Last Monday, two lawsuits were filed that strike at a fundamental challenge facing the U.S. health system:
In the District Court of NJ, a class action lawsuit (ANN LEWANDOWSKI v THE PENSION & BENEFITS COMMITTEE OF JOHNSON AND JOHNSON) was filed against J&J alleging the company had mismanaged health benefits in violation of the Employee Retirement Income Security Act (“ERISA”). As noted in the 74-page filing “This case principally involves mismanagement of prescription-drug benefits. “Over the past several years, defendants breached their fiduciary duties and mismanaged Johnson and Johnson’s prescription-drug benefits program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth… Defendants’ mismanagement is most evident in (but not limited to) the prices it agreed to pay one of its vendors—its Pharmacy Benefits Manager (“PBM”)—for many generic drugs that are widely available at drastically lower prices.”
The issue is this: what liability risk does a self-insured employer have in providing health benefits to their employees?
Is the structure of the plan, the selection of providers and vendors, and costs and prices experienced by employees subject to litigation? What’s the role of the employer in protecting employees against unnecessary costs?
On the same day, in the District Court of Eastern Wisconsin, an 85-page class action lawsuit was filed against Advocate-Aurora Health (AAH) claiming it “uses its market power to raise prices, limit competition and harm consumers in Wisconsin:
Forces commercial health plans to include all its “overpriced facilities” in-network even when they would prefer to include only some facilities.
Goes to “extreme efforts to drive out innovative insurance products that save commercial health plans and their members money.”
Suppresses competition through “secret and restrictive contract terms that have been the subject of bipartisan criticism.”
Acquires new facilities, which then allows it to raise prices due to reduced competition
… without intervention, the health system will continue to use “anticompetitive contracting and negotiating tactics to raise prices on Wisconsin commercial health plans and their members and use those funds for aggressive acquisitions and executive compensation.”
The issue is this: is a health system’s liable when its consolidation activities result in higher prices for services provided communities and employers in communities where they operate?
Is there a direct causal relationship between a system’s consolidation activities and their prices, and how should alleged harm be measured and remedied?
Two complicated issues for two reputable mega-players in the U.S. health system. Both lawsuits were brought as class actions which guarantees widespread media attention and a protracted legal process. And each contributes directly to the gradual erosion of public trust in the health system since the plaintiffs essentially claim the business practices of J&J and Advocate-Aurora willfully harm the individuals they pledge to serve.
In the November 2023 Keckley Poll, I asked the sample of 817 U.S. adults to assess the health system overall. The results were clear:
69% think the system is fundamentally flawed and in need of major change vs. 7% who think otherwise.
60% believe it puts its profits above patient care vs. 13% who disagree.
74% think price controls are needed vs. 7% who disagree.
83% believe having health insurance that’s ‘affordable and comprehensive’ is essential to financial security vs 3% who disagree.
52% feel confident in their ability to navigate the U.S. system “when I have a problem” vs. 32% who have mixed feelings and 16% who aren’t.
And 76% think politicians avoid dealing with healthcare issues because they’re complex and politically risky vs/ 6% who think they tackle them head-on.
The poll also asked their level of trust and confidence in five major institutions “to develop a plan for the U.S. health system that maximizes what it has done well and corrects its major flaws.”
Clearly, trust and confidence in the health system is low, and expectations about solutions fall primarily on hospitals and doctors. Lawsuits like these widen suspicion that the industry’s dominated first and foremost by Big Businesses focused on their own profitability before all else. And they pose particular problems for sectors in healthcare dominated by not-for-profit and public ownership i.e. hospitals, home care, public health agencies and others.
My take
These lawsuits address two distinct issues: the roles of employers in designing their health benefits for employees including the use of PBMs, and the justification for consolidation of hospital and ancillary services in markets.
But each lawsuit s predicated on a legal theory that prices set by organizations are geared more to corporate profits than public good and justifiable costs.
Pricing is the Achilles of the health system. Pushback against price transparency by some, however justified, has amplified exposure to litigation risk like these two and contributed to the public’s loss of trust in the system.
It is unlikely greater price transparency and business practice disclosures by J&J and Advocate-Aurora could have avoided these lawsuits, but it’s clearly a message that needs consideration in every organization.
Healthcare organizations and their trade groups can no longer defend against lack of transparency by defaulting to the complexity of our supply chains and payment systems. They’re excuses. The realities of generative AI and interoperability assure information driven healthcare that’s publicly accessible and inclusive of prices, costs, outcomes and business practices. In the process, the public’s interest will heighten and lawsuits will increase.
Earlier this month, we released our year-end report on hospital and health system M&A activity in 2023. As a follow-up to that report, here are our thoughts on the five most interesting transactions announced in the past year.[1]
The creation of Risant Health and its planned acquisition of Geisinger Health. This was the transaction that created the most buzz in 2023, promising the formation of a platform—supported by Kaiser Permanente—dedicated to the advancement of value-based care. Risant Health will be created by the Kaiser Foundation Hospitals and will acquire Geisinger as its first member. It will seek to add additional systems to the platform once the acquisition of Geisinger has been finalized.
Novant Health’s acquisition of three hospitals from Tenet Healthcare. This transaction represented several of the 2023 M&A trends highlighted in our year-end report. It offers an example of for-profit health system portfolio realignment: Tenet announced that the proceeds of the sale—a pre-tax book gain of approximately $1.6 billion—will be used primarily for debt retirement. It also offers an example of regional market development, as Novant continues to expand its network in North and South Carolina. And with a valuation of the deal at 16 times adjusted EBITDA—based on the $2.4 billion sale price and $150 million adjusted EBITDA reported in the press release—this transaction reflects the value of investing in high-growth markets: in this case, coastal South Carolina.
Henry Ford Health System’s joint venture with Ascension. Offering another example of regional market development, this transaction, when finalized, would also provide an example of how secular and faith-based organizations can work together in partnership. The press release announcing the transaction noted that both organizations “are committed to working to maintain the Catholic identity of the Ascension Michigan facilities included in the transaction.”
The combination of BJC Health System and Saint Luke’s Health System. This transaction, announced in May 2023, closed on January 1, 2024, and provides an example of the cross-market transactions that have emerged as a significant trend in hospital and health system M&A. Also—given the relatively close geographic alignment of the two systems—it provides another example of regional market development. It is the largest of the regional development transactions called out in our year-end report: others included the Novant/Tenet transaction described above, as well as the combination of Froedtert Health and ThedaCare in eastern Wisconsin and Vandalia Health’s development of a statewide network in West Virginia.[2]
Centura Health’s acquisition of Steward Health’s Utah care sites. In another example of a for-profit system divesting its interest in a geographic market, Steward Health announced the sale of its Utah care sites—including five hospitals and more than 35 medical group clinics—to Centura Health, which is part of CommonSpirit Health. CommonSpirit will own the assets, which will be managed by Centura Health. For Centura, the transaction offers an opportunity to enter the growing Utah market, which has demographics similar to its home base in Colorado.
We are early in the year, but 2024 has started with a bang: the announced acquisition of Summa Health, based in Akron, Ohio, by General Catalyst’s Healthcare Assurance Transformation Corporation (HATCo).[3]The acquisition, when completed, would launch HATCo on its path to fulfill one of the three goals set forth during the October 2023 announcement of its formation: “acquiring and operating a health system for the long term where we can demonstrate the blueprint of [healthcare] transformation for the rest of the industry.”
The lawsuit filed in federal court seeks to represent thousands of other UPMC employees.
Dive Brief:
A nurse is suing the University of Pittsburgh Medical Center for allegedly leveraging its monopoly control over the employment market in Pennsylvania to keep wages down and prevent workers from leaving for competitors, all while increasing their workload.
The lawsuit, filed late last week in a federal court, seeks class action status to represent other staff at the nonprofit health system. Plaintiff Victoria Ross, who worked as a nurse at UPMC Hamot in Erie, Pennsylvania, seeks damages and is asking the judge to enjoin UPMC from continuing its unfair business practices.
If granted class action status, the lawsuit could represent thousands of current and former UPMC workers, including registered nurses, medical assistants and orderlies. UPMC has denied the allegations in statements to other outlets but did not respond to a request for comment by time of publication.
Dive Insight:
UPMC has grown steadily over the past few decades into the largest private employer in Pennsylvania, employing 95,000 workers overall.
From 1996 to 2018, the system acquired 28 competing healthcare providers, greatly expanding its market power, according to the lawsuit. The acquisitions also shrunk the availability of healthcare services. Over the same period, UPMC closed four hospitals and downsized operations in three other facilities, eliminating 1,800 full- and part-time jobs, the lawsuit said.
UPMC relied on “draconian” mobility restrictions and labor law violations to lock employees into lower pay and subcompetitive working conditions, according to the 44-page complaint.
Specifically, the system enacted restraints like noncompete clauses and “do-not-rehire blacklists” to stop workers from leaving. Meanwhile, UPMC allegedly suppressed workers’ labor law rights to prevent them from unionizing.
“Each of these restraints alone is anticompetitive, but combined, their effects are magnified.UPMC wielded these restraints together as a systemic strategy to suppress worker bargaining power and wages,” the lawsuit said. “As a result, UPMC’s skilled healthcare workers were required to do more while earning less — while they were also subjected to increasingly unfair and coercive workplace conditions.”
According to the complaint, UPMC has faced 133 unfair labor practice charges since 2012, and 159 separate allegations. Roughly 74% of the violations were related to workers’ efforts to unionize, the lawsuit said.
Meanwhile, UPMC workers’ wages have fallen at a rate of 30 to 57 cents per hour on average compared to other hospital workers for every 10% increase in UPMC’s market share, said the lawsuit, citing a consultant’s economic analysis.
The lawsuit also noted that UPMC’s staffing ratios have been decreasing, even as staffing ratios on average have increased at other Pennsylvania hospitals.
The alleged labor abuses and UPMC’s market power are linked, according to the complaint.
“Had UPMC been subject to competitive market forces, it would have had to raise wages to attract more workers and provide higher staffing levels in order to avoid degrading the care it provided to its patients, and in order to prevent losing patients to competitors who could provide better quality care,” the lawsuit said.
UPMC is facing similar labor allegations. In May, two unions filed a complaint asking the Department of Justice to investigate labor abuses at the nonprofit.
Hospitals were plagued by staffing shortages during the COVID-19 pandemic. Many facilities still bemoan the difficulty of hiring and retaining full-time workers, and point to shortages (of nurses in particular) as the reason for overworked employees and poor staffing ratios.
Yet some studies suggest that’s not the case. One recent analysis of Bureau of Labor Statistics data found employment in hospitals — including registered nurses — is now slightly higher than it was at the start of the pandemic.
Despite the controversy, UPMC — which now operates 40 hospitals with annual revenue of $26 billion — continues to try and expand its market share. Late last year, the system signed a definitive agreement to acquire Washington Health Care Services, a Pennsylvania system with more than 2,000 employees and two hospitals. The deal faces pushback from local unions.
Private equity (PE) acquisitions in healthcare have exploded in the past decade. The number of private equity buyouts of physician practices increased six-fold from 2012-2021. At least 386 hospitals are now owned by private equity firms, comprising 30% of for-profit hospitals in the U.S.
Emerging evidence shows that the influence of private equity in healthcare demands attention. Here’s what’s in the latest research.
What is private equity?
There are a few key characteristics that differentiate private equity firms from other for-profit companies. At a 2023 event hosted by the NIHCM Foundation, Assistant Professor of Health Care Management at The Wharton School at the University of Pennsylvania Dr. Atul Gupta explained these factors:
Financial engineering. PE firms primarily use debt to finance acquisitions (that’s why they’re often known as “leveraged buyouts”). But unlike in other acquisitions, this debt is placed on the balance sheet of the the target company (ie. the physician practice or hospital).
Short-term goals. PE firms make the majority of their profits when they sell, and they look to exit within 5-8 years. That means they generally look for ways to cut costs quickly, like reducing staff or selling real estate.
Moral hazard. PE companies can make a big profit even if their target firm goes bankrupt. This is different from most investments where the success of the investor depends on how well the target company does.
The nature of private equity itself has serious implications for healthcare, in which the health of communities depends on the long-term sustainability and quality improvement of hospitals and physician practices. But are these concerns borne out in the real world?
PE acquisition and adverse events
A recent study in JAMA from researchers at Harvard Medical School and the University of Chicago analyzed patient mortality and the prevalence of adverse events at hospitals acquired by private equity compared to non-acquired hospitals. The study used Medicare claims from more than 4 million hospitalizations from 2009-2019, comparing claims at 51 PE-acquired hospitals and 249 non-acquired hospitals to serve as controls.
In-hospital mortality decreased slightly at PE-acquired hospitals compared to controls, but not 30-day mortality. This may be because the patient mix at PE-acquired hospitals shifted more toward a lower-risk group, and transfers to other acute care hospitals increased.
However, there were concerning results for patient safety. The rate of adverse events at PE-acquired hospitals compared to control hospitals increased by 25%, including a 27% increase in falls, 38% increase in central line-associated bloodstream infections (CLABSI), and double the rate of surgical site infections. The authors found the rates of CLABSI and surgical site infections at PE-acquired hospitals alarming because overall surgical volume and central line placements actually decreased.
What could be behind these higher rates of adverse events after PE acquisition? In a Washington Post op-ed, Dr. Ashish Jha, dean of the School of Public Health at Brown University, writes that it’s down to two things: staffing levels and adherence to patient safety protocols. “Both cost money, and it is not a stretch to connect cuts in staffing and a reduced focus on patient safety with an increased risk of harm for patients,” he writes.
Social responsibility impact
Private equity acquisitions may have a negative effect on patient safety, but what about social responsibility? In a recent report from PE Stakeholder on the impact of Apollo Global Management’s reach into healthcare, the authors use the Lown Institute Hospitals Index to understand hospitals owned by Apollo perform on social responsibility. Lifepoint Health, a health system owned by Apollo, was ranked 222 out of 296 systems on social responsibility nationwide. And in Virginia, North Carolina, and Arizona, some of the worst-ranked hospitals in the state for social responsibility are those owned by Lifepoint Health, the PE Stakeholder report shows.
Apollo Global Management is the second largest private equity firm in the United States, with $598 billion total assets under management, according to thereport. The PE stakeholder report outlines concerning practices by Apollo, including putting high levels of debt that lowers hospitals’ credit ratings and increases their interest rates, cutting staff and essential healthcare services, and selling off real estate for a quick buck. If we care about hospital social responsibility we should clearly be concerned about private equity acquisitions.
The bigger picture
Private equity buyouts did not come from out of nowhere, so what does this trend tell us about our healthcare system? PE acquisitions are in many ways a symptom of larger issues in healthcare, such as increasing administrative burden, tight margins, and lack of regulation on consolidation. For owners of private physician practices that face a lot of administrative work, deciding to sell to a PE firm to reduce this workload and focus on patient care (not to mention, getting a hefty payout) is a tempting proposal.
In the Washington Post, Ashish Jha describes what made his colleague decide to sell his practice to a PE firm: “The price he was getting was very good, and he was happy to outsource the headache of running the business (managing billing, making sure there was adequate coverage for nights and weekends, etc.).”
“In many ways, private equity is both a response to and an accelerator of broader health system trends – one in which consolidation is happening quickly, care is being delivered by larger and larger entities, and corporate influence is growing.”Jane M. Zhu, MD, MPP, MSHP, Associate Professor of Medicine at Oregon Health & Science University, at NIHCM Foundation Event
PE buyouts are also indicative of a larger trend, what some researchers call the “financialization” of health. As Dr. Joseph Bruch at the University of Chicago and colleagues describe in the New England Journal of Medicine, financialization refers to the “transformation of public, private, and corporate health care entities into salable and tradable assets from which the financial sector may accumulate capital.”
Financialization is a sort of merging of the financial and healthcare sectors; not only are financial actors like private equity buying up healthcare providers, but healthcare institutions are also acting like financial firms. For example, 22 health systems have investment arms, including nonprofit system Ascension, which has its own private equity operation worth $1 billion. The financialization of healthcare is also reflected in the boards of nonprofit hospitals. A 2023 study of US News top-ranked hospitals found that a plurality of their board members (44%) were from the financial sector.
What we can do about it?
What can we do to mitigate harms caused by PE acquisitions? In Health Affairs Forefront, executive director of Community Catalyst Emily Stewart and executive director of the Private Equity Stakeholder Project Jim Baker provide some policy ideas to stop the “metastasizing disease” of private equity:
Joint Liability. Currently PE firms can put all of their debt on the balance sheet of the firm they acquire, letting them off the hook for this debt and making it harder for the acquired company to succeed. “Requiring private equity firms to share in the responsibility of the debt…would prevent them from making huge profits while they are saddling hospitals and nursing homes with debts that ultimately impact worker pay and cut off care to patients,” write Stewart and Baker.
Regulate mergers. Private equity acquisitions often go under the radar because the acquisitions are small enough to not be reported to authorities. But the U.S. Federal Trade Commission could be more aggressive in evaluating mergers and buyouts by PE, as they have done recently in Texas, where a PE firm has been buying up numerous anesthesia practices.
Transparency of PE ownership. It can be hard to know when hospitals are bought by a PE firm. The Department of Health and Human Services could require disclosure of PE ownership for hospitals as they have done for nursing homes.
Remove tax loopholes. The carried interest loophole allows PE management fees to be taxed at as capital gains, which is a lower rate than corporate income. Closing this loophole would remove a big incentive that makes PE buyouts so attractive for firms.
“It is clear that the problem is not the lack of solutions but rather the lack of political will to take on private equity,” write Steward and Baker.
We need not to not only stem the tide of PE acquisitions sweeping through healthcare, but address the financialization of healthcare more broadly, to put patients back at the center of our health system.
Private equity firm Apollo Global Management’s ownership of two large health systems — Louisville, Ky.-based ScionHealth and Brentwood, Tenn.-based Lifepoint Health — downgrades hospital services, hurts workers and puts patients at risk, according to a study published Jan. 11 by the Private Equity Stakeholder Project.
Since acquiring Lifepoint in 2018 and spinning off ScionHealth in 2021, Apollo has consolidated ownership of 220 hospitals in 36 states, with a workforce of about 75,000 employees. Many of the hospitals have experienced service cuts, layoffs, poor quality ratings and regulatory investigations, according to the report.
The report comes amid rising scrutiny of private equity hospital ownership.
In December, the Senate Budget Committee launched an investigation into the effects of private equity ownership on hospitals that specifically mentioned Apollo’s ownership of Lifepoint. Iowa Sen. Chuck Grassley and Rhode Island Sen. Sheldon Whitehouse requested “documents and detailed answers” about certain hospital transactions and the degree to which private equity firms are calling the shots at hospitals.
A Harvard Medical School-led study published Dec. 26 in JAMA also found that hospitals that are bought by private equity-backed companies are less safe for patients. On average, patients at private equity-purchased facilities had 25.4% more hospital-acquired conditions, according to the study.
“Apollo’s purchase of these hospital systems follows a disturbing pattern of harm caused by the growing influence of private equity in the healthcare sector,” PESP Healthcare Director Eileen O’Orady, said in a news release. “Private equity’s utmost priority to maximize short-term profit over the long-term viability of the companies it controls leads to excessive debt, cost cutting, worse outcomes for patients and deteriorating working conditions for employees. Apollo’s management of its hospitals seems to follow the usual playbook.”
The study, “Apollo’s Stranglehold on Hospitals Harms Patients and Healthcare Workers,” was developed in conjunction with the American Federation of Teachers and the International Association of Machinists and Aerospace Workers. Clickhere to access the full report.
Apollo, Lifepoint and ScionHealth did not respond to Becker’s request for comment.
The Nelson A. Rockefeller Institute of Government is a public policy think tank founded in 1981 that conducts cutting-edge research and analysis to inform lasting solutions to the problems facing New York State and the nation.
Introduction & Definitions
In 2023, I noted10 trends within three broad categories in healthcare worth watching and provided a mid-year update on those trends. They included: the impact of unwinding the Public Health Emergency on insurance coverage, healthcare workforce shortages, price inflation, declining margins at hospitals, private equity in healthcare, consolidations, alternate payment models, attention to health equity, digital telehealth expansion, and the expansion of non-traditional providers in healthcare. These trends continue to be worth watching in 2024.
More significant than any one of these trends is the combined interaction of the trends in the industry overall—what I’ll call a “mega-trend,” which results in a trifurcation of the industry. Currently, there are parts of the healthcare industry struggling to exist. This is due to different factors, including high expenses, staffing challenges, and a lack of access to capital and technology, among other things. I call the types of healthcare entities that fall into this category “Today” entities because they exist now but may or may not exist in the future. In contrast, there is another set of entities in healthcare that have emerged in the last five or so years. They are becoming larger through consolidation and integration, and have greater access to capital and technology. I call these types of healthcare entities the “Tomorrow” entities because their size, resources, and forward-looking strategies are changing the future of healthcare.
In between these two categories, are existing and traditional entities in healthcare that seek sustaining strategies. I call these entities the “Striving Survivors” whose success and ability to persevere is still an open question. Most look like the healthcare entities of Today, but what distinguishes them is their ability to partner, use technology, and diversify what they offer. To understand the mega–trend phenomena of this trifurcation in healthcare and what’s happening within and across each of these three categories, this blog dissects how the trends I highlighted in 2023 are impacting the Today and the Tomorrow entities and discusses how the Striving Survivors are attempting to keep pace as the healthcare industry evolves.
The “Today” Healthcare Entities
As noted in my 2023 blog,price inflation and expense growth—particularly as they relate toworkforce and labor costs—were two trends impacting existing healthcare organizations. Today’s healthcare entities are heavily reliant on people, and, unsurprisingly, increased expenses for personnel, which had a major impact on organizations’ bottom lines for the past few years, as did general inflation and increased supply prices. However, for some providers, revenue and patient volume have returned to levels comparable to pre–pandemic. According to Kaufman Hall, a healthcare consulting firm, by the end of 2023, some hospitals’ margins were beginning to stabilize.
In looking at what may happen in 2024 for providers, however, the return of patient volume and, therefore, more predictable revenue may not be enough to yield positive margins. This is because expenses are predicted to be challenging. Industry experts estimate that healthcare prices will grow 7 percent in the coming year. The estimate reflects increases in pharmaceutical costs, growing provider expenses given the high labor and supply costs noted earlier, and insurer rate increases.
Another challenge to the healthcare entities of Today is the availability of capital to make strategic investments. More of this capital is now being provided by private equity firms, an estimated $750 billion in the last decade. To secure capital in the private market, bond rating agencies typically favor larger providers because they are less risky. This, among other factors, has contributed to growing consolidation in the industry among physician groups, insurers, and hospitals. Not only do these entities need capital for projects like upgrades to existing facilities, but to also make strategic investments. Such investments include acquisitions of other providers or companies that add to the revenue base, or technologies that allow improvements in care delivery.
The Today entities are increasingly challenged with adapting to consumer demands for tech–enabled care options. Consumers want more tech–supported smart applications that allow them to book appointments or get assistance with care more quickly via chatbots. Consumers also want new options for care at home—including hospital–at–home, which provides acute care in a home-based setting, and home–based care. As noted in my November blog on AI in healthcare, access to such technologies is not only creating further separation between healthcare entities, but can also create further inequities among consumers.
The “Tomorrow” Healthcare Entities
With the challenges for the healthcare entities of Today outlined above, it is important to note that those same challenges are not as significant for the healthcare players of Tomorrow. This is because most are substantial in size and have sufficient revenue, technology, and capital resources—often in the form of private equity. And many of them did not start in healthcare. They include, for example, Amazon—which started as an online bookstore and now has annual revenues of over $500 billion, CVS—which started as a retail pharmacy and now has revenues close to $300 billion; Uber—which started as a tech-enabled taxi-like transport application and now has revenues of over $30 billion, and Microsoft—which started as computer company but has expanded into healthcare with annual revenues of over $200 billion.
Some of these companies have entered healthcare by partnering with, or acquiring companies already in the sector such as Amazon’s 2023 acquisition of One Medical, a tech–enabled primary care entity; the 2022 partnership between United Health Group and Change Healthcare, a technology company; and CVS’s official 2023 acquisition of Signify, a home health organization. This was on top of CVS’s earlier (2018) merger with health insurance company Aetna, and its 2022 partnership announcement with Uber with the stated aim of improving access to care and decreasing health inequities in underserved communities across the country. Other entities have increased their footprint in healthcare by launching their products, such as Microsoft’s 2020 launch of Cloud services, specifically for healthcare. Some of these companies are now collaborating, including the 2021 partnership between CVS Health and Microsoft, which was designed to customize care further, enable frontline workers to more easily access and use data, and digitize operations.
In addition to these large nontraditional healthcare entities, the health insurance industry has also experienced large–scale consolidation and diversification that enables them to compete. One of the most notable companies in the world of healthcare integration is the nation’s largest insurer, United Health Group (UHG). UHG continued to outpace provider margins, with 2023 third quarter margins for UHG at levels 14 percent higher year-over-year. The continued growth at UHG was largely due to the increasing number of individuals served and a growing provider base of 90,000 physicians, or 10 percent of all physicians nationwide. This contrasts with one of the largest provider margins (Kaiser) whose 2023 third-quarter margin was only $239 million, an improvement from the $1.5 billion loss they experienced in the third quarter from the previous year. Although no other insurers are as big as UHG, the next biggest including, Aetna, Anthem, Cigna, and Humana all had 2023 third–quarter net incomes ranging from $1 billion to $1.4 billion.
The Striving Survivors
Not all traditional healthcare entities are being left behind; I call these the Striving Survivors. They may currently be considered Today entities, but they are attempting to put in place strategies so they can be Tomorrow entities in the future. Here are three primary strategies that may help these entities survive into the future:
Partnering—The number of independent hospitals as well as the number of independent physician groups has shrunk dramatically in the past decade, and there is increasing pressure for both to consider merging. A report by Kaufman Hall prepared at the request of the American Hospital Association, shows that merging can have advantages such as creating economies of scale, improving leverage to bargain for better payments from increasingly large insurance companies, and allowing better access to capital markets. Other advantages to partnering include diversifying what services can be offered to patients, allowing providers to assume risk for the care of a larger population, or leveraging complementary strengths for strategic investments. Although many of these consolidations used to be regional in nature (providers would merge with neighboring providers), new mergers are occurring across broader geographic areas, as was the case with the merger of west–coast–based Kaiser and Pennsylvania-based Geisinge.
Maximizing Technology—Striving Survivors are also seeking to compete and survive into the future by partnering to maximize technology. Technologies like telehealth, remote monitoring, artificial intelligence, and hospital–at–home, are growing because they are delivering care in ways that are preferable to consumers. As recently noted by Deloitte, “Adopting new technologies and business models—while under sustained financial pressure—might be the biggest challenge health care executives will face in 2024.” The good news for the healthcare players of Today is the use of data and technology in new and creative ways can counteract some of their current financial and care delivery challenges. Technology can make care more convenient for consumers, reduce costs, or provide care in places where it is sometimes inaccessible. Some recent examples of partnerships between technology companies and today’s healthcare entities include women’s health tech startup Tia’s partnership with Common Spirit, one of the largest healthcare systems in the country. Similarly, Strive Health is managing kidney patients for Bon Secours Mercy Health; Carbon Health is providing tech–enabled urgent care for Milwaukee–based Froedtert Health. Even Best Buy, a home electronics store, has begun offering homecare through several partnerships, including, for example, Mass General Brigham.
Revenue Diversification—Revenue diversification has long been a growth strategy in many industries. Up until recently, there hasn’t been the same pressure for such diversification for healthcare entities. That is changing, in part, because many of the healthcare entities of Tomorrow come from non–health–related industries. Diversification can occur using either of the strategies noted above (partnership or maximizing the use of technology). Diversification might also include providing services in areas of healthcare where demand is growing (e.g. urgent care or outpatient instead of legacy inpatient services). It might also include services that are not currently widely used but are likely to become more commonplace in the future, such as precision medicine or hospital–at–home.
Conclusion
In 2024, it will not only be important for healthcare policymakers to monitor single trends such as the continued focus on health equity, the expansion of alternate payment models, or the cost of the healthcare workforce, but it will also be important to understand how trends may be interacting with each other to create larger market trends. Such is the case for the emergence of non-traditional players in healthcare, the influx of private equity, digital expansion, and major consolidations— which when combined —are resulting in a mega trend of trifurcation of the industry into Today, Tomorrow, and Striving entities in healthcare that are seeking to survive into the future. For healthcare policymakers, all these trends along with their interaction will be worth monitoring and understanding so that effective policies can be developed that result in a healthcare system that supports innovation, protects patients, reduces inequities, and results in better health outcomes at lower cost.
By the end of this week, we’ll know a lot more about the economic trajectory for U.S. healthcare in 2024: it may cause indigestion.
Digesting deal announcements and industry prognostics from last week’s 42nd JPM conference in San Francisco. Notably, with the exceptions of promising conditions for weight loss drugs, artificial intelligence and biotech IPOs, the outlook is cautionary for providers and inviting for insurers and retail health. Expanded conflicts in Ukraine and Gaza loom as threats. The U.S. trade relationship with China and its growing tension with Taiwan poses an immediate threat to the U.S. healthcare supply chain for raw materials in drugs, OTC products, disposables. U.S. public opinion about its institutions is arguably shaped in part in social media: TikTok is owned by Chinese internet tech company ByteDance and operates in 150 countries. The 16 not for profit health system presentations at JPM sounded a chorus in unison: ‘our core business—hospital care– is not sustainable. We need deals with private capital to stay afloat.’ By contrast, national insurers and retailers sang a different tune: ‘the market is receptive to our products and services that are cheaper, better and more easily accessed through digital platforms. The status quo is outdated’.
Digesting results from today’s Iowa GOP Caucus which serves as a gatekeeper for Presidential candidate wannabes. In the run-up to Campaign 2024, polls show voters interested in abortion rights and affordability. But specific health system reforms have not surfaced to date in this election cycle and understandably: per the November 2023 Keckley Poll, 76% of U.S. adults agree that “Most politicians avoid healthcare issues because solutions are complicated and they fear losing votes” vs. 6% who disagree. Thus, the Iowa results might narrow the President contestant pool, but it will do little to clarify U.S. health policies in 2025 and beyond.
Digesting takeaways from the World Economic Forum (WEF) in Davos. The annual confab draws world leaders and big-name consultancies and bankers who want to rub elbows with them. It’s notable that the WEF pre-conference Global Risk Survey indicated growing concern about a looming “global catastrophe” and its agenda includes sessions on women’s health, misinformation and artificial intelligence—all central to healthcare’s future. The world is small: 8 billion inhabitants in 195 countries. There’s growing global attention to healthcare and recognition that the integration of social services (nutrition, housing, transportation, et al) and elimination of structural barriers that limit access are necessary to the effectiveness of their systems. The U.S. lacks both though it’s the world’s most expensive system. Thus, U.S.-based solutions to enhance clinical efficacy for specialty care are accessible to global markets at prices significantly lower than what U.S. taxpayers pay because their government’s refuse to pay U.S. rates.
Digesting where Congress lands this week on the fiscal 2024 budget. A deal was reached tentatively yesterday on a short-term funding bill that would avert a partial government shutdown this Friday. The $1.6 trillion continuing resolution funds the government through March 1 and March 8 and includes $886B for defense and $704B for other total discretionary programs. While payments for social security and Medicare are not impacted, most other federal health programs are impacted and therefore caught in the Congressional crossfire between budget hawks wary of the ballooning federal deficit ($34 trillion) and progressives who think the federal government spends too much on the ‘have’s’ and not enough, including health and social services, on its ‘have not’s.’ And this deal is TENTATIVE!
My take:
The cumulative effect of these events in economic indigestion for the entire U.S. economy and especially for those of us who work in its healthcare industry. So, for the balance of 2024, the realities for U.S. healthcare are these:
Public support for the health system is eroding. Trust and confidence in the U.S. health system is low. No sector in U.S. healthcare is immune though some (community hospitals, public health programs, independent physicians) are more favorably viewed than others. Confidence in government agencies (CDC, FDA, CMS) is fractured due to misinformation and disinformation. ‘Not-for-profit’ designation is a meaningful distinction to some but secondary to characteristics more readily understood and valued.
Federal policies toward healthcare are increasingly antagonistic. They’re popular and in most cases, bipartisan. Federal policies that expand price transparency (drugs, hospitals, health insurance), constrain on consolidation (horizontal) and private equity investing, expose/reduce conflicts of interest, address workforce resilience (compensation, work-rules) and protect consumers will be prominent. Beyond these, court actions and budgetary negotiations will define/refine federal health policies. Notably, the rumored DOJ antitrust action against Apple will be a closely watched barometer as will the government’s attention toward Microsoft given its leading role in ChatGPT and AI platform Copilot et al.
The big players enjoy advantages over smaller players. It’s a buyer’s market for them. The corporatization of U.S. healthcare has rewarded big operators in each sector and punished smaller, independent operators. More regulation, higher operating costs, escalating administrative complexity and shifting demand require capital that’s increasingly unaffordable/inaccessible to less credit-worthy players. In 2024, in every sector, bigger fish will eat the smaller as readily-accessible private capital is deployed to welcoming sellers. But mechanisms whereby ‘independents’ are protected and growing disparity in how care is financed and delivered will be a prominent concern to policymakers.
Regrettably, an off-the-shelf Pepto-Bismol is not available to the U.S. system. It is complex, fragmented, inequitable and expensive, but also profitable for many who benefit from the status quo.
So, the conclusion that can be deduced from the four events this week is this: economic indigestion in U.S. healthcare will persist this year and beyond because there is no political will nor industry appetite to fix it. Darwinism aka ‘survival of the fittest’ is its destiny unless….???
This discussion was recorded on November 16, 2023. This transcript has been edited for clarity.
Robert D. Glatter, MD: Welcome. I’m Dr Robert Glatter, medical advisor for Medscape Emergency Medicine. Joining me today is Dr Brian Miller, a hospitalist with Johns Hopkins University School of Medicine and a health policy expert, to discuss the current and renewed interest in physician-owned hospitals.
Welcome, Dr Miller. It’s a pleasure to have you join me today.
Brian J. Miller, MD, MBA, MPH: Thank you for having me.
History and Controversies Surrounding Physician-Owned Hospitals
Miller: Thank you. I should note that my views are my own and don’t represent those of Hopkins or the American Enterprise Institute, where I’m a nonresident fellow nor the Medicare Payment Advisory Commission, of which I’m a Commissioner.
The story about physician-owned hospitals is an interesting one. Hospitals turned into health systems in the 1980s and 1990s, and physicians started to shift purely from an independent model into a more organized group practice or employed model. Physicians realized that they wanted an alternative operating arrangement. You want a choice of how you practice and what your employment is. And as community hospitals started to buy physicians and also establish their own physician groups de novo, physicians opened physician-owned hospitals.
Physician-owned hospitals fell into a couple of buckets. One is what we call community hospitals, or what the antitrust lawyers would call general acute care hospitals: those offering emergency room (ER) services, labor and delivery, primary care, general surgery — the whole regular gamut, except that some of the owners were physicians.
The other half of the marketplace ended up being specialty hospitals: those built around a specific medical specialty and series of procedures and chronic care. For example, cardiac hospitals often do CABG, TAVR, maybe abdominal aortic aneurysm (triple A) repairs, and they have cardiology clinics, cath labs, a cardiac intensive care unit (ICU), ER, etc. There were also orthopedic surgical specialty hospitals, which were sort of like an ambulatory surgery center (ASC) plus several beds. Then there were general surgical specialty hospitals. At one point, there were some women’s health–focused specialty hospitals.
The hospital industry, of course, as you can understand, didn’t exactly like this. They had a series of concerns about what we would historically call cherry-picking or lemon-dropping of patients. They were worried that physician-owned facilities didn’t want to serve public payer patients, and there was a whole series of reports and investigations.
Around the time the Affordable Care Act passed, the hospital industry had many concerns about physician-owned specialty hospitals, and there was a moratorium as part of the 2003 Medicare Modernization Act. As part of the bargaining over the hospital industry support for the Affordable Care Act, they traded their support for, among other things, their number one priority, which is a statutory prohibition on new or expanded physician-owned hospitals from participating in Medicare. That included both physician-owned community hospitals and physician-owned specialty hospitals.
Glatter: I guess the main interest is that, when physicians have an ownership or a stake in the hospital, this is what the Stark laws obviously were aimed at. That was part of the impetus to prevent physicians from referring patients where they had an ownership stake. Certainly, hospitals can be owned by attorneys and nonprofit organizations, and certainly, ASCs can be owned by physicians. There is an ongoing issue in terms of physicians not being able to have an ownership stake. In terms of equity ownership, we know that certain other models allow this, but basically, it sounds like this is an issue with Medicare. That seems to be the crux of it, correct?
Miller: Yes. I would also add that it’s interesting when we look at other professions. When we look at lawyers, nonlawyers are actually not allowed to own an equity stake in a law practice. In many other professions, you either have corporate ownership or professional ownership, or the alternative is you have only professional ownership.I would say the hospital industry is one of the few areas where professional ownership not only is not allowed, but also is statutorily prohibited functionally through the Medicare program.
Unveiling the Dynamics of Hospital Ownership
Glatter: A recent study done by two PhDs looked at 2019 data on 20 of the most expensive diagnosis-related groups (DRGs). It examined the cost savings, and we’re talking over $1 billion in expenditures when you look at the data from general acute care hospitals vs physician-owned hospitals. This is what appears to me to be a key driver of the push to loosen restrictions on physician-owned hospitals. Isn’t that correct?
Miller: I would say that’s one of many components. There’s more history to this issue. I remember sitting at a think tank talking to someone several years ago about hospital consolidation as an issue. We went through the usual levers that us policy wonks go through. We talked about antitrust enforcement, certificate of need, rising hospital costs from consolidation, lower quality (or at least no quality gains, as shown by a New England Journal of Medicine study), and decrements in patient experience that result from the diseconomies of scale. They sort of pooh-poohed many of the policy ideas. They basically said that there was no hope for hospital consolidation as an issue.
Well, what about physician ownership? I started with my research team to comb through the literature and found a variety of studies — some of which were sort of entertaining, because they’d do things like study physician-owned specialty hospitals, nonprofit-owned specialty hospitals, and for-profit specialty hospitals and compare them with nonprofit or for-profit community hospitals, and then say physician-owned hospitals that were specialty were bad.
They mixed ownership and service markets right there in so many ways, I’m not sure where to start. My team did a systematic review of around 30 years of research, looking at the evidence base in this space. We found a couple of things.
We found that physician-owned community hospitals did not have a cost or quality difference, meaning that there was no definitive evidence that the physician-owned community hospitals were cheaper based on historical evidence, which was very old. That means there’s not specific harm from them. When you permit market entry for community hospitals, that promotes competition, which results in lower prices and higher quality.
Then we also looked at the specialty hospital markets — surgical specialty hospitals, orthopedic surgical specialty hospitals, and cardiac hospitals. We noted for cardiac hospitals, there wasn’t clear evidence about cost savings, but there was definitive evidence of higher quality, from things like 30-day mortality for significant procedures like treatment of acute MI, triple A repair, stuff like that.
For orthopedic surgical specialty hospitals, we noted lower costs and higher quality, which again fits with operationally what we would know. If you have a facility that’s doing 20 total hips a day, you’re creating a focused factory. Just like if you think about it for interventional cardiology, your boards have a minimum number of procedures that you have to do to stay certified because we know about the volume-quality relationship.
Then we looked at general surgical specialty hospitals. There wasn’t enough evidence to make a conclusive thought about costs, and there was a clear trend toward higher quality. I would say this recent study is important, but there is a whole bunch of other literature out there, too.
Exploring the Scope of Emergency Care in Physician-Owned Hospitals
One thing I want to bring up — and this is an important issue — is that the risk for patients has been talked about by the American Hospital Association and the Federation of American Hospitals, in terms of limited or no emergency services at such physician-owned hospitals and having to call 911 when patients need emergent care or stabilization. That’s been the rebuttal, along with an Office of Inspector General (OIG) report from 2008. Almost, I guess, three quarters of the patients that needed emergent care got this at publicly funded hospitals.
Miller: I’m familiar with the argument about emergency care. If you actually go and look at it, it differs by specialty market. Physician-owned community hospitals have ERs because that’s how they get their business. If you are running a hospital medicine floor, a general surgical specialty floor, you have a labor delivery unit, a primary care clinic, and a cardiology clinic. You have all the things that all the other hospitals have. The physician-owned community hospitals almost uniformly have an ER.
When you look at the physician-owned specialty hospitals, it’s a little more granular. If you look at the cardiac hospitals, they have ERs. They also have cardiac ICUs, operating rooms, etc. The area where the hospital industry had concerns — which I think is valid to point out — is that physician-owned orthopedic surgical specialty hospitals don’t have ERs. But this makes sense because of what that hospital functionally is: a factory for whatever the scope of procedures is, be it joint replacements or shoulder arthroscopy. The orthopedic surgical specialty hospital is like an ASC plus several hospital beds. Many of those did not have ERs because clinically it didn’t make sense.
What’s interesting, though, is that the hospital industry also operates specialty hospitals. If you go into many of the large systems, they have cardiac specialty hospitals and cancer specialty hospitals. I would say that some of them have ERs, as they appropriately should, and some of those specialty hospitals do not. They might have a community hospital down the street that’s part of that health system that has an ER, but some of the specialty hospitals don’t necessarily have a dedicated ER.
I agree, that’s a valid concern. I would say, though, the question is, what are the scope of services in that hospital? Is an ER required? Community hospitals should have ERs. It makes sense also for a cardiac hospital to have one. If you’re running a total joint replacement factory, it might not make clinical sense.
Glatter: The patients who are treated at that hospital, if they do have emergent conditions, need to have board-certified emergency physicians treating them, in my view because I’m an ER physician. Having surgeons that are not emergency physicians staff a department at a specialty orthopedic hospital or, say, a cancer hospital is not acceptable from my standpoint. That’s my opinion and recommendation, coming from emergency medicine.
Miller: I would say that anesthesiologists are actually highly qualified in critical care. The question is about clinical decompensation; if you’re doing a procedure, you have an anesthesiologist right there who is capable of critical care. The function of the ER is to either serve as a window into the hospital for patient volume or to serve as a referral for emergent complaints.
Glatter: An anesthesiologist — I’ll take issue with that — does not have the training of an emergency physician in terms of scope of practice.
Miller: My anesthesiology colleagues would probably disagree for managing an emergency during an operating room case.
Glatter: Fair enough, but I think in the general sense. The other issue is that, in terms of emergent responses to patients that decompensate, when you have to transfer a patient, that violates Medicare requirements. How is that even a valid issue or argument if you’re going to have to transfer a patient from your specialty hospital? That happens. Again, I know that you’re saying these hospitals are completely independent and can function, stabilize patients, and treat emergencies, but that’s not the reality across the country, in my opinion.
Miller: I don’t think that’s the case for the physician-owned specialty cardiac hospitals, for starters. Many of those have ICUs in addition to operating rooms as a matter of routine in addition to ERs. I don’t think that’s the case for physician-owned community hospitals, which have ERs, ICUs, medicine floors, and surgical floors. Physician-owned community hospitals are around half the market. Of that remaining market, a significant percentage are cardiac hospitals. If you’re taking an issue with orthopedic surgical specialty hospitals, that’s a clinical operational question that can and should be answered.
I’d also posit that the nonprofit and for-profit hospital industries also operate specialty hospitals. Any of these questions, we shouldn’t just be asking about physician-owned facilities; we should be asking about them across ownership types, because we’re talking about scope of service and quality and safety. The ownership in that case doesn’t matter. The broader question is, are orthopedic surgical specialty hospitals owned by physicians, tax-exempt hospitals, or tax-paying hospitals? Is that a valid clinical business model? Is it safe? Does it meet Medicare conditions of participation? I would say that’s what that question is, because other ownership models do operate those facilities.
Glatter: You make some valid points, and I do agree on some of them. I think that, ultimately, these models of care, and certainly cost and quality, are issues. Again, it goes back to being able, in my opinion, to provide emergent care, which seems to me a very important issue.
Miller: I agree that providing emergent care is an issue. It’s an issue in any site of care. The hospital industry posits that all hospital outpatient departments (HOPDs) have emergent care. I can tell you, having worked in HOPDs (I’ve trained in them during residency), the response if something emergent happens is to either call 911 or wheel the patient down to the ER in a wheelchair or stretcher. I think that these hospital claims about emergency care coverage —these are important questions, but we should be asking them across all clinical settings and say what is the appropriate scope of care provided? What is the appropriate level of acuity and ability to provide emergent or critical care? That’s an important question regardless of ownership model across the entire industry.
Deeper Dive Into Data on Physician-Owned Hospitals
Glatter: We need to really focus on that. I’ll agree with you on that.
There was a March 2023 report from Dobson | DaVanzo. It showed that physician-owned hospitals had lower Medicaid, dual-eligible, and uncompensated care and charity care discharges than full-service acute care hospitals. Physician-owned hospitals had less than half the proportion of Medicaid discharges compared with non–physician-owned hospitals. They were also less likely to care for dual-eligible patients overall compared with non–physician-owned hospitals.
In addition, when COVID hit, the physician-owned hospitals overall — and again, there may be exceptions — were not equipped to handle these patient surges in the acute setting of a public health emergency. There was a hospital in Texas that did pivot that I’m aware of — Renaissance Hospital, which ramped up a long-term care facility to become a COVID hospital — but I think that’s the exception. I think this report raises some valid concerns; I’ll let you rebut that.
Miller: A couple of things. One, I am not aware that there’s any clear market evidence or a systematic study that shows that physician-owned hospitals had trouble responding to COVID. I don’t think that assertion has been proven. The study was funded by the hospital industry. First of all, it was not a peer-reviewed study; it was funded by an industry that paid a consulting firm. It doesn’t mean that we still shouldn’t read it, but that brings bias into question. The joke in Washington is, pick your favorite statistician or economist, and they can say what you want and have a battle of economists and statisticians.
For example, in that study, they didn’t include the entire ownership universe of physician-owned hospitals. If we go to the peer-reviewed literature, there’s a great 2015 BMJ paper showing that the Medicaid payer mix is actually the same between physician-owned hospitals vs not. The mix of patients by ethnicity — for example, think about African American patients — was the same. I would be more inclined to believe the peer-reviewed literature in BMJ as opposed to an industry-funded study that was not peer-reviewed and not independent and has methodological questions.
Glatter: Those data are 8 years old, so I’d like to see more recent data. It would be interesting, just as a follow-up to that, to see where the needle has moved — if it has, for that matter — in terms of Medicaid patients that you’re referring to.
Miller: I tend to be skeptical of all industry research, regardless of who published it, because they have an economic incentive. If they’re selecting certain age groups or excluding certain hospitals, that makes you wonder about the validity of the study. Your job as an industry-funded researcher is that, essentially, you’re being paid to look for an answer. It’s not necessarily an honest evaluation of the data.
Glatter: I want to bring up another point about the Hospital Readmissions Reduction Program (HRRP) and the data on how physician-owned hospitals compared with acute care hospitals that are non–physician-owned and have you comment on that. The Dobson | DaVanzo study called into question that physician-owned hospitals treat fewer patients who are dual-eligible, which we know.
Miller: I don’t think we do know that.
Glatter: There are data that point to that, again, looking at the studies.
Miller: I’m saying that’s a single study funded by industry as opposed to an independent, academic, peer-reviewed literature paper. That would be like saying, during the debate of the Inflation Reduction Act (IRA), that you should read the pharmaceutical industries research but take any of it at pure face value as factual. Yes, we should read it. Yes, we should evaluate it on its own merits. I think, again, appropriately, you need to be concerned when people have an economic incentive.
The question about the HRRP I’m going to take a little broader, because I think that program is unfair to the industry overall. There are many factors that drive hospital readmission. Whether Mrs Smith went home and ate potato chips and then took her Lasix, that’s very much outside of the hospital industry’s control, and there’s some evidence that the HRRP increases mortality in some patient populations.
In terms of a quality metric, it’s unfair to the industry. I think we took an operating process, internal metric for the hospital industry, turned it into a quality metric, and attached it to a financial bonus, which is an inappropriate policy decision.
Rethinking Ownership Models and Empowering Clinicians
Glatter: I agree with you on that. One thing I do want to bring up is that whether the physician-owned hospitals are subject to many of the quality measures that full-service, acute care hospitals are. That really is, I think, a broader context.
Miller: Fifty-five percent of physician-owned hospitals are full-service community hospitals, so I would say at least half the market is 100% subject to that.
Glatter: If only 50% are, that’s already an issue.
Miller: Cardiac specialty hospitals — which, as I said, nonprofit and for-profit hospital chains also operate — are also subject to the appropriate quality measures, readmissions, etc. Just because we don’t necessarily have the best quality measurement in the system in the country, it doesn’t mean that we shouldn’t allow care specialization. As I’d point out, if we’re concerned about specialty hospitals, the concern shouldn’t just be about physician-owned specialty hospitals; it should be about specialty hospitals by and large. Many health systems run cardiac specialty hospitals, cancer specialty hospitals, and orthopedic specialty hospitals. If we’re going to have a discussion about concerns there, it should be about the entire industry of specialty hospitals.
I think specialty hospitals serve an important role in society, allowing for specialization and exploiting in a positive way the volume-quality relationship. Whether those are owned by a for-profit publicly traded company, a tax-exempt facility, or physicians, I think that is an important way to have innovation and care delivery because frankly, we haven’t had much innovation in care delivery. Much of what we do in terms of how we practice clinically hasn’t really changed in the 50 years since my late father graduated from medical school. We still have rounds, we’re still taking notes, we’re still operating in the same way. Many processes are manual. We don’t have the mass production and mass customization of care that we need.
When you have a focused factory, it allows you to design care in a way that drives up quality, not just for the average patient but also the patients at the tail ends, because you have time to focus on that specific service line and that specific patient population.
Physician-owned community hospitals offer an important opportunity for a different employment model. I remember going to the dermatologist and the dermatologist was depressed, shuffling around the room, sad, and I asked him why. He said he didn’t really like his employer, and I said, “Why don’t you pick another one?” He’s like, “There are only two large health systems I can work for. They all have the same clinical practice environment and functionally the same value.”
Physicians are increasingly burned out. They face monopsony power in who purchases their labor. They have little control. They don’t want to go through five committees, seven administrators, and attend 25 meetings just to change a single small process in clinical operations. If you’re an owner operator, you have a much better ability to do it.
Frankly, when many facilities do well now, when they do well clinically and do well financially, who benefits? The hospital administration and the hospital executives. The doctors aren’t benefiting. The nurses aren’t benefiting. The CNA is not benefiting. The secretary is not benefiting. The custodian is not benefiting. Shouldn’t the workers have a right to own and operate the business and do well when the business does well serving the community? That puts me in the weird space of agreeing with both conservatives and progressives.
Glatter: I agree with you. I think an ownership stake is always attractive. It helps with retention of employed persons. There’s no question that, when they have a stake, when they have skin in the game, they feel more empowered. I will not argue with you about that.
Miller: We don’t have business models where workers have that option in healthcare. Like the National Academy of Medicine said, one of the key drivers of burnout is the externalization of the locus of control over clinical practice, and the current business operating models guarantee an externalization of the locus of control over clinical practice.
If you actually look at the recent American Medical Association (AMA) meeting, there was a resolution to ban the corporate practice of medicine. They wanted to go more toward the legal professions model where only physicians can own and operate care delivery.
Miller: It’s not just doctors. I think nurses want a better lifestyle. The nurses are treated as interchangeable lines on a spreadsheet. The nurses are an integral part of our clinical team. Why don’t we work together as a clinical unit to build a better delivery system? What better way to do that than to have clinicians in charge of it, right?
My favorite bakery that’s about 30 minutes away is owned by a baker. It is not owned by a large tax-exempt corporation. It’s owned by an owner operator who takes pride in their work. I think that is something that the profession would do well to return to. When I was a resident, one of my colleagues was already planning their retirement. That’s how depressed they were.
I went into medicine to actually care for patients. I think that we can make the world a better place for our patients. What that means is not only treating them with drugs and devices, but also creating a delivery system where they don’t have to wander from lobby to lobby in a 200,000 square-foot facility, wait in line for hours on end, get bills 6 months later, and fill out endless paper forms over and over again.
All of these basic processes in healthcare delivery that are broken could have and should have been fixed — and have been fixed in almost every other industry. I had to replace one of my car tires because I had a flat tire. The local tire shop has an app, and it sends me SMS text messages telling me when my appointment is and when my car is ready. We have solved all of these problems in many other businesses.
We have not solved them in healthcare delivery because, one, we have massive monopolies that are raising prices, have lower quality, and deliver a crappy patient experience, and we have also subjugated the clinical worker into a corporate automaton. We are functionally drones. We don’t have the agency and the authority to improve clinical operations anymore. It’s really depressing, and we should have that option again.
I trust my doctor. I trust the nurses that I work with, and I would like them to help make clinical decisions in a financially responsible and a sensible operational manner. We need to empower our workforce in order to do that so we can recapture the value of what it means to be a clinician again.
The current model of corporate employment: massive scale, more administrators, more processes, more emails, more meetings, more PowerPoint decks, more federal subsidies. The hospital industry has choices. It can improve clinical operations. It can show up in Washington and lobby for increased subsidies. It can invest in the market and not pay taxes for the tax-exempt facilities. Obviously, it makes the logical choices as an economic actor to show up, lobby for increased subsidies, and then also invest in the stock market.
Improving clinical operations is hard. It hasn’t happened. The Bureau of Labor Statistics shows that the private community hospital industry has had flat labor productivity growth, on average, for the past 25 years, and for some years it even declined. This is totally atypical across the economy.
We have failed our clinicians, and most importantly, we have failed our patients. I’ve been sick. My relatives have been sick, waiting hours, not able to get appointments, and redoing forms. It’s a total disaster. It’s time and reasonable to try an alternative ownership and operating model. There are obviously problems. The problems can and should be addressed, but it doesn’t mean that we should have a statutory prohibition on professionals owning and operating their own business.
Glatter: There was a report that $500 million was saved by limiting or banning or putting a moratorium on physician-owned hospitals by the Congressional Budget Office.
The CBO is not transparent about what its assumptions are or its analysis and methods. As a researcher, we have to publish our information. It has to go through peer review. I want to know what goes into that $500 million figure — what the assumptions are and what the model is. It’s hard to comment without knowing how they came up with it.
Glatter: The points you make are very valid. Physicians and nurses want a better lifestyle.
Miller: It’s not even a better lifestyle. It’s about having a say in how clinical operations work and helping make them better. We want the delivery system to work better. This is an opportunity for us to do so.
Glatter: That translates into technology: obviously, generative artificial intelligence (AI) coming into the forefront, as we know, and changing care delivery models as you’re referring to, which is going to happen. It’s going to be a slow process. I think that the evolution is happening and will happen, as you accurately described.
Miller: The other thing that’s different now vs 20 years ago is that managed care is here, there, and everywhere, as Dr Seuss would say. You have utilization review and prior authorization, which I’ve experienced as a patient and a physician, and boy, is it not a fun process. There’s a large amount of friction that needs to be improved. If we’re worried about induced demand or inappropriate utilization, we have managed care right there to help police bad behavior.
Reforming Healthcare Systems and Restoring Patient-Centric Focus
Glatter: If you were to come up with, say, three bullet points of how we can work our way out of this current morass of where our healthcare systems exist, where do you see the solutions or how can we make and effect change?
Miller: I’d say there are a couple of things. One is, let business models compete fairly on an equal playing field. Let the physician-owned hospital compete with the tax-exempt hospital and the nonprofit hospital. Put them on an equal playing field. We have things like 340B, which favors tax-exempt hospitals. For-profit or tax-paying hospitals are not able to participate in that. That doesn’t make any sense just from a public policy perspective. Tax-paying hospitals and physician-owned hospitals pay taxes on investments, but tax-exempt hospitals don’t. I think, in public policy, we need to equalize the playing field between business models. Let the best business model win.
The other thing we need to do is to encourage the adoption of technology. The physician will eventually be an arbiter of tech-driven or AI-driven tools. In fact, at some point, the standard of care might be to use those tools. Not using those tools would be seen as negligence. If you think about placing a jugular or central venous catheter, to not use ultrasound would be considered insane. Thirty years ago, to use ultrasound would be considered novel. I think technology and AI will get us to that point of helping make care more efficient and more customized.
Those are the two biggest interventions, I would say. Third, every time we have a conversation in public policy, we need to remember what it is to be a patient. The decision should be driven not around any one industry’s profitability, but what it is to be a patient and how we can make that experience less burdensome, less expensive, or in plain English, suck less.
Glatter: Safety net hospitals and critical access hospitals are part of this discussion that, yes, we want everything to, in an ideal world, function more efficiently and effectively, with less cost and less red tape. The safety net of our nation is struggling.
Miller: I 100% agree. The Cook County hospitals of the world are deserving of our support and, frankly, our gratitude. Facilities like that have huge burdens of patients with Medicaid. We also still have millions of uninsured patients. The neighborhoods that they serve are also poorer. I think facilities like that are deserving of public support.
I also think we need to clearly define what those hospitals are. One of the challenges I’ve realized as I waded into this space is that market definitions of what a service market is for a hospital, its specialty type or what a safety net hospital is need to be more clearly defined because those facilities 100% are deserving of our support. We just need to be clear about what they are.
Regarding critical access hospitals, when you practice in a rural area, you have to think differently about care delivery. I’d say many of the rural systems are highly creative in how they structure clinical operations. Before the public health emergency, during the COVID pandemic, when we had a massive change in telehealth, rural hospitals were using — within the very narrow confines — as much telehealth as they could and should.
Rural hospitals also make greater use of nurse practitioners (NPs) and physician assistants (PAs). For many of the specialty services, I remember, your first call was an NP or a PA because the physician was downstairs doing procedures. They’d come up and assess the patient before the procedure, but most of your consult questions were answered by the NP or PA. I’m not saying that’s the model we should use nationwide, but that rural systems are highly innovative and creative; they’re deserving of our time, attention, and support, and frankly, we can learn from them.
Glatter: I want to thank you for your time and your expertise in this area. We’ll see how the congressional hearings affect the industry as a whole, how the needle moves, and whether the ban or moratorium on physician-owned hospitals continues to exist going forward.
Miller: I appreciate you having me. The hospital industry is one of the most important industries for health care. This is a time of inflection, right? We need to go back to the value of what it means to be a clinician and serve patients. Hospitals need to reorient themselves around that core concern. How do we help support clinicians — doctors, nurses, pharmacists, whomever it is — in serving patients? Hospitals have become too corporate, so I think that this is an expected pushback.
Glatter: Again, I want to thank you for your time. This was a very important discussion. Thank you for your expertise.
Robert D. Glatter, MD, is an assistant professor of emergency medicine at Zucker School of Medicine at Hofstra/Northwell in Hempstead, New York. He is a medical advisor for Medscape and hosts the Hot Topics in EM series.
Brian J. Miller, MD, MBA, MPH, is a hospitalist and an assistant professor of medicine at the Johns Hopkins University School of Medicine. He is also a nonresident fellow at the American Enterprise Institute. From 2014 – 2017, Dr Miller worked at four federal regulatory agencies: Federal Trade Commission (FTC), Federal Communications Commission (FCC), Centers for Medicare & Medicaid Services (CMS), and the Food & Drug Administration (FDA).
Big, industry-shaking acquisitions including Oakland, Calif.-based Kaiser Permanente’s purchase of Danville, Pa.-based Geisinger, could redefine healthcare delivery with an eye toward value. Regional deals, such as Detroit-based Henry Ford Health’s planned joint venture with Ascension Michigan and St. Louis-based BJC HealthCare’s plan to acquire Saint Luke’s Health System to create a $10 billion organization, have also made waves.
There were 18 hospital and health system transactions announced in the third quarter, up from 10 transactions over the same time period in 2022, according to Kaufman Hall’s third quarter M&A report. Financial pressures with inflation catapulting staffing and supply costs, and reimbursement rates growing much more slowly, have forced some systems to look for a buyer while others aim to increase market share.
Academic health systems are also seeking community partners at a higher rate than in the past, according to the Kaufman Hall report.
But not all announced deals have gone according to plan.
The Federal Trade Commission is scrutinizing deals more closely than ever before to ensure costs don’t increase after an acquisition in some cases. In other cases, the two partners aren’t able to agree upon the details after announcing their plans. The dissolved merger between Sioux Falls, S.D.-based Sanford Health and Minneapolis-based Fairview Health Services fell apart amid contention in Minnesota, and West Des Moines, Iowa-based UnityPoint Health’s plans to merge with Presbyterian Healthcare Services in Albuquerque, N.M., was halted without a publicly stated reason.
Will there be more or fewer health system deals in the next three years?
Seth Ciabotti, CEO of MSU Health Care at Michigan State University in East Lansing, thinks so, at least when it comes to academic medical centers.
“There will be more consolidation to mitigate risk,” he told Becker’s. “I believe we are heading down a path of having only a dozen or so non-academic medical centers/health systems being left in the near future in the U.S.”
Mark Behl, president and CEO of NorthBay Health in Fairfield, Calif., has a similar outlook for the next three years.
“I suspect we will see more mergers and acquisitions with a continued desire to grow larger and remain relevant,” he told Becker’s. “Independent regional health systems will fight for relevance, and sometimes survival.”
And health systems won’t be the only buyers. Private equity, health insurers and non-traditional owners are on the hunt for health systems. General Catalyst has strengthened its healthcare presence recently and announced it plans to acquire a system in the near future.
“I believe that over the next three years, the landscape of acquisitions, divestitures and joint ventures will continue to reshape the healthcare industry,” said Dennis Sunderman, system director of HR M&A, non-employee and provider services at CommonSpirit Health, told Becker’s. “Current and proposed legislation, the continued evolution of ownership groups, nonprofit, for profit, and private equity, and the drive to hire and retain exceptionally talented teams, will lead to new innovations and an enhanced focus on the associates affected by the transaction.”
Health systems will need to optimize their operations to expand their value-based care efforts and digital transformation, including telehealth and remote patient monitoring services. Not all systems have the expertise and resources to fully make this transition, but with the right partners and strategic alignments, they can accelerate care transformation.
“There will likely be more collaborations and partnerships to expand services and increase access versus brick and mortar acquisitions,” said Cliff Megerian, MD, CEO of University Hospitals in Cleveland. “Innovative thinking is critical for success and quite frankly survival in our industry, so health systems should already be investing in growing in-house expertise dedicated to ideating new models of care, but in three years, these efforts should be producing tangible results.”
Michelle Fortune, BSN, CEO of Atrium St. Luke’s Hospital in Columbus, N.C., pointed to recent collaborations between Mercy, Microsoft and Mayo Clinic as examples of how health systems can partner on important initiatives such as improved data sharing, generative AI, digital transformation and more.
“I expect to see an increase in collaborations and connections between health systems to a degree that has never existed before as part of the focus on bringing the right care to people across the full continuum, when and where they need it,” she said.
Kaufman Hall sees more minority ownership deals ahead, which allows the smaller system to maintain near-autonomy while benefiting from the resources of a larger system.
“Health systems are also engaging in creative transaction structures that allow partners to maintain their independence while building strategic alliances that enhance access to care,” the report notes. “Announced transactions in Q3 included [Charlottesville, Va.-based] UVA Health’s acquisition of 5% ownership interest in [Newport News, Va.-based] Riverside Health System as part of a strategic alliance design ‘to expand patient access to innovative care for complex medical conditions, transplantation, and the latest clinical trials.'”
Pennsylvania health systems Jefferson and Lehigh Valley Health Network have signed a non-binding letter of intent to combine.
Philadelphia-based Jefferson and Allentown, Pa.-based LVHN announced the letter Dec. 19 in a news release, with expectations to close the transaction in 2024. Combined, Jefferson and LVHN would form a system with 30 hospitals, more than 700 sites of care and more than 62,000 employees.
Jefferson CEO Joseph Cacchione, MD, will serve as CEO of the expanded system — dubbed for now as Jefferson Enterprise — and LVHN President and CEO Brian Nester, DO, will serve as its executive vice president and COO. Dr. Nester will also serve as president of the legacy LVHN, reporting directly to Dr. Cacchione. An integrated board of trustees and leadership team will be made up of members from both systems, specifics of which are expected in the definitive agreement.
“The healthcare landscape and our communities’ needs are changing; it is critical leading systems evolve and make investments in the future of care and wellness — growing and protecting access to enhanced, affordable, high-quality and innovative care, particularly for historically underserved patients,” Dr. Cacchione said in the release.
The merger is another development out of Jefferson, which has seen a year of change. Dr. Cacchione assumed the CEO post in September 2022, and the system has since welcomed a new president, CFO, and dean of its medical school and physicians group. Earlier this year, Jefferson rolled out a reorganization planto operate as three divisions instead of five, which involved layoffs affecting executives and a later workforce reduction of about 400 positions.
Cost-cutting has been in effect at LVHN, too. The 13-hospital system, which includes nearly 3,000 physicians and advanced practice clinicians, eliminated approximately 240 positions as part of restructuring this fall.
“In Jefferson, we have found an ideal partner that shares our culture and commitment to excellence in clinical care and a learning environment, and that has done a fabulous job in establishing a highly successful health plan with a sharp focus on the well-being of Medicaid and Medicare beneficiaries,” Dr. Nester said. “The expertise derived from these operations is becoming a crucial competency for health systems to deliver on their mission, and Jefferson Health Plans will help drive improvements in health outcomes, especially in vulnerable populations. We are also very excited about the opportunity to expand academic and talent development programs that will further bolster our provider pipeline and enhance our ability to attract and retain top talent to the benefit of the communities we both serve.”
HENRY KOTULA 