On Tuesday, Milwaukee, WI-based Froedtert Health and Neenah, WI-based ThedaCare shared they have signed a letter of intent to form a $5B, 18-hospital system.
The merger would unite Froedtert’s southeast Wisconsin service area with ThedaCare’s northeast and central Wisconsin footprint, linking tertiary care patients in ThedaCare’s high-growth service areas in the Fox Valley to Froedtert’s Medical College of Wisconsin in Milwaukee. As the systems serve non-overlapping markets, the merger is not expected to receive challenge from federal regulators.
The Gist: These two systems have partnered previously, striking a joint venture last fall to build two health campuses with micro-hospitals, which likely served as the operational test case for merger plans already in the works.
The pace of consolidation has quickened in the Badger State, with Gundersen Health System and Bellin Health completing a merger last fall to form an 11-hospital system.
While interstate mega-mergers have defined recent health system M&A trends, these types of regional mergers, which bring together systems in adjacent but non-overlapping markets, could serve to bolster the combined system’s value proposition as a partner to employers and other healthcare entities in the state and beyond.
Published in the April edition of Health Affairs Forefront, this piece unpacks why payers and other corporations have replaced health systems as the top bidders for primary care practices, driving up practice purchase prices from hundreds of dollars to tens of thousands of dollars per patient. While corporate players like UnitedHealth Group, Amazon, and Walgreens have spent an estimated $50B on primary care, it pales in comparison to the potential “$1T opportunity” in value-based care projected by McKinsey and Company.
The authors argue that this tantalizing opportunity exists because the Centers for Medicare and Medicaid Services (CMS) invited corporations to “re-insure” Medicare through capitated arrangements in Medicare Advantage (MA) and its Direct Contracting program.
While CMS intended to promote risk and value-based incentives to improve care quality and costs, the incentive structures baked into these programs have afforded payers record profits, despite neither improving patient outcomes nor reducing government healthcare spending.
The Gist: While the critiques of MA reimbursement structures in this piece are familiar, they are woven together into a convincing rebuke of the “unintended consequences” of CMS’s value-based care policy.
Through poorly designing incentives, CMS paved a runway for corporate America to capture the lion’s share of the financial returns of value-based care, paying prices for primary care that health systems can’t match.
Meanwhile, despite skyrocketing valuations for primary care practices, primary care services remain underfunded and inadequately reimbursed, pushing primary care groups closer to payers with excess profits to invest.
Jaime King On Consolidation and Competition — The Trials and Triumphs of Health Care Antitrust Law New England Journal of Medicine March 18, 2023; 388:1057-1060 DOI: 10.1056/NEJMp2201629
“Over the past 30 years, health care consolidation has gone largely unchecked by federal and state antitrust enforcers, which has resulted in higher prices, stagnant quality of care, and limited access to care for patients. Similarly, consolidation has contributed to the availability of fewer employment options, limited wage growth, longer hours, and staff shortages for health care providers.
Antitrust law is designed to prevent such harms, but its failure to evolve alongside the health care industry has led to pervasive consolidation, which now necessitates regulation in some markets to address market-power abuses that competitive forces can no longer govern…
Although mergers are often justified with promises of improved quality or patient access, evidence supporting these claims is lacking.
Clinical integration as envisioned in accountable care organizations, for example, requires substantial oversight, training, and investment that goes well beyond the financial integration involved in most mergers. Most studies have found either no changes or a reduction in quality after provider mergers. Consolidation can also limit access to care; post-merger facility closures, reductions in charity care, and elimination of abortion and other reproductive health services have often occurred.
Consolidation among insurers also affects health care prices and quality. Insurers with market power can increase premiums above competitive levels by exercising monopoly power or can push provider payments below competitive levels by exercising monopsony power. Lower premiums are commonly found in areas with more insurers, whereas in the absence of competition, insurers that obtain price concessions from providers may not pass savings on to consumers.4 Some evidence suggests, however, that moderate amounts of insurer consolidation may be associated with improved patient experience, since providers in such markets have an incentive to compete on quality.
Given the health care industry’s growing complexity, future oversight could involve a combination of more responsive antitrust enforcement and creative regulatory interventions. Combining competitive and regulatory forces may offer the only hope for controlling health care prices, restoring high-quality care, protecting health care workers, and preserving and expanding access to care.”
Large, not-for-profit hospitals/health systems are getting a disproportionate share of unflattering attention these days. Last week was no exception: Here’s a smattering of their coverage:
Jiang et al “Factors Associated with Hospital Commercial Negotiated Price for Magnetic Resonance Imaging of Brain” JAMA Network Open March 21. 2023;6(3):e233875. doi:10.1001/jamanetworkopen.2023.3875
Whaley et al What’s Behind Losses At Large Nonprofit Health Systems? Health Affairs March 24, 2023 10.1377/forefront.20230322.44474
A Pa. hospital’s revoked property tax exemption is a ‘warning shot’ to other nonprofits, expert says KYW Radio Philadelphia March 24, 2023 ww.msn.com/en-us/news/us/a-pa-hospital-s-revoked-property-tax-exemption-is-a-warning-shot-to-other-nonprofits-expert-says
These come on the heals of the Medicare Advisory Commission’s (MedPAC) March 2023 Report to Congress advising that all but safety-net hospitals are in reasonably good shape financially (contrary to industry assertions) and increased lawmaker scrutiny of “ill-gotten gains” in healthcare i.e., Moderna’s vaccine windfall, Medicare Advantage overpayments and employer activism about hospital price-gauging in several states.
Like every sector in healthcare, hospitals enter budget battles with good stories to tell about cost-reductions and progress in price transparency compliance. But in the current political and economic environment, large, not-for-profit hospitals and health systems seem to be targets of more adverse coverage than others as illustrated above. Like many NFP institutions in society (higher education, organized religion, government), erosion of trust is palpable. Not-for-profit hospitals and health systems are no exception.
The themes emerging from last week’s coverage are familiar:
‘Not-for-profit hospitals/health systems, do not provide value commensurate with the tax exemptions they get.’
‘Not for profit hospitals & health systems take advantage of their markets and regulations to create strong brands and generate big profits.’.
‘Not for profit hospitals & health systems charge more than investor-owned hospitals: the victims are employers and consumers who pay higher-than-necessary prices for their services.’
‘NFP operators invest in risky ventures: when the capital market slumps, they are ill-prepared to manage. Risky investments, not workforce and supply chain issues, are the root causes of NFP financial stress. They’re misleading the public purposely.’
‘Executives in NFP systems are overpaid and patient collection policies are more aggressive than for-profits. NFP boards are ineffective.’
The stimulants for this negative attention are equally familiar:
Proprietary studies by think tanks, trade associations, labor unions and consultancies designed to “prove a point” for/against not-for-profit hospitals/health systems.
Government reports about hospital spending, waste, fraud, workforce issues, patient safety, concentration and compliance with transparency rules.
Aggressive national/local reporting by journalists inclined to discount NFP messaging.
Public opinion polls about declining trust in the system and growing concern about price transparency, affordability and equitable access.
Politicians who use soundbites and dog whistles about NFP hospitals to draw attention to themselves.
The cumulative effect of these is confusion, frustration and distrust of not-for-profit hospitals and health systems. Most believe not-for-profit hospitals/health systems do not own the moral high ground they affirm to regulators and their communities (though religiously-affiliated systems have an edge). Most are unaware that more than half of all hospitals (54%) are not-for-profit and distinctions between safety net, rural, DSH, teaching and other forms of NFP ownership are non-specific to their performance.
What’s clear to the majority is that hospitals are expensive and essential. They’re soft targets representing 31.1% of the health system’s total spend ($4.3 trillion in 2021) increasing 4.9% annually in the last decade while inflation and GDP growth were less.
So why are not-for-profit systems bearing the brunt of hospital criticism?
Simply put: many NFP systems act more like Big Business than shepherds of community health. In fact, 4 of the top 10 multi-hospital system operators is investor owned: HCA (184), CHS (84), LifePoint (84), Tenet (65). In addition, 3 others are in the top 50: Ardent (30), UHS (26), Quorum (22). So, corporatization of hospital care using private capital and public markets for growth is firmly entrenched in the sector exposing not-for-profit operators to competition that’s better funded and more nimble. And, per industry studies, not-for-profits tend to stay in markets longer and operate unprofitable services more frequently than their investor-owned competitors. But does this matter to insurers, community leaders, legislators, employers, hospital employees and physicians? Some but not much.
My take:
There are no easy answers for not-for-profit hospitals/heath systems. The issue is about more than messaging and PR. It’s about more than Medicare reimbursement (7.5% below cost), protecting programs like 340B, keeping tax exemptions and maintaining barriers against physician-owned hospitals. The issue is NOT about operating income vs. investment income: in every business, both are essential and in each, economic cycles impact gains/losses. Each of these is important but only band-aids on an open wound in U.S. healthcare.
Near-term (the next 2 years), opportunities for not-for-profit hospitals involve administrative simplification to reduce costs and improve the efficiencies and effectiveness of the workforce. Clinical documentation using ChatGPT/Bard-like tools can have a massive positive impact—that’s just a start. Advocacy, public education and Board preparedness require bigger investments of time and resources. But that’s true for every hospital, regardless of ownership. These are table stakes to stay afloat.
The longer-term issue for NFPs is bigger:
It’s about defining the future of the U.S. health system in 2030 and beyond—the roles to be played and resources necessary for it to skate to where the puck is going. It’s about defining the role played by private employers and whether they’ll pay 220% more than Medicare pays to keep providers and insurers solvent. It’s about how underserved and unhealthy people are managed. It’s about defining systemness in healthcare and standardizing processes. It’s about defining sources of funding and optimal use of resources. Not-for-profit systems should drive these discussions in the communities they serve and at a national level.
MedPAC’s 17 member Commission will play a vital role, but equally important to this design process are inputs from employers, consumers and thought leaders who bring fresh insight. Until then, not-for-profit health systems will be soft targets for unflattering media because protecting the status quo is paramount to insiders who benefit from its dysfunction. Incrementalism defined as innovation is a recipe for failure.
It’s time to begin a discussion about the future of the U.S. health system—all of it, not just high-profile sectors like not-for-profit hospitals/health systems who are currently its soft target.
Thursday marks the 13th anniversary of the signing of the Affordable Care Act– perhaps the most consequential healthcare legislation since LBJ’s passage of the Medicare Act in 1965. Except in healthcare circles, it will probably go unnoticed.
World events in the Ukraine and China President Xi Jinping’s visit to Russia will grab more media attention. At home, the ripple effects of Silicon Valley Bank’s bankruptcy and the stability of the banking system will get coverage and former President Trump’s arrest tomorrow will produce juicy soundbites from partisans and commentators. Thus, the birthday of Affordable Care Act, will get scant attention.
That’s regrettable: it offers an important context for navigating the future of the U.S. health system. Having served as an independent facilitator between the White House and private sector interests in 2009-2010, I recall vividly the events leading to its passage and the Supreme Court challenge that affirmed it:
The costs and affordability of healthcare and growing concern about the swelling ranks of uninsured were the issues driving its origin. Both political parties and every major trade group agreed on the issues; solving them not so easy.
Effective messaging from special interests about the ACA increased awareness of the law and calcified attitudes for or against. Misinformation/disinformation about the “Patient Protection and Affordable Care Act” morphed to a national referendum on insurance coverage and the cost-effectiveness of the ACA’s solution (Medicaid expansion, subsidies and insurance marketplaces). ‘Death panels. government run healthcare and Obamacare’ labels became targets for critics: spending by special interests opposed to the law dwarfed support by 7 to 1. Differences intensified: Emotions ran high. I experienced it firsthand. While maintaining independence and concerns about the law, I received death threats nonetheless. Like religion, the ACA was off-limits to meaningful discussion (especially among the majority who hadn’t read it).
And after Scott Brown’s election to the vacant Massachusetts seat held by Ted Kennedy in January, 2010, the administration shifted its support to a more-moderate Senate Finance Committee version of the law that did not include a public option or malpractice reforms in the House version. Late-night lobbying by White House operatives resulted in a House vote in favor of the Senate version with promises ‘it’s only the start’. Through amendments, executive orders, administrative actions and appropriations, it would evolve with the support of the Obama team. It passed along party lines with the CBO offering an optimistic view it would slow health cost escalation by reducing administrative waste, implementation of comparative effectiveness research to align evidence with care, increased insurance coverage, changing incentives for hospitals and physicians and more.
The Affordable Care Act dominated media coverage from August 2009 to March 2010. In the 2010 mid-term election, it was the issue that catapulted Republicans to net gains of 7 in the Senate, 63 in the House and 6 in Governor’s offices. And since, Republicans in Congress have introduced “Repeal and Replace” legislation more than 60 times, failing each time.
Today, public opinion about the ACA has shifted modestly: from 46% FOR and 40% against in 2010 to 55% FOR and 42% against now (KFF). The national uninsured rate has dropped from 15.5% to 8.6% and Medicaid has been expanded in 39 states and DC. Lower costs, increased affordability and quality improvements owing to the ACA have had limited success.
Key elements of the ACA have not lived up to expectations i.e. the Patient Centered Outcome Research Institute, the National Quality Strategy, Title V National Healthcare Workforce Task Force, CMMI’s alternative payment models and achievement of Level 3 interoperability goals vis a vis ONCHIT, CHIME et al. So, as the 2024 political season starts, the ACA will get modest attention by aspirants for federal office because it addressed big problems with blunt instruments. Most recognize it needs to be modernized based on trends and issues relevant to healthcare in 2030 and beyond.
Trends like…
Self-diagnostics and treatment by consumers (enabled by ChatGPT et al).
Data-driven clinical decision-making.
Integration of non-allopathic methodologies.
The science of wellbeing.
Complete price, cost and error transparency.
Employer and individual insurance coverage optimization.
And others.
Issues like….
The role and social responsibility of private equity in ownership and operation of services in healthcare delivery and financing.
The regulatory framework for local hospitals vs. Regional/nation health systems, and between investor-owned and not-for-profit sponsorship.
The role and resources for guided self-care management and virtual-care.
Innovations in care delivery services to vulnerable populations using technologies and enhanced workforce models.
Modernization of regulatory environments and rules of competition for fully integrated health systems, prescription drug manufacturers, health insurers, over-the counter therapies, food as medicine, physician ownership of hospitals, data ownership, tech infomediaries that facilitate clinical decision-making, self-care, professional liability and licensing and many others.
Integration of public health and local health systems.
The allocation of capital to the highest and best uses in the health system.
The sustainability of Medicare and role of Medicare Advantage.
The regulatory framework for disruptors”.
And many others.
These trends are not-easily monitored nor are the issues clear and actionable. Most are inadequately addressed or completely missed in the ACA.
Complicating matters, the political environment today is more complicated than in 2010 when the ACA became law. The economic environment is more challenging: the pandemic, inflation and economic downturn have taken their toll. Intramural tensions in key sectors have spiked as each fights for control and autonomy i.e. primary care vs. specialty medicine, investor-owned vs. not-for-profit hospitals, retail medicine & virtual vs. office-based services, carve-outs, direct contracting et al . Consolidation has widened capabilities and resources distancing big organizations from others. Today’s media attention to healthcare is more sophisticated. Employers are more frustrated. And the public’s confidence in the health system is at an all-time low.
“ACA 2.0” is necessary to the system’s future but unlikely unless spearheaded by community and business leaders left out of the 1.0 design process. The trends and issues are new and complicated, requiring urgent forward thinking.
While hospitals, payers, and private equity firms have long been competing to acquire independent physician groups, theCOVID pandemic spurred a marked acceleration of the physician employment trend, with non-hospital corporate entities leading the charge.
The graphic above uses data released by consulting firm Avalere Health and the nonprofit Physicians Advocacy Institute to show that nearly three quarters of American physicians were employed by a larger entity as of January 2022, up from 62 percent just three years prior.
While hospitals employ a majority of those physicians, corporate entities (a group that includes payers, private equity groups, and non-provider umbrella organizations) have been increasing their physician rolls at a much faster rate.
Corporate entities employed over 40 percent more physicians in 2022 than in 2019, and in the southern part of the country—a hotspot for growth of Medicare Advantage—corporate physician employment grew by over 50 percent.
We expect the move away from private practice, accelerated by the pandemic, will only continue as physicians seek financial returns, secure a path to retirement, and look to access capital for necessary investments to help grow and manage the increasing complexities of running a practice.
In last week’s graphic, we showed how the nation’s largest health insurance companies earn annual revenues several times greater than the largest health systems. In the graphic above, we unpack the 2022 revenue of five of the largest payers, to show just how diversified they have become.
UnitedHealth Group (UHG) continues to lead the way not only as the largest US payer, but also the most vertically integrated, growing its OptumCare provider business by over 30 percent last year.
Playing catch-up, the other payers have also shown willingness to spend large sums on provider acquisitions, with CVS dropping nearly $20B on primary care company Oak Street and home health company Signify last year. UHG and Humana also recently spent over $5B each, on their own home health companies, in pursuit of lower cost settings for treating their Medicare Advantage enrollees.
In contrast, Cigna and Elevance have not been as active in the M&A space of late, prompting Cigna investors to question the CEO on whether the company may be at a competitive disadvantage. We’d expect the race to create full-stack, vertically integrated healthcare platforms, of the kind illustrated by these large payers, to gain steam across the rest of 2023 and beyond. Looming even larger than UHG, CVS Health, and the like: Amazon and Walmart, both of which are actively pursuing their own platform visions in healthcare.
On Thursday, Des Moines, IA-based UnityPoint Health and Albuquerque, NM-based Presbyterian Healthcare Services revealed they have signed a letter of intent to explore a merger. The UnityPoint and Presbyterian brands would continue to operate in their local regions, but the combined system would manage $11B in annual revenue, over 40 hospitals, and nearly 3K physicians and advanced practice clinicians.
The Gist: A UnityPoint and Presbyterian link up would seem to follow the playbook of the recently closed Advocate Aurora and Atrium merger. Mergers between large, noncontiguous health systems are currently popular as a means to achieve the benefits of scale without tripping the alarms of federal antitrust regulators.
UnityPoint has been seeking a merger partner for years; most recently its plan to combine with Sanford Health fell through in 2019. It may have found a like-minded partner in Presbyterian, as both systemshave made significant investments in risk, including establishing mature ACOs, developing their own Medicare Advantage plans, and expanding their hospital at home programs.
We’re expecting to see a number of these cross-state system mergers announced over the course of 2023, as large regional players seek combinations that allow them to scale into super-regional, or even national, delivery platforms.
The deal, first announced in March 2022, will bring LHC’s home health locations, hospice sites, and long-term acute care hospitals across 37 states into UHG’s Optum division. LHC also has over 400 joint-venture arrangements with hospitals. The acquisition received heightened scrutiny from antitrust regulators, but was ultimately allowed to proceed.
The Gist: LHC’s postacute footprint expands UHG’s Medicare Advantage value play, guaranteeing postacute capacity and providing a platform to funnel care into lower-cost settings.
UHG’s strategy is right in line with its peers: Humana fully owns home health provider Kindred at Home (now branded CenterWell Home Health), and CVS Health plans to acquire Signify Health, which provides home care services with an emphasis on risk scoring. But achieving lower cost of care will require integration of postacute referrals and care management across rapidly expanding physician networks.
We’ve updated our annual comparison of the relative size of the largest healthcare companies, with the graphic below comparing 2022 revenues to 2019 for a sense of how different companies and industry sectors weathered the pandemic.
The annual revenues of the five largest health systems in 2022 pale in comparison to the industry’s true giants—and the gap only widened over the pandemic. The largest health systems averaged just 5 percent annual growth since 2019, while the largest companies in each other healthcare subsector have grown revenues by over 10 percent annually.
Unsurprisingly, the pandemic drove Pfizer’s revenue to a record $100B in 2022—over half of that was driven by the company’s COVID vaccine and antiviral treatment, Paxlovid. Amazon’s 2022 revenue was nearly double its pre-COVID level. While very little of that growth came from healthcare, it enabled the company to fund investments like its all-cash $3.9B purchase of One Medical, which closed this week.
Even the nation’s largest health systems cannot compete with that kind of firepower, and looking beyond revenue paints an even more difficult picture. According to Kaufman Hall, although the median hospital has grown its revenue by 15 percent, it has seen expenses climb 20 percent, and lost 26 percent of margin since 2019.
HENRY KOTULA 