lives, or more. (Somehow this doesn’t seem to hold for insurance startups: see the recent public offerings of Clover Health and Alignment Health, who have just 57K and 82K lives, respectively, nationwide.)
We’re watching for a coming wave of health system consolidation to gain the financial footing and geographic footprint needed to compete in the Medicare Advantage market, and would expect traditional payers to respond with regional consolidation of their own.
- Virtual care company Doctor on Demand and clinical navigator Grand Rounds have announced plans to merge, creating a multibillion-dollar digital health firm.
- The goal of combining the two venture-backed companies, which will continue to operate under their existing brands for the time being, is to integrate medical and behavioral healthcare with patient navigation and advocacy to try to better coordinate care in the fragmented U.S. medical system.
- Financial terms of the deal, which is expected to close in the first half of this year, were not disclosed, but it is an all-stock deal with no capital from outside investors, company spokespeople told Healthcare Dive.
The digital health boom stemming from the coronavirus pandemic resulted in a flurry of high-profile deals last year, including the biggest U.S. digital health acquisition of all time: Teladoc Health’s $18.5 billion buy of chronic care management company Livongo. Such tie-ups in the virtual care space come as a slew of growing companies race to build out end-to-end offerings, making them more attractive to potential payer and employer clients and helping them snap up valuable market share.
Ten-year-old Grand Rounds peddles a clinical navigation platform and patient advocacy tools to businesses to help their workers navigate the complex and disjointed healthcare system, while nine-year-old Doctor on Demand is one of the major virtual care providers in the U.S.
Merging is meant to ameliorate the problem of uncoordinated care while accelerating telehealth utilization in previously niche areas like primary care, specialty care, behavioral health and chronic condition management, the two companies said in a Tuesday release.
Grand Rounds and Doctor on Demand first started discussing a potential deal in the early days of the coronavirus pandemic, as both companies saw surging demand for their offerings. COVID-19 completely overhauled how healthcare is delivered as consumers sought safe digital access to doctors, resulting in massive tailwinds for digital health companies and unprecedented investor interest in the sector.
Equity funding in digital health globally hit an all-time high of $26.5 billion in 2020, according to CB Insights, with mental and women’s health services seeing particularly fast growth in investor interest.
Both companies reported strong funding rounds in the middle of last year, catapulting Grand Rounds and Doctor on Demand to enterprise valuations of $1.34 billion and $821 million respectively, according to private equity marketplace SharesPost. Doctor on Demand says its current valuation is $875 million.
The combined entity will operate in an increasingly competitive space against such market giants as Teladoc, which currently sits at a market cap of $31.3 billion, and Amwell, which went public in September last year and has a market cap of $5.1 billion.
Grand Rounds CEO Owen Tripp will serve as CEO of the combined business, while Doctor on Demand’s current CEO Hill Ferguson will continue to lead the Doctor on Demand business as the two companies integrate and will join the combined company’s board.
|When Jeff Goldsmith and Ian Morrison talk, people listen (apologies to E.F. Hutton…Goldsmith and Morrison are old enough to get that reference, anyway). These two lions of health policy and strategy came together recently to pen an editorial in Health Affairs examining the impact of large integrated health systems on the nation’s response to COVID-19. |
Morrison and Goldsmith admit to often finding themselves on opposite sides of consolidation issue, but looking back over the past year, both agree the scale systems have built over decades has been foundational to their effective and rapid response to the pandemic, which they rate as “better than just about any other element of our society”.
Larger health systems were able to mobilize the resources to secure protective gear as supplies dwindled. They responded at a speed many would have thought impossible, doubling ICU capacity in a matter of days, and shifting care to telemedicine, implementing their five-year digital strategies during the last two weeks of March.
This kind of innovation would have been impossible without the investments in IT and electronic records enabled by scale—but systems also exhibited an impressive degree of “systemness”, making important decisions quickly, and mobilizing across regional footprints. Given the financial stresses experienced by smaller providers, consolidation is sure to increase. And the Biden healthcare team will likely bring more scrutiny to health system mergers.
Morrison and Goldsmith urge regulators to reconsider the role of health systems. The government should continue to pursue truly anticompetitive behavior that raises employer and consumer prices. But lawmakers should focus less on the sheer size of health systems and rather on their behavior, considering the potential societal impact a combined system might deliver—and creating policy that takes into account the role health systems have played in bolstering our public health infrastructure.
Many physician practices weathered 2020 better than they would have predicted last spring. We had anticipated many doctors would look to health systems or payers for support, but the Paycheck Protection Program (PPP) loans kept practices going until patient volume returned. But as they now see an end to the pandemic, many doctors are experiencing a new round of uncertainty about the future. Post-pandemic fatigue, coupled with a long-anticipated wave of retiring Baby Boomer partners, is leading many more independent practices to consider their options. And layered on top of this, private equity investors are injecting a ton of money into the physician market, extending offers that leave some doctors feeling, according to one doctor we spoke with, that “you’d have to be an idiot to say no to a deal this good”.
2021 is already shaping up to be a record year for physician practice deals. But some of our recent conversations made us wonder if we had time-traveled back to the early 2000s, when hospital-physician partnerships were dominated by bespoke financial arrangements aimed at securing call coverage and referrals. Some health system leaders are flustered by specialist practices wanting a quick response to an investor proposal. Hospitals worry the joint ventures or co-management agreements that seemed to work well for years may not be enough, and wonder if they should begin recruiting new doctors or courting competitors, “just in case” current partners might jump ship for a better deal.
In contrast to other areas of strategy, where a ten-year vision can guide today’s decisions, it has always been hard for health systems to take the long view with physician partnerships.
When most “strategies” are really just responses to the fires of the day, health systems run the risk of relationships devolving to mere economic terms. Health systems may find themselves once again with a messy patchwork of doctors aligned by contractual relationships, rather than a tight network of physician partners who can work together to move care forward.
Jefferson’s hospital network will grow to 18 locations with Einstein’s three general acute care hospitals and an inpatient rehabilitation hospital.
The merger between Pennsylvania-based Jefferson Health and Einstein Healthcare Network can now close after the Federal Trade Commission voted to withdraw its opposition to the deal, Jefferson Health announced this week.
The deal is now expected to be finalized within the next six months.
Earlier this year, the FTC voted 4-0 to voluntarily dismiss its appeal to the Third Circuit of the district court, according to the commission’s case summary.
Once the deal is complete, Jefferson’s network of hospitals will grow to 18 with the addition of Einstein’s three general acute care hospitals and an inpatient rehabilitation hospital.
WHY IT MATTERS
Merger plans were first announced in 2018 in a deal estimated to be worth $599 million.
The FTC initially blocked the merger because it believed it would reduce competition in the Philadelphia and Montgomery counties.
It alleged the deal would give the two health systems control of at least 60% of the inpatient general acute care hospital services market in North Philadelphia, at least 45% of that market in Montgomery County, and at least 70% of the inpatient acute rehabilitation services market in the Philadelphia area.
But late last year, a federal judge blocked the FTC’s attempt to stop the merger. Judge Gerald Pappert of the U.S. District Court for the Eastern District of Pennsylvania wrote that the FTC failed to demonstrate that there’s a credible threat of harm to competition. He pointed to other competitors in the region, such as Penn Medicine, Temple Health and Trinity Health Mid-Atlantic.
The FTC and the Commonwealth of Pennsylvania attempted to appeal the court’s decision, but after Jefferson and Einstein filed a motion to withdraw the case, the commission unanimously voted to drop its appeal.
THE LARGER TREND
The FTC is taking a closer look at healthcare mergers and acquisitions to better understand how physician practice and healthcare facility mergers affect competition. Earlier this year, it sent orders to Aetna, Anthem, Florida Blue, Cigna, Health Care Service Corporation and United Healthcare to share patient-level claims data for inpatient, outpatient and physician services across 15 states from 2015 through 2020.
Although M&A activity was down in 2020 due to the COVID-19 pandemic, Kaufman Hall called the 79 transactions that did take place “remarkable” for falling within the range of the 92 deals from the year before.
The analysts expect activity to ramp up moving forward, however. They predict that as health systems evaluate their business strategies post-pandemic, those in strong positions will take advantage of other systems’ divestitures to grow their capabilities and expand into new markets.
ON THE RECORD
“We are excited to have Einstein and Jefferson come together, as our shared vision will enable us to improve the lives of patients, the health of our communities and enhance our health education and research capabilities,” said Ken Levitan, the interim president and CEO of Einstein Healthcare Network.
“By bringing our resources together, we can offer those we care for – particularly the historically underserved populations in Philadelphia and Montgomery County – even greater access to high-quality care.”