Behind Rising Health-Care Bills: Secret Hospital Deals

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Last year, Cigna Corp. and the New York hospital system Northwell Health discussed developing an insurance plan that would offer low-cost coverage by excluding some other health-care providers, according to people with knowledge of the matter. It never happened.

The problem was a separate contract between Cigna and New York-Presbyterian, the powerful hospital operator that is a Northwell rival. Cigna couldn’t find a way to work around restrictive language that blocked it from selling any plans that didn’t include New York-Presbyterian.

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Newly merged Advocate-Aurora sees 20% drop in operating income

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Dive Brief:

  • After finalizing its merger in April, Downers Grove, Illinois-based Advocate Aurora Health released a financial report on the combined company’s year-over-year performance showing a 20% drop in operating income to $220 million for the first six months of the year. The decline is partly due to $34 million in costs related to both the merger and implementation of a new EHR.
  • Total revenue increased 3% to nearly $6 billion for the first six months of the year, while revenue increased 3.5% to about $3 billion for the quarter. Net patient service revenue grew across most service lines, excluding inpatient volumes during the quarter, according to the financial statement.
  • While revenue climbed, so did expenses. The 27-hospital system increased its spending on salaries and wages, supplies and purchased services, and contracted medical services. Total expenses grew 4% to nearly $2.87 billion during the three months ended June 30, and increased 3.5% to $5.68 billion during the first six months of the year.

Dive Insight:

In line with industry trends, inpatient volumes for what is now the 10th-largest nonprofit health system in U.S. either slightly declined or remained flat during the reporting periods. 

About 85,000 patients were discharged from Advocate Aurora during the first six months of the year while more than 3 million patients during that time were seen either during a traditional doctor’s visit or through another outpatient setting. The system’s home care unit saw the largest increases during both reporting periods. 

Meanwhile, the company is not alone in its struggles to rein in EHR rollout costs. The University of Texas MD Anderson Cancer Center in Houston and Partners HealthCare in Boston have all experienced those costs weighing down financial performance, according to a previous report from Becker’s.

The financial report of the combined companies marks a milestone in Advocate’s quest for a partner to increase its scale. The system set its sights on Aurora after it had long tried to acquire NorthShore University Health System, a deal Advocate later dropped after pushback from antitrust regulators worried about price increases.

Analysts don’t expect the frenzied pace of M&A in the healthcare sector to slow down any time soon. The Advocate-Aurora deal was the largest regional transaction, Kaufman Hall reported, amid a year that turned out blockbuster deals threatening to shake up the status quo. 

As patients seek care in lower-acuity settings and as payers and providers team up to transform access to the industry, hospitals have eyed mergers to increase scale and offerings to attract more patients.

The consolidated financial statement details the results of the quarter ended June 30 and the first six months of the year.




Bon Secours finalizes merger with Mercy Health

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Bon Secours Health System and Mercy Health finalized their merger on Wednesday, creating the fifth largest Catholic health system in the U.S.

The new leadership team, to be led by President and CEO John M. Starcher Jr., former chief of Mercy, took effect immediately upon the announcement, officials said.  The merger comes about six months after the organizations first announced plans to integrate.

Officials said the combined nonprofit health system will provide nearly $640 million annually in charity care and community benefit programs.

In February, it was first announced Bon Secours—a not-for-profit Catholic health system with operations in Maryland, Virginia, South Carolina, Kentucky, Florida and New York—intended to merge with Mercy Health, a Catholic health ministry in Ohio and Kentucky.

The two organizations represented $8 billion in net operating revenue and $293 million in operating income, according to an announcement about the merger. The combined systems will include 57,000 associates and more than 2,100 employed physicians and advanced practice clinicians.

The new system will have more than 10 million patient encounters across seven states, with 43 hospitals, more than 1,000 care sites and more than 50 home health agencies, hospice agencies, and skilled nursing and assisted living facilities.

Officials said they were able to finalize the deal so quickly because of “early alignment of similar cultures and grounding in mission-based” care. They also said no outside resources were used to organize the agreement between the two organizations, but Deloitte Consulting was hired to assist with operational integration.

Leaders of the newly formed health system include Chief Operating Officer Brian Smith, Chief Clinical Officer Wael Haidar and Chief Financial Officer Debbie Bloomfield.

The C-suite also includes Chief Administrative Officer Mark Nantz, Chief Enterprise Risk Officer Jeff Oak, Chief Legal Officer Michael Bezney, Chief Community Health Officer Sam Ross and Chief Sponsorship and Mission Officer Sr. Ann Lutz.

The merger is part of ongoing consolidation across the industry including a planned merger between Dignity Health and Catholic Health Initiatives as well as a merger between Partners HealthCare in Massachusetts and Care New England Health System in Rhode Island.





Health care mega-mergers may get green light from feds

The Department of Justice headquarters in Washington, D.C.


Antitrust regulators at the Department of Justice are expected to approve two major health care deals — CVS Health’s $69 billion buyout of Aetna and Cigna’s $67 billion deal for Express Scripts — within a matter of weeks, the Wall Street Journal reports.

Why it matters: The health insurance and pharmacy benefits industries would be even more heavily consolidated than they currently are, which has worried consumer advocates and providers. The WSJ reports the only required antitrust remedies would be for CVS and Aetna to divest overlapping assets in their Medicare prescription drug plans.



450 hospitals at risk of potential closure, Morgan Stanley analysis finds

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More than 15 percent of U.S. hospitals have weak financial metrics or are at risk of potential closure, according to Business Insider, which cited a recent report from Morgan Stanley.

Morgan Stanley analyzed data from more than 6,000 hospitals and found 600 of the hospitals were “weak” based on criteria for margins for earnings before interest and other items, occupancy and revenue, according to Bloomberg. The analysis revealed another 450 hospitals were at risk of potential closure, according to Business Insider

Texas, Oklahoma, Louisiana, Kansas, Tennessee and Pennsylvania had the highest concentration of hospitals in the “at risk” pool, according to the report.

Industry M&A may be no savior as the pace of hospital closures, particularly in hard-to-reach rural areas, seems poised to accelerate.

Hospitals have been closing at a rate of about 30 a year, according to the American Hospital Association, and patients living far from major cities may be left with even fewer hospital choices as insurers push them toward online providers like Teladoc Inc. and clinics such as CVS Health Corp’s MinuteClinic.

Morgan Stanley analysts led by Vikram Malhotra looked at data from roughly 6,000 U.S. private and public hospitals and concluded eight percent are at risk of closing; another 10 percent are considered “weak.” The firm defined weak hospitals based on criteria for margins for earnings before interest and other items, occupancy and revenue. The “at risk” group was defined by capital expenditures and efficiency, among others.

The next year to 18 months should see an increase in shut downs, Malhotra said in a phone interview.

The risks are coming following years of mergers and acquisitions. The most recent deal saw Apollo Global Management LLC swallowing rural hospital chain LifePoint Health Inc. for $5.6 billion last month. Apollo declined to comment on the deal; LifePoint has until Aug. 22 to solicit other offers. Consolidation among other health-care players, such as CVS’s planned takeover of insurer Aetna Inc., could also pressure hospitals as payers push patients toward outpatient services.

There are already a lot of hospitals with high negative margins, consultancy Veda Partners health care policy analyst Spencer Perlman said, and that’s going to become unsustainable. Rural hospitals with a smaller footprint may have less room to negotiate rates with managed care companies and are often hobbled by more older and poorer patients.

Also wearing away at margins are technological improvements that allow patients to get more surgeries and imaging done outside of the hospital. They are also likely to be forced to pay more to attract and retain doctors in key areas, Bloomberg Intelligence analyst Jason McGorman said.

They “are getting eaten alive from these market trends,” Perlman cautioned.

Future M&A options could be too late — buyers may hesitate as debt laden operators like Community Health Systems Inc. and Tenet Healthcare Corp. focus on selling underperforming sites to reduce leverage, Morgan Stanley’s Zachary Sopcak said.

The light at the end of the tunnel is some hospitals are rising to the occasion, Perlman said. Some acute care facilities are restructuring as outpatient emergency clinics with free-standing emergency departments. “Microhospitals,” or facilities with ten beds or less, are another trend that may hold promise.


5 key takeaways from hospitals’ Q2 results

Earnings results were mixed for hospital operators in the second quarter, with debt-laden health systems slagging and high-performing counterparts pulling ahead.