Hospital mergers and acquisitions are a bad deal for patients. Why aren’t they being stopped?

Contrary to what health care executives advertise, hospital mergers and acquisitions aren’t good for patients. They rarely improve access to health care or its quality, and they don’t reduce prices. But the system in place to stop them is often more bark than bite.

During 2019 and 2020, hospitals acquired an additional 3,200 medical practices and 18,600 physicians. By January 2021, almost half of all U.S. physicians were employed by a hospital or health system.

In 2018, the last year for which complete data are available, 72% of hospitals and more than 90% of hospital beds were affiliated with a health care system. Mergers and acquisitions are increasing the number of health care systems while decreasing the number of independently operated hospitals.

When hospitals buy provider practices, it leads to more unnecessary care and more expensive care, which increases overall spending. The same thing happens when hospitals merge or acquire other hospitals. These deals often increase prices and they don’t improve care quality; patients simply pay more for the same or worse care.

Mergers and acquisitions can negatively affect clinician morale as well. Some argue they lead to providers’ loss of autonomy and increase the emphasis on financial targets rather than patient care. They can also contribute to burnout and feeling unsupported.

Considerable machinery is in place at both the federal and state levels to stop “anticompetitive” mergers before they happen. But that machinery is limited by a lack of follow through.

The Federal Trade Commission (FTC) and the U.S. Department of Justice have always had broad authority over mergers. By law, one or both of these entities must review for any antitrust concerns proposed deals of a certain size before the deals are finalized. After a preliminary review, if no competition issues are identified, the merger or acquisition is allowed to proceed. This is what happens in most cases. If concerns are raised, however, the involved parties must submit additional information and undergo a second evaluation.

Some health care organizations seem willing to challenge this process. Leaders involved in a pending merger between Lifespan and Care New England in Rhode Island — which would leave 80% of the state’s inpatient market under one company’s umbrella — are preparing to move forward even if the FTC deems the deal anticompetitive. The companies will simply ask the state to approve the merger despite the FTC’s concerns.

The reality is that the FTC’s reach is limited when it comes to nonprofits, which most hospitals are. While the FTC can oppose anticompetitive mergers involving nonprofits, it cannot enforce action against them for anticompetitive behavior. So if a merger goes through, the FTC has limited authority to ensure the new entity plays fairly.

What’s more, the FTC has acknowledged it can’t keep up with its workload this year. It modified its antitrust review process to accommodate an increasing number of requests and its stagnant capacity. In July, the Biden administration issued an executive order about economic competition that explicitly acknowledges the negative impact of health care consolidation on U.S. communities. This is encouraging, signaling that the government is taking mergers seriously. Yet it’s unclear if the executive order will give the FTC more capacity, which is essential if it is to actually enforce antitrust laws.

At the state level, most of the antitrust power lies with the attorney general, who ultimately approves or challenges all mergers. Despite this authority, questionable mergers still go through.

In 2018, for example, two competing hospital systems in rural Tennessee merged to become Ballad Health and the only source of care for about 1.2 million residents. The deal was opposed by the FTC, which deemed it to be a monopoly. Despite the concerns, the state attorney general and Department of Health overrode the FTC’s ruling and approved the merger. (This is the same mechanism the Rhode Island hospitals hope to employ should the FTC oppose their merger.) As expected, Ballad Health then consolidated the services offered at its facilities and increased the fees on patient bills.

It’s clear that mechanisms exist to curb potentially harmful mergers and promote industry competition. It’s also clear they aren’t being used to the fullest extent. Unless these checks and balances lead to mergers being denied, their power over the market is limited.

Experts have been raising the alarm on health care consolidation for years. Mergers rarely lead to better care quality, access, or prices. Proposed mergers must be assessed and approved based on evidence, not industry pressure. If nothing changes, the consequences will be felt for years to come.

Health system consolidation as a “safety net”

https://mailchi.mp/26f8e4c5cc02/the-weekly-gist-july-16-2021?e=d1e747d2d8

Might health care consolidation be slowing and if so, why and what might it  mean? A perspective on where we are, how we got here and what is next. —  CASTLING PARTNERS

One of the underappreciated ways in which health systems create value in our healthcare economy, as was recently the topic of discussion with the CEO of an organization we work with, is their role as a “safety net”. We weren’t talking about safety-net providers in the traditional sense—those which serve low-income populations. Rather, we were talking about the ability of larger health systems to acquire and invest in smaller hospitals that might otherwise risk going out of business entirely due to economic pressures.

When economic shocks hit, as was recently the case with COVID, we often see firms close; think of all the restaurant and hospitality businesses forced to shut down over the past year. As the economy rebounds, new business spring up to take their places—that kind of “creative destruction” is commonplace in the larger economy. But when a hospital is forced to shut its doors, it’s a different story, one that could be potentially disastrous for the community. 

Often the most economically vulnerable hospitals are sole providers for their communities; without them, critical medical services could be much less accessible for patients. Enter multi-hospital health systems, which have often stepped in to acquire hospitals in jeopardy. 

By providing access to capital, technology, and management infrastructure, systems have probably kept hundreds of such smaller hospitals in business over the past several decades. Policy analysts are quick to criticize health systems for value destruction: leveraging scale to raise prices, and so forth.

Often valid criticism, but it would be myopic to overlook the fact that systems have also allowed many vulnerable communities to retain access to a viable local hospital. The pushback is often to posit that we simply have too many hospitals to begin with—but try telling that to patients and communities who have lost access to their local source of care.

How would “Medicare at 60” impact health system margins?

https://mailchi.mp/26f8e4c5cc02/the-weekly-gist-july-16-2021?e=d1e747d2d8

An estimate from the Partnership for America’s Healthcare Future predicts that nearly four out of five 60- to 64-year-olds would enroll in Medicare, with two-thirds transitioning from existing commercial plans, if “Medicare at 60” becomes a reality.

In the graphic above, we’ve modeled the financial impact this shift would have on a “typical” five-hospital health system, with $1B in revenue and an industry-average two percent operating margin. 

If just over half of commercially insured 60- to 64-year-olds switch to Medicare, the health system would see a $61M loss in commercial revenue.

There would be some revenue gains, especially from patients who switch from Medicaid, but the net result of the payer mix shift among the 60 to 64 population would be a loss of $30M, or three percent of annual revenue, large enough to push operating margin into the red, assuming no changes in cost structure. (Our analysis assumed a conservative estimate for commercial payment rates at 240 percent of Medicare—systems with more generous commercial payment would take a larger hit.)

Coming out of the pandemic, hospitals face rising labor costs and unpredictable volume in a more competitive marketplace. While “Medicare at 60” could provide access to lower-cost coverage for a large segment of consumers, it would force a financial reckoning for many hospitals, especially standalone hospitals and smaller systems.

Large self-insured employers lack power in hospital price negotiations

Dive Brief:

  • As some employers look to contract directly with hospitals in an effort to lower healthcare costs, researchers found that large self-insured employers likely do not have enough market power to extract lower prices, according to a study published in The American Journal of Managed Care.
  • The study examined the relationship between employer market power and hospital prices every year between 2010 and 2016 in the nation’s 10 most concentrated labor markets.
  • The study found that hospital market power far outweighs employer market power, suggesting employers will not be successful in lowering prices alone, but may want to consider forging purchase alliances with local government employee groups, the research paper said.

Dive Insight:

In recent years, some larger employers have cut out the middlemen to strike deals directly with hospitals.

For example, General Motors entered into an arrangement with Detroit’s Henry Ford Health System in 2018, joining other major employers such as Walmart, Walt Disney and Boeing.

Perhaps most notably, J.P. Morgan, Amazon and Berkshire Hathaway joined forces to bend the cost of care in the U.S. Despite all the fanfare, the venture, named Haven, later fell apart, illustrating how difficult it is to change the nation’s healthcare system.

By circumventing traditional health insurers, companies are hoping they themselves can negotiate better deals.

But this latest study throws cold water on that strategy, at least in part. “Our study suggests that almost all employers, operating alone, simply do not have the market power to impose a threat of effective negotiation,” the paper found.

One of the paper’s main aims is to measure market power of hospitals and employers, and the results are striking. The average hospital market power far exceeds that of the employer in the 10 metropolitan areas researchers examined.

The average hospital market power was more than 80 times greater than that of the employer, putting into context just how askew the power dynamics are.

These employers are not wrong for wanting to strike out on their own, the researchers point out.

Many self-insured employers bear the insurance risk while entering into administrative services only arrangements with insurers which provide just that, administrative type services.

But insurers in these arrangements may not have any incentive to lower prices. The paper pointed to another working research paper that found ASO plans pay more for the same service, at the same hospital compared to those in fully insured arrangements.

“The empirical evidence suggests that insurers, because they lack the incentive, may not be negotiating lower prices for their ASO enrollees,” according to the study.

Even though employers may not have enough market power on their own, researchers offered up a solution: team up with state or local government employee groups to increase market power to obtain lower hospital prices.

‘I only see the potential for massive financial loss’: Former Spectrum CFO doubts value of Beaumont merger

I only see the potential for massive financial loss': Former Spectrum CFO  doubts value of Beaumont merger

Michael Freed, the former CFO of Spectrum Health, said he was “stunned” when he heard that the Grand Rapids, Mich.-based system plans to pursue a merger with Southfield, Mich.-based Beaumont Health, for myriad reasons. 

In a June 24 open letter to Spectrum’s board of directors, Mr. Freed said during his tenure they discussed possible mergers routinely and that a Spectrum-Beaumont combination “brought nothing new with it” and wouldn’t enhance value. 

“The markets didn’t overlap, so there were no significant administrative savings opportunities. The ability of each hospital to grow wasn’t enhanced by adding the other to the ‘system,'” Mr. Freed wrote. “In short, I never saw how such a merger could improve health, enhance value or make care more affordable. I still don’t.”

Mr. Freed was Spectrum’s CFO from May 1995 to December 2013. During his tenure, he helped oversee the formation of Spectrum and a substantive period of growth for the Michigan system. Mr. Freed also served as CEO of Spectrum’s health plan, Priority Health, from May 2012 until he retired in January 2016.

In his letter, Mr. Freed outlined several reasons he was “stunned” by the pursuit of the merger that would create a health system with 22 hospitals, 305 outpatient centers and about $13 billion in operating revenue.

Mr. Freed wrote that the merger with Beaumont, which is based in Southfield, Mich., may not be in the best interest of West Michigan. He said the combination of the two systems raises questions about whether governance truly will remain in the region and with Spectrum, if financial transparency will continue and if Spectrum will continue to honor the consent decree it signed in 1997 establishing a set of operational guidelines. 

If the merger moves forward, “debt can be placed on the books of West Michigan while investments EARNED IN West Michigan could be spent in SE Michigan … and vice versa,” Mr. Freed wrote. “If this entity should someday merge with other out-of-state entities, West Michigan could find itself investing in healthcare in other states as well, rather than in its own health.”

Mr. Freed raised concerns over the agreement between Spectrum and Beaumont to create a 16-person board of directors, seven of whom would come from Spectrum and seven from Beaumont. The CEO would come from Spectrum, and one new board member will be appointed. 

“While this structure looks to favor Spectrum Health initially, it would only take the hiring of a board member more favorable to Beaumont Health and the replacement of the CEO (in favor of Beaumont Health) for Spectrum Health to find itself outvoted 9 to 7 on key issues,” Mr. Freed said.

Additionally, Mr. Freed noted that the merger has the potential for massive financial losses to West Michigan. In particular, Mr. Freed said losses would stem from the financial assets of Spectrum and Priority Health no longer residing in West Michigan. 

“I’ll admit, I don’t see any value in this merger,” Mr. Freed wrote. “I only see the potential for massive financial loss, both historically and an undetermined amount going forward, to the region that produced all of Spectrum Health.” 

Mr. Freed urged the Spectrum board to take a few steps before moving forward with the merger, including selling or divesting Priority Health. 

“When you sign the documents that will permanently change this region, your signature will forever hold you accountable for the repercussions,” Mr. Freed wrote. “Please sign carefully.” 

Spectrum Health told MiBiz it remains committed to the commitments in the 1997 consent agreement and that it “remains enthusiastic” about the merger.

“Spectrum Health is fully committed to fulfilling its consent decree obligations and will continue to uphold its tenets,” the health system said. “We remain confident that creating a new system not only meets our current obligations to our local communities but will also improve the health of individuals in West Michigan and throughout the state.”

Access the full letter here

Michigan systems announce intent to merge

https://mailchi.mp/bade80e9bbb7/the-weekly-gist-june-18-2021?e=d1e747d2d8

Spectrum Health & Beaumont Health to Merge, Creating New Health System for  Michigan | Moody on the Market

On Thursday, Grand Rapids-based Spectrum Health and Southfield-based Beaumont Health signed a letter of intent to merge, in a combination that would create a 22-hospital, $12B company that would become Michigan’s largest health system.

Spectrum CEO Tina Freese Decker will lead the combined company, while Beaumont CEO John Fox will assist with the merger, then depart. The proposed deal would not only create a system spanning much of Michigan, but would also allow for the expansion of Spectrum’s health plan, Priority Health, which accounted for more than $5B of the system’s $8B in revenue, into the Detroit market.

This is the third proposed merger since 2019 for Beaumont, which saw its planned combinations with Ohio-based Summa Health fall apart early in the pandemic; the system’s planned merger with Illinois-based Advocate-Aurora Health was called off in 2020 amid pushback from the system’s medical staff. Both deals fell apart due to challenges in communication and cultural compatibility—which will likely also be the greatest potential stumbling blocks for a Spectrum-Beaumont partnership.

The recently abandoned combination between NC-based Cone Health and VA-based Sentara Healthcare also appears to have fallen apart due to cultural challenges, as have many other recent health system deals. Yet despite a string of cautionary tales, health system mergers continue apace—a sign of the pressure industry players are under to seek scale in order to contend with the growing ranks of disruptive (and well-funded) competitors.

Health systems facing an uphill battle for MA lives

https://mailchi.mp/66ebbc365116/the-weekly-gist-june-11-2021?e=d1e747d2d8

Fighting an Uphill Battle? - Zeteo 3:16

A number of the regional health systems we work with have either launched or are planning to launch their own Medicare Advantage (MA) plans. The good news is the breathless enthusiasm among hospitals for getting into the insurance business that followed the advent of risk-based contracting has been tempered in recent years.

Early strategies, circa 2012-15, involved health systems rushing into the commercial group and individual markets, only to run up against fierce competition from incumbent Blues plans, and an employer sales channel characterized by complicated relationships with insurance brokers. 

Slowly, a lightbulb has gone off among system strategists that MA is where the focus should be, given demographic and enrollment trends, and the fact that MA plans can be profitable with a smaller number of lives than commercial plans. It’s also a space that rewards investments in care management, as MA enrollees tend to be “sticky”, remaining with one plan for several years, which gives population health interventions a chance to reap benefits.

But as systems “skate to where the puck is going” with Medicare risk, they’re confronting a new challenge: slow growth. Selling a Medicare insurance plan is a “kitchen-table sale”, involving individual consumer purchase decisions, rather than a “wholesale sale” to a group market purchaser. That means that consumer marketing matters more—and the large national carriers are able to deploy huge advertising budgets to drive seniors toward their offerings. 

Regional systems are often outmatched in this battle for MA lives, and we’re beginning to hear real frustration with the slow pace of growth among provider systems that have invested here. Patience will pay off, but so will scale, most likely—the bigger the system, the bigger the investment in marketing can be. (Although even large, national health systems are still dwarfed by the likes of UnitedHealthcare, CVS Health, and Humana.)

Look for the pursuit of MA lives to further accelerate the trend toward consolidation among regional health systems.

Healthcare M&A heats up in first quarter

https://mailchi.mp/66ebbc365116/the-weekly-gist-june-11-2021?e=d1e747d2d8

Judging from the level of deal activity across healthcare in the first quarter of this year, post-pandemic euphoria is truly taking hold. After a substantial, COVID-related dip across most of last year, healthcare M&A began to accelerate in the fourth quarter of 2020, and hit a new high in the first quarter of 2021—up 19 percent. While all sectors saw an uptick in deal flow, the level of activity was particularly high among physician groups, as well as in the behavioral health and “e-health” spaces.

Although hospital deal activity waned somewhat in the first quarter, the average value of deals increased: the average seller size by revenue was $676M, around 70 percent above historical year-end averages. This reflects a shift from bolt-on acquisitions by health systems looking to add isolated assets, to larger health systems seeking to combine their portfolios. Private equity continues to fuel a large portion of deal activity, especially in the behavioral health and physician group space, contributing to an 87 percent surge in the physician sector

We’d expect this flurry of M&A activity to persist—especially among physician groups and hospitals—as organizations seek financial security after a turbulent year, and as larger players look to scale their market presence and diversify revenue streams. 

One Medical buying Medicare-focused Iora in $2.1B deal

Announcing Iora | One Medical

Dive Brief:

  • Google-backed One Medical is acquiring Medicare-focused primary healthcare chain Iora Health for $2.1 billion in an all-stock trade deal, the companies announced Monday.
  • The buy will give One Medical presence in 28 markets, covering about 40% of the U.S. population and is expected to generate annual revenue at $350 million by 2025. The deal will add about $700 billion in total addressable market, according to an investor presentation.
  • Under the terms of the deal, which is expected to close in the late third quarter or fourth quarter of this year, Iora stockholders will own about 27% of the combined company. One person from Iora will join One Medical’s board and Iora co-founder and CEO Rushika Fernandopulle will become One Medical’s chief innovation officer.

Dive Insight:

The acquisition aligns two key players in part of the value-based care movement that eschews traditional payer-provider arrangements in favor of a concierge membership model. Iora’s concentration in the Medicare population and related participation in CMS’ direct contracting model could be key reasons for coming under One Medical’s sights.

Jefferies analysts said they viewed the transaction as positive, particularly considering both companies’ tech and data capabilities. “Given tech orientation and emphasis on outcomes, we expect substantial derivative value from combining data and developing better treatment programs with superior outcomes across [longitudinal] care. We see this as a clear clinical and applied advantage,” they wrote.

Both companies base their business on value-based models, which some in the industry worry have suffered during the COVID-19 pandemic as cash-strapped providers avoid the risk of models not based on fee-for-service. The Biden administration’s director at the Center for Medicare and Medicaid Innovation said recently the movement is at “a critical juncture” and that more mandatory models are likely forthcoming.

One Medical has faced challenges as of late, after a first quarter that saw losses double what was expected and a controversy over COVID-19 vaccine distribution that sparked a congressional investigation. The company, however, has forged ahead in deals, including a new partnership with Baylor Scott & White.

And on the Q1 call with investors, executives highlighted a membership increase of 31% year over year.

One Medical, founded in 2007, lead the pack of recent healthcare IPOs, going public in January 2020.

The company touts its direct-to-consumer model buts also contracts directly with employers and partners with several health systems. CFO Bjorn Thaler told Healthcare Dive at the time of the IPO its pitch to investors focused on highlighting a differentiated model.

“[W]e provide the member with a very, very valuable service. They don’t have to wait 29 days to get care. They can get care oftentimes in an instant, digitally,” he said.

Boston-based Iora, which was founded in 2011, has raised nearly $350 million over seven funding rounds, according to Crunchbase. It has contracts with major payers including UnitedHealthcare, Cigna and Humana.

The deal extends One Medical into full-risk Medicare reimbursement. Iora began the direct contracting model in April across all its markets. The program ties reimbursement to spending and quality for all Medicare fee-for-service beneficiaries across a geographic region.

About 60% of Iora’s members are in the fast-growing Medicare Advantage program, which has now reached about 40% of the Medicare population.

Iora had expected revenue this year to reach nearly $300 million and as of the first quarter had 38,000 members, compared to nearly 600,000 members at One Medical, according to the investor presentation.

One Medical stock was trending slightly down in early morning trading Monday.

Sentara, Cone Health nix merger

Norfolk, Va.-based Sentara Healthcare and Greensboro, N.C.-based Cone Health have abandoned plans to merge into an $11.5 billion system, the organizations said in a joint statement June 2. 

The health systems said they mutually agreed to end the plans late last week. Leaders said they believe their respective organizations will be better served by remaining independent. 

The two healthcare systems announced plans to combine last August. The deal would have formed an $11.5 billion system with 17 hospitals in Virginia and North Carolina.  

“Sentara Healthcare and Cone Health are high performing, well respected, community-focused organizations. Those similarities served as the basis for efforts toward an affiliation. I am confident that this mutual decision will not alter either organization’s ongoing commitment to meet the needs of our respective communities,” Howard Kern, president and CEO of Sentara, said in a prepared statement. “I have no doubt that Cone Health will remain a top tier health system and will continue to pursue new and innovative ways to provide value for North Carolinians for years to come.”

“We appreciate the efforts of Sentara to work with Cone Health to determine whether an affiliation of our two high-performing organizations is in the best interest of those we serve. Recently, in the final analysis, we mutually decided that we can best serve our communities by remaining independent organizations,” Terry Akin, CEO of Cone Health, said in the news release.