Dialysis giant Fresenius Medical Care is creating a new $2.4B company by combining its US value-based care division, Fresenius Health Partners, with nephrologist network InterWell Health, and digital-first kidney care startup Cricket Health. Cricket Health CEO Robert Sepucha is set to lead the new company, which will be named InterWell Health, assuming the deal closes in the second half of 2022 as expected.
The Gist:This move will enable Fresenius to move further up the renal care delivery chain, managing patients with earlier stage chronic kidney disease before they need dialysis. Fresenius says the new company will more than triple its total addressable market in the US, from $50B to around $170B.
Seeing an opportunity to disrupt the dialysis market, which has been dominated by for-profit giants Fresenius and DaVita, significant capital has been flowing to numerous disruptors in the kidney care space who aim to bring care closer to consumers. Medicare, which spends nearly $115B annually on chronic kidney disease, is testing new payment models aimed at delaying the need for dialysis, as well as moving care into patients’ homes.
But whether Fresenius’s latest moves will make a significant difference in lowering the cost of kidney care remains to be seen.
Insurers, retailers, and other healthcare companies vastly exceed health system scale, dwarfing even the largest hospital systems. The graphic above illustrates how the largest “mega-systems” lag other healthcare industry giants, in terms of gross annual revenue.
Amazon and Walmart, retail behemoths that continue to elbow into the healthcare space, posted 2021 revenue that more than quintuples that of the largest health system, Kaiser Permanente. The largest health systems reported increased year-over-year revenue in 2021, largely driven by higher volumes, as elective procedures recovered from the previous year’s dip.
However, according to a recent Kaufman Hall report, while health systems, on average, grew topline revenue by 15 percent year-over-year, they face rising expenses, and have yet to return to pre-pandemic operating margins.
Meanwhile, the larger companies depicted above, including Walmart, Amazon, CVS Health, and UnitedHealth Group, are emerging from the pandemic in a position of financial strength, and continue to double down on vertical integration strategies, configuring an array of healthcare assets into platform businesses focused on delivering value directly to consumers.
A National Bureau of Economic Research working paper found that higher-priced hospitals in competitive markets were associated with lower patient mortality—flying in the face of the common policy narrative that higher-priced care is not higher quality. However, in more concentrated, less-competitive healthcare markets (in which over two-thirds of the nation’s hospitals are located), the study found no correlation between price and quality. Authors of the study analyzed patient outcomes from more than 200K admissions among commercially insured patients, transported by ambulance to about 1,800 hospitals between 2007 and 2014.
The Gist: As hospitals have consolidated, prices have risen by about 30 percent between 2015 to 2019, leading policy experts and regulators to search for ways to rein in price inflation.
While there continues to be widespread consensus that industry consolidation has resulted in unsustainable cost growth, the new study’s findings bring a bit of welcome nuance around impact on quality and outcomes to an otherwise one-sided, price-centric policy narrative.
“Follow the money,” was the advice of Deep Throat to the Watergate journalists. But now, new Federal Trade Commission Chair Lina Khan says that’s not enough when analyzing monopolies in both healthcare and rest of the economy. Follow the algorithms and follow the power, too, not just the money.
We all know how monopolies harm consumers with higher prices. But monopolies and powerful corporations cause harm in other ways. Some examples:
Facebook using algorithms that “wire” teenage girls to engage with it (and boost Facebook’s profits) but “probably” hurt their mental health
Remington Arms baiting insecure men to buy guns as a badge of masculinity, with tragic results in the case of the Sandy Hook mass murder.
Not all of these examples are linked directly to potentially illegal anticompetitive activities. But all are linked to the exercise of insufficiently checked corporate power. Commissioner Khan has signaled that she will consider such harms when analyzing mergers and other potentially anticompetitive activities.
This expanded view of anticompetitive harm is a departure from Robert Bork’s more narrow approach to antitrust enforcement taken by the F.T.C. since publication of Bork’s 1978 book The Antitrust Paradox. Bork noted that in many cases, mergers resulted in economies of scale that lowered prices for consumers. By his standard, such mergers were permissible as benefiting the consumer.
But now Commissioner Khan – and others like-minded theorists called neo-Brandeisians – point to the other harmful effects beyond the seeming benefit of lower prices. For example, the flip-side of a monopoly’s position as seller is its monopsony as a purchaser of labor. If there is only one big potential employer, workers do not have a competitive labor market, depressing their bargaining power and wages. In the digital economy there is also potential jeopardy to data privacy and security, and coercion to use certain digital products. Think the teenage girls on Instagram.
Employees of a single powerful employer are also inhibited from rocking the boat with innovations, critiques, or whistleblowing. This enervates a truly competitive marketplace.
Commissioner Khan views the antitrust issue not as being one of bigness but rather of power, power that reduces true competition. Beyond merely looking at prices, she seeks to identify and quantify the other elements of power and competition.
This blog has implicated healthcare monopolies as one direct cause of relentless increases in spending. It has also embraced the view of Steven Brill that “over the last five decades a new ‘best and brightest’ meritocracy rigged not only healthcare, but also the entire American financial, legal, and political system to build ‘moats’ of protection to perpetuate their wealth and power.”
Commissioner Khan is now highlighting a key mechanism – anticompetitive political and financial power — by which healthcare corporations rig healthcare and by which other corporations have blocked reform in pursuit of short-sighted profits. She summarizes the remedy:
If you allow unfettered monopoly power to concentrate, its power can rival that of the state., right? And historically, the antitrust laws have a rich tradition and rich history, and a key goal was to ensure that our commercial sphere was characterized by the same types of checks and balances and protections against concentration of economic power that we had set up in our political and governance sphere. And so the desire to kind of check those types of concentrations of power, I think, is deep in the American tradition.
While many hospitals face financial hardships and rising expenses from the COVID-19 pandemic, several large health systems ended 2021 with profits above $1 billion.
These big health systems attributed the financial performance to several factors, including bigger investment gains and higher-acuity patients.
Seven health systems that posted net income of $1 billion last year:
1. Pittsburgh-based UPMC, an integrated delivery system with 40 hospitals, recorded a net income of $1.1 billion in 2021, driven by an operating income of $843 million and nonoperating gains of $810 million.
2. AdventHealth, a 48-hospital system based in Altamonte Springs, Fla., recorded a net income of $1.5 billion in 2021. The net income included an operating income of $994.6 million and investment gains of $517.7 million. In 2020, the health system’s net income was $914.8 million.
3. Cleveland Clinicreported a 66.7 percent increase in net income for the 12 months ended Dec. 31. The 19-hospital system saw its net income hit $2.2 billion, including an operating income of $746.3 million and investment gains of $1.4 billion.
4. Rochester, Minn.-based Mayo Clinic’s net income for 2021 was $3.6 billion, up from $2.5 billion a year earlier. The results included an operating income of $1.2 billion.
5. Driven by strong investment gains, Oakland, Calif.-based Kaiser Permanenterecorded a net income of $8.1 billion in 2021, an increase of $1.7 billion from 2020. The sharp rise in net income from the integrated delivery system with 39 hospitals included $7.5 billion in other income, including investment gains, and $611 million in operating income for 2021.
6. Nashville, Tenn.-based HCA Healthcare, a 182-hospital system, reported a net income of $7.7 billion in 2021, including investment gains and operating profits.
7. Tenet Healthcare, a 60-hospital system based in Dallas, reported net income of $1.5 billion on revenues of $19.5 billion in 2021. Tenet ended the 12-month period with an operating income of $2.9 billion, up from $2 billion recorded one year before. It also recorded losses on nonoperating activities and said its results for the year ending Dec. 31 included a pretax gain of $406 million associated with the divestiture of five Miami area hospitals, as well as stimulus funds totaling $205 million.
Overall health sector M&A activity bounced back in 2021 across nearly every subsector except one: hospitals, which saw a significant decrease in deal volume. Drawing on data from Kaufman Hall, the graphic above shows the scale of the most recent wave of health system consolidation, driven by last year’s eight “mega-mergers” between entities with over $1B in annual revenue each.
While the total number of hospital transactions decreased, the average seller size increased, with the total valuation of all hospital M&A activity nearly tripling from 2020 to 2021. With a dwindling number of independent hospitals left, health systems are pursuing larger combinations with their peers, to achieve greater scale and maintain economic “relevance.”
But as systems who have struggled to complete such mergers can attest, getting a larger deal across the finish line isn’t easy. The path to hospital consolidation now hinges on navigating complex organizational structures and issues of cultural compatibility, in addition to simply identifying “synergies” and avoiding antitrust pitfalls.
We recently caught up with a health system chief clinical officer, who brought up some recent news about CVS. “I was really disappointed to hear that they’re going to start employing doctors,” he shared, referring to the company’s announcement earlier this month that it would begin to hire physicians to staff primary care practices in some stores. He said that as his system considered partnerships with payers and retailers, CVS stood out as less threatening compared to UnitedHealth Group and Humana, who both directly employ thousands of doctors: “Since they didn’t employ doctors, we saw CVS HealthHUBs as complementary access points, rather than directly competing for our patients.”
As CVS has integrated with Aetna, the company is aiming to expand its use of retail care sites to manage cost of care for beneficiaries. CEO Karen Lynch recently described plans to build a more expansive “super-clinic” platform targeted toward seniors, that will offer expanded diagnostics, chronic disease management, mental health and wellness, and a smaller retail footprint. The company hopes that these community-based care sites will boost Aetna’s Medicare Advantage (MA) enrollment, and it sees primary care physicians as central to that strategy.
It’s not surprising that CVS has decided to get into the physician business, as its primary retail pharmacy competitors have already moved in that direction. Last month, Walgreens announced a $5.2B investment to take a majority stake in VillageMD, with an eye to opening of 1,000 “Village Medical at Walgreens” primary care practices over the next five years. And while Walmart’s rollout of its Walmart Health clinics has been slower than initially announced, its expanded clinics, led by primary care doctors and featuring an expanded service profile including mental health, vision and dental care, have been well received by consumers. In many ways employing doctors makes more sense for CVS, given that the company has looked to expand into more complex care management, including home dialysis, drug infusion and post-operative care. And unlike Walmart or Walgreens, CVS already bears risk for nearly 3M Aetna MA members—and can immediately capture the cost savings from care management and directing patients to lower-cost servicesin its stores.
But does this latest move make CVS a greater competitive threat to health systems and physician groups? In the war for talent, yes. Retailer and insurer expansion into primary care will surely amp up competition for primary care physicians, as it already has for nurse practitioners. Having its own primary care doctors may make CVS more effective in managing care costs, but the company’s ultimate strategy remains unchanged: use its retail primary care sites to keep MA beneficiaries out of the hospital and other high-cost care settings.
Partnerships with CVS and other retailers and insurers present an opportunity for health systems to increase access points and expand their risk portfolios. But it’s likely that these types of partnerships are time-limited. In a consumer-driven healthcare market, answering the question of “Whose patient is it?” will be increasingly difficult, as both parties look to build long-term loyalty with consumers.
Dallas-based Tenet Healthcare and one of its subsidiaries have entered into a definitive agreement to acquire Towson, Md.-based SurgCenter Development.
Under the agreement, Tenet and its subsidiary United Surgical Partners International will acquire ownership interests in 92 ambulatory surgery centers and related ambulatory support services for approximately $1.2 billion. Of the 92 ASCs, 16 of them are under development and have not yet opened.
Under the deal, expected to close in the fourth quarter of this year, SurgCenter and USPI will also enter into an agreement to develop at least 50 centers over a five-year period.
“We are extremely pleased to announce this transformative transaction and partnership, which builds upon USPI’s position as a premier growth partner and SCD’s track record of developing high-quality centers with leading physicians,” Saum Sutaria, MD, CEO of Tenet Healthcare, said in a Nov. 8 news release. “By welcoming these centers into our company, USPI will maintain its reach as the largest ambulatory platform for musculoskeletal services, a high-growth service line.”
Tenet said it expects the deal to generate strong financial returns.
HENRY KOTULA 