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The No. 1 takeaway from the 2019 JP Morgan Healthcare Conference: It’s the platform, stupid

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https://www.beckershospitalreview.com/hospital-management-administration/the-no-1-takeaway-from-the-2019-jp-morgan-healthcare-conference-it-s-the-platform-stupid.html

If you want to understand the shifting sands of healthcare, you’ll find no better place than the nonprofit provider track during the infamous JP Morgan Healthcare Conference that took place this week in San Francisco.

Over 40,000 players were in town from every corner of the healthcare ecosystem. However, if you want to hear the heartbeat of what’s happening at ground level, you needed to literally squeeze into the standing room only nonprofit provider track where the CEOs and CFOs of 25 of the most prominent hospitals and healthcare delivery systems in the country shared their perspectives in rapid-fire 25 minute presentations.

This year those presenters represented over $300 billion, or close to 10 percent of the annual healthcare spend in U.S. healthcare. These organizations play a truly unique role in this country as they are integrated into the very fabric of the communities that they serve and are often the single largest employer in their respective regions. In other words, if you work in or care about healthcare, understanding their perspective is a must.

Every year I take a shot at condensing all of these presentations into a set of takeaways so healthcare providers who aren’t in the room can share something with their teams to help inform their strategy. So what do you need to know? Glad you asked, here you go.

Shift Happens — Moving from Being a Healthcare Provider to Creating a Platform for Health and Healthcare in Your Community

Trying to synthesize 25 presentations into a single punch line is pretty stressful. I listened to every presentation, debriefed with other healthcare providers in the audience afterwards and then spent the next 48 hours trying to process what I heard. I was stumped.

But then, finally, it hit me. To take a new spin on an old phrase, “It’s the platform, stupid.” To be clear, even though I’ve been in healthcare for close to 30 years, “stupid” in that sentence is absolutely referring to me.

So the No. 1 takeaway from the 2019 JP Healthcare Conference is this — for healthcare providers, there is a major shift taking place. They are moving from a traditional strategy of buying and building hospitals and simply providing care into a new and more dynamic strategy that focuses on leveraging the platform they have in place to create more value and growth via new and often more profitable streams of revenue. Simply stated, the healthcare delivery systems of today will increasingly leverage the platform and resources that they have in place to become a hub for both health and healthcare in the future. There is a level of urgency to move quickly. Many feel that if they don’t expand the role that they play in both health and healthcare in their community, someone else will step in.

Folks in tech would think of this as the difference between a “product” strategy (old school) and a “platform” strategy (new school). Think of this as the difference from cell phones (Blackberry) to smartphones (iPhone and Android devices). One was a product, the other was a platform. Common platforms that we’re all familiar with such as Facebook, Amazon, Google, Apple and even Starbucks have always 1) started with a very small niche, 2) built an audience, 3) built trust and 4) then added other offerings on top of that platform. By now there is no need for a “spoiler alert.” We all know that this strategy works and these companies have created a breathtaking amount of value. The comforting news for hospitals and healthcare delivery systems is that many have already completed the first three steps and have many of the building blocks they need to leverage a “platform” as a business strategy. The presentations at the JP Morgan Healthcare Conference made it clear that most are now actually taking that fourth step to separate themselves from the pack.

There is enormous upside to those who understand this pivot and take advantage of this change in the market. Dennis Dahlen, CFO of Mayo Clinic, shared his perspective on this: “Thinking differently in the future is essential. In many ways, at Mayo, we are already operating as a platform today, but we have to continue to leverage this approach to uncover additional ways that we can be a hub for both health and healthcare in our community.” Mayo’s platform includes leveraging research, big data, expert clinic insights and artificial intelligence to create new value for Mayo’s clinical practice as well as new opportunities for Mayo’s partners.

To be clear, the mental shift here is massive. It’s the difference of being on defense (where most healthcare providers are) to be being on offense (which is where they know they need to be). Executive teams have focused their time, energy and resources on driving and supporting inpatient admissions via a traditional bricks and mortar presence coupled with the acquisition of physician practices. The difficulty of thinking through what it means to truly be “asset light” and taking a different approach shouldn’t be underestimated. The good news is that the recent financial results of many health systems have improved, providing a little breathing room for investments to enable this shift in strategy. Those who don’t may fall way behind.

A New Way of Thinking — What it Means to be a Hub

Being a hub is essentially bringing together people with common interests to spark innovation and facilitate work getting done more efficiently. Examples include Silicon Valley as a “tech hub,” Los Angeles as an “entertainment hub,” New York as a “financial hub,” Washington, D.C. as a “hub for politics” and how essentially every college town is or can become a “research hub.”

Given that hospitals and health systems are the largest employers in their community, they are already set up to become a hub. In the past, they leveraged that position to simply care for the sick. Increasingly in the future, these organizations will be health and healthcare hubs for innovation and building new companies, for bringing the community together to tackle issues like hunger and homelessness, for education and training, for research and development partnerships, for coordinated, compassionate and longitudinal care delivery for treatment, for support groups for specific chronic conditions, for digital and virtual care, and for thoughtful and effective support for mental and behavioral health. Changes in the care delivery market over the last 10 years have put the right building blocks in place to make this happen.

Hiding in Plain Sight — The Single Biggest Change in Healthcare We May Ever See Has Already Happened

Taking advantage of becoming a hub and leveraging the strategic concept of being a platform requires new thinking, new structures and new skill sets. The great news for healthcare providers is they have already made the toughest move of all in order to set this in motion.

Over the last decade, there has been a massive level of consolidation with hundreds of hospitals and thousands of physician practices being acquired every year. While more mergers and acquisitions will still happen, this stunning and fundamental restructuring of healthcare delivery has taken place and there is no turning back. This is likely the single biggest shift relative to how healthcare is structured in this country that will take place during our lifetime, and it barely gets mentioned. The strategy many were chasing was primarily being driven by a “heads in beds” pay-off that was both based on offense (“an easier way to grow”) and defense (“we better buy them before someone else does”). That said, as this consolidation happened most healthcare delivery systems were really just an amalgamation of stand-alone hospitals set up as a holding company that provided no real leverage other than more top-line revenue.

During the JP Morgan Healthcare Conference, it was clear that most have made the shift from a holding company into a single operating entity. Chicago-based Northwestern Medicine shared a very refined playbook for quickly bringing acquisitions onto their “platform,” and the results are pretty stunning as they have transformed from a $1 billion academic medical center into a $5 billion regional healthcare hub in a handful of years.

And over the last few years, these organizations have gotten super serious about making the toughest decisions right away. The mega-merger of Advocate Health and Aurora Health, the largest healthcare delivery systems in Illinois and Wisconsin respectively, was accompanied by a gutsy decision to fast-track the implementation of Epic at Advocate to get the leverage of a single EHR platform across the system. While many focus on the cost of the transition and the shortcomings of some of the applications, what gets missed is the enormous long-term leverage this provides regarding communication, integration, continuity of care and, of course, access to data and the potential to improve clinical and financial performance. This creates a “platform-like” experience for both employees and customers. 

So, the twist in the story is that the pay-off for consolidation will likely be very different and perhaps much better than many had originally intended. They have the building blocks in place to be a health and healthcare platform for their community. But now they need to figure out how to truly take advantage of it.

Your Action Plan — 6 Ideas from 25 Healthcare Delivery Systems on How to Leverage Your “Platform”

During their presentations the 25 non-profit provider organizations opened up their playbooks on how others can leverage their platforms and the idea of becoming the hub for health and healthcare in their respective communities. Here is what they shared.

1. Create the Digital Front Door — or Someone Else Will

The big shift in play right now is the moving away from traditional reliance on transactional face-to-face interactions with individual providers. Building relationships and trust is something that has been a core competency and core strategic asset for hospitals in the past. In the future, this simply won’t be possible without leveraging digital platforms as we do in every other aspect of our lives today. As Stephen Klasko, MD, CEO of Philadelphia-based Jefferson Health, shared, the real strategy will be to deliver “health and healthcare with no address.”

Many provider organizations are moving aggressively to create digital front doors. Kaiser Permanente delivered 77 million virtual visits last year. Intermountain introduced a virtual hospital that provides over 40 services and has delivered over 500,000 interactions. Nearly every health system leverages MyChart or a similar personal health record platform. There is an enormous amount of risk for hospitals and health systems that don’t take action here, as traditional healthcare providers will be competing with more mainstream and polished consumer brands for the relationships and trust of the folks in their community.

As the team from Spectrum Health shared, “87 percent of Americans measure all brands against a select few — think Amazon, Netflix and Starbucks.” Google, Apple and Facebook as well as Walgreens or CVS are all going after this “digital handshake,” and are big threats to healthcare providers. There is no question that some of these organizations will be “frenemies,” where they are both competing and collaborating. Healthcare organizations will need to approach any partnerships mindful of that risk.

2. Drive Affordability and Reduce Cost — or Risk Being the Problem

As the burden of the cost of care increasingly shifts to the patient’s wallet, healthcare providers will need to play in driving affordability. Coupled with the recent federal requirement to post prices online, there is a great deal of visibility around the price of care, even if the numbers are way off the mark. Understanding and reducing the total cost of care is now viewed as a requirement. As legacy cost accounting applications relied on charges as a proxy for cost and were limited to the acute care setting, most provider organizations have or are now in the process of deploying advanced cost accounting applications with time-driven and activity-based costing capabilities including a number that presented during the conference, such as Advocate Aurora Health, Bon Secours Mercy, Boston Children’s Hospital, Hospital for Special Surgery, Intermountain Healthcare, Northwestern Medicine, Novant Health, Spectrum Health and Wellforce.

This was one of the hottest topics during the conference, and there was significant buzz regarding having a single source of truth for the cost of care across the continuum. Vinny Tammaro, CFO of Yale New Haven Health, commented, “We need to align with the evolution of consumerism and help drive affordability in healthcare. How we leverage data is mission critical to making this concept a reality. Bringing clinical and financial data together provides us with a source of truth to help both reduce the cost of care as well as reallocate our finite resources to high impact initiatives in our community.” Organizations like Intermountain Healthcare, which implemented a 2.7 percent price reduction in exchange pricing, are taking the next step in translating cost reduction into lower prices for consumers. And now healthcare systems are starting to work together to create additional leverage via Civica Rx, which now includes 750 hospitals joining forces to help lower the cost of generic drugs.

3. Tackle Social Determinants of Health — or You Won’t Be the Hub for Health in Your Community

It is always less expensive to prevent a problem than it is to fix it. The good news is that the economic incentives for hospitals and healthcare delivery systems to both think and act that way are beginning to line up. They are certainly there already for providers that are also health plans such Intermountain, Kaiser Permanente, Providence St. Joseph Health, Spectrum Health and UPMC. They are also in place for providers that have aggressively taken on population-based risk contracts such as Advocate Aurora Health. With that said, it feels like every health system is starting to lean in here — and they should.

Being the central community hub for these issues makes a ton of sense. The way that Kaiser framed it is that while they have 12 million members, there are 68 million people in the communities they serve. Taking that broader lens both allows them to make a bigger impact but also broaden their market. Many organizations, such as Henry Ford Health System, are taking on hunger via fresh food pharmacies. Geisinger shared how a 2.0 reduction in Hemoglobin A1c reduction leads to a $24,000 cost reduction per participant in their fresh food “farmacy.” So while hospitals are perfectly positioned, have the resources and know it’s the right thing to do, they are now also beginning to understand the business model tied to targeting the social determinants of health. There is also strong strategic rationale associated with taking on a broader role of driving health versus only providing healthcare.

4. Create Partnerships for Healthcare Innovation — or Lose the Upside

Spectrum Health has a $100 million venture fund. Providence St. Joseph’s Health announced a second $150 million venture capital and growth equity fund. Mayo Clinic Ventures has returned over $700 million to their organization. Jefferson Health has a 120-person innovation team focused on digital innovation and the consumer experience, partnering with companies to build solutions. These are all variations on a theme as virtually every organization that presented is leveraging their resources to make a bigger impact and drive additional upside from their platform. “We have close to 900 agreements with over 500 partners,” stated Sanda Fenwick, CEO of Boston Children’s Hospital. “Our strategy is to be a hub for research, innovation and education in order to help evolve how care is delivered. This can only be done by collaborating with others.”

5. Become the Hub for Targeted Services and Chronic Conditions — or They Will Go Elsewhere

Perhaps the best example here is the work of Hospital for Special Surgery, the largest orthopedics shop in the world. It is has become a destination for good reason — fewer complications, fewer infections, a higher discharge rate to home and fewer readmissions. The most compelling data point is that when patients come to HSS for a second opinion, one-third of the time they receive a non-surgical recommendation. The same type of shopping is increasingly going to happen for chronic conditions.

Healthcare delivery systems that take a more holistic yet targeted approach have significant potential. They will need to think more deeply about the end-to-end experience and become immersed within the community outside of the four walls of the hospital. Other players in the community, such as CVS Health and Walgreens, would say they have a platform — and they would be right. The platform that healthcare providers have built and are building will absolutely be competing against other care delivery platforms.

6. Leverage Applied Analytics — or You’ll Lose Your Way

In order to enable everything listed above, the lifeline for every health and healthcare hub will be actionable data. Applied analytics is a boring term that is actually gaining traction and starting to dislodge buzzwords like big data, machine learning and artificial intelligence relative to its importance to healthcare providers.

Similar to how analytics are being used in a practical way in baseball to determine where to throw a pitch to a batter or position players in the field, healthcare providers are pushing for practical data sets presented in a simple, actionable framework. That may seem obvious, but it is simply not present in many healthcare organizations that have been focused on building data warehouse empires without doors to let anyone in. Many organizations, such as Advocate Aurora Health, Bon Secours Mercy and Spectrum Health, have deployed more dynamic business decision support solutions to access better insight into performance and care variation. This allows them to assess opportunities to reallocate resources to invest in more productive ways to leverage their platform.

While leveraging a platform as a business strategy is new to healthcare providers, the good news is that building blocks are already in place. It’s time to leverage that platform to drive better outcomes and more affordable care in the community. And now is the time to get started.

 

OUTLOOK ‘STABLE’ FOR HEALTH INSURERS IN 2019 DESPITE ACA UNCERTAINTY

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https://www.healthleadersmedia.com/finance/outlook-stable-health-insurers-2019-despite-aca-uncertainty

A robust job market bolstering employer-sponsored plans, Baby Boomers transitioning to Medicare Advantage, and ACA exchanges attracting new payers are good signs for health plans in the coming year.

KEY TAKEAWAYS

Consolidations among larger payers makes it harder for smaller players to enter the market or sustain a presence.

Payment reforms around the ACA will continue to drive more cross-sector collaboration among payers and providers.

Despite the uncertainty over the future of the Affordable Care Act, the U.S. health insurance sector remains stable heading into 2019, according to a new analysis by S&P Global Ratings.

“A combination of still-favorable business conditions, financial factors, and diminished near-term legislative uncertainty balances our concerns relating to merger and acquisition activity, elevated policy risk, and re-emergent legal overhang,” said S&P analyst Joseph Marinucci.

Strong job growth is bolstering commercial markets, aging Baby Boomers are driving Medicare Advantage growth, states are shifting their high acuity populations into managed Medicaid, and the ACA exchanges are stabilizing and attracting new competitors, S&P said.

“We assess capital and liquidity as strong or better for most of our rated U.S. health insurers, which supports balance-sheet strength,” Marinucci said. “U.S. health insurers’ operating performance reflects sustained earnings strength and improved earnings quality.”

However, Marinucci said that profitability could moderate somewhat this year.

M&As remain a key rating factor, especially with larger transaction sizes, raising concerns about financial leverage, integration, and cultural compatibility. Consolidations, joint ventures, and partnering among larger insurers are defragmenting the sector, allowing the big insurers to build scale, “and create more touch points as the trend toward consumerism gains traction.”

“This is making it harder for newer and smaller players to enter the market or sustain their presence,” S&P said. “As a result, we continue to see larger health insurers taking a bigger share of the marketplace, and smaller players being displaced or struggling to achieve profitable growth as the competitive gap widens.”

“Although the mid-term elections removed a good deal of legislative uncertainty for the industry, policy risk remains elevated given the administration’s preference for ACA alternatives,” S&P said.

In addition, S&P says that payment and delivery reforms mandated in the ACA around value-based care will continue to drive greater cross-sector collaboration among payers and providers.

“A COMBINATION OF STILL-FAVORABLE BUSINESS CONDITIONS, FINANCIAL FACTORS, AND DIMINISHED NEAR-TERM LEGISLATIVE UNCERTAINTY BALANCES OUR CONCERNS RELATING TO MERGER AND ACQUISITION ACTIVITY, ELEVATED POLICY RISK, AND RE-EMERGENT LEGAL OVERHANG.”

 

 

 

Healthcare’s vertical mergers kick-started a massive industry shift in 2018. Will it pay off?

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https://www.fiercehealthcare.com/payer/healthcare-s-vertical-mergers-kick-started-a-massive-industry-shift-2018-will-it-pay-off?mkt_tok=eyJpIjoiTnpBNE1HTmtObUl3WVRkayIsInQiOiJFOU1xMDRPMGtzMCtnWXU4MExUVFAzZ3Jrdm5cL2s3S1dMRkVldTRWS2QyNmJZU255UWRIWW14QmtXVkJ2T2VTeGpYTVBvQXZWWW1JVnB0S0crTXV3aFhDS0wrY3NzTmtEYmJEMHdvSG03bGkxS2ZlREdiaWZydFZkbkdlXC9tTHE1In0%3D&mrkid=959610&utm_medium=nl&utm_source=internal

Mergers and acquisitions deals consolidation

Two massive megamergers in CVS-Aetna and Cigna-Express Scripts dominated the conversation around mergers and acquisitions in healthcare.

Whether you think the mergers will help or hurt consumers, both deals have sparked a distinct shift across the industry as competitors search for ways to keep pace. It also frames 2019 as the year in which five big vertically integrated insurers in CVS, UnitedHealth, Cigna, Anthem and Humana begin to take shape.

Combined, the mergers totaled nearly $140 billion.

Both CVS and Cigna closed their transactions in the fourth quarter with promises that their new combined companies would “transform” the industry. Unquestionably, it’s already triggered some response from other players. Whether those companies can make good on their promises to improve care for consumers remains to be seen, and the payoff may not come for several years, as 2019 is likely to be a year of initial integration.

While CVS and Cigna hogged most of the spotlight, several other notable transactions across the payer sector could have smaller but similarly important consequences going forward.

WellCare acquires Meridian Health Plans for $2.5B

In May, WellCare picked up Illinois-based Meridian Health Plans for $2.5 billion, acquiring a company with an established Medicaid footprint with 1.1 million members. The deal boosted WellCare’s membership by 26%.

But the transaction also thrust WellCare back onto the ACA exchanges. Meridian has 6,000 marketplace members in Michigan.

Importantly, the acquisition gave WellCare a new pharmacy benefit manager in Meridian Rx. CEO Kenneth Burdick said it would provide “additional insight into changing pharmacy costs and improving quality through the integration of pharmacy and medical care.”

WellCare also makes out on CVS-Aetna transaction

WellCare was also a beneficiary of the CVS-Aetna deal after the Department of Justice required Aetna to sell off its Part D business in order to complete its merger.

The deal adds 2.2 million Part D members to WellCare, tripling its existing footprint of 1.1 million.

Humana goes after post-acute care

2018 was the year of post-acute care acquisitions for Humana. The insurer partnered with two private equity firms to buy Kindred Healthcare for $4.1 billion in a deal that was first announced last year. It used a similar purchase arrangement to invest in hospice provider Curo Health Service in a $1.4 billion deal.

Both acquisitions give Humana equity stake in the companies, with room to make further investments down the road. Kindred, in particular, is expected to further Humana’s focus on data analytics, digital tools and information sharing and improve the continuity of care for patients even after they leave the hospital.

Not to be outdone, rival Anthem also closed its purchase of Aspire Health, one of the country’s largest community-based palliative care providers.

UnitedHealth keeps quietly buying up providers, pharmacies

With ample reserves, UnitedHealth is always in the mix when it comes to acquisitions. This year was no different. The insurance giant snapped up several provider organizations to add to its OptumHealth arm. In June, it was one of two buyers of hospital staffing company Sound Inpatient Physicians Holdings for $2.2 billion. It also bought out Seattle-based Polyclinic for an undisclosed sum. The physician practice has remained staunchly independent for more than a century.

Most notably, UnitedHealth is still in the process of closing its acquisition of DaVita Medical Group. DaVita recently dropped the price of that deal from $4.9 billion to $4.3 billion in an effort to speed up Federal Trade Commission approval.

The Minnesota-based insurer is also clearly interested in specialty pharmacies to supplement its PBM OptumRx. UnitedHealth bought Genoa Healthcare in September, adding 435 new pharmacies under its umbrella. Shortly after, it bought up Avella Specialty Pharmacy, a specialty pharmacy that also offers telepsychiatry services and medication management for behavioral health patients.

Centene invests in a tech-forward PBM

Perhaps in an effort to keep pace with Cigna and CVS, Centene has made smaller scale moves in the PBM space, investing in RxAdvance, a PBM launched by former Apple CEO John Sculley. Following an initial investment in March, Centene sunk another $50 million into the company in October and then announced plans to roll the solution out nationally. Notably, CEO Michael Neidorff has said he is pushing the PBM to move away from rebates and toward a model that relies on net pricing.

“You talk about ultimate transparency—that gets us there,” he said recently.

 

 

 

Policy upheaval, tech giant disruption and megamergers: Healthcare Dive’s 10 best stories of 2018

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https://www.healthcaredive.com/news/policy-upheaval-tech-giant-disruption-and-megamergers-healthcare-dives-1/543390/

Mobile health records and nurse protests also grabbed readers this year.

This year in healthcare was marked by sweeping changes, including seemingly constant vertical and horizontal consolidation, led by the $69 billion CVS grab of Aetna and Cigna’s $67 billion acquisition of Express Scripts.

As 2018 wound down, a federal judge took an ax to the Affordable Care Act as the Trump administration kept up its efforts to undermine the law, with CMS expanding short-term health plans many say are built to subvert the ACA. Elimination of the individual mandate penalty, Medicaid expansion and rising premiums all likely contributed to declined enrollment on ACA exchanges as well.

The administration encouraged states to use waivers to expand controversial Medicaid work requirements and proposed site-neutral payments, rattling health systems of all sizes that were already struggling under ferocious operating headwinds. Hospitals cut back on services and invested heavily in lucrative outpatient facilities in an attempt to reclaim volume.

Tech companies Apple and Amazon pushed further into the space, with the former focusing on mobile health apps and the latter focusing on, well, almost everything.

But that’s just scratching the surface. Here is a curated list of Healthcare Dive’s top stories from the last year.

    1. Optum a step ahead in vertical integration frenzy

      After a 2017 marked by failed horizontal mergers, vertical consolidation came into vogue during the year, led by CVS-Aetna, Cigna-Express Scripts and Humana-Kindred.

      Some smart observers saw a predecessor to these unions in UnitedHealth Group’s Optum: a pharmacy benefit manager plus a care services unit that employs over 30,000 physicians, using data analytics to capitalize on consumerism and value-based care.

      Our piece on Optum’s solid foothold in the space, and its likelihood of staying ahead of the nascent competition, was Healthcare Dive’s most-read article in 2018. Read More »

    2. New Medicare Advantage rules hold big potential for pop health

      A novel Medicare Advantage rule giving payers more flexibility to sell supplemental benefits to chronically ill enrollees sparked a fair amount of interest in our readers.

      The rule offered up a slate of new opportunities for insurers such as UnitedHealthcare and Humana that can now work with rideshare companies to provide transportation to medical appointments, air conditioners for beneficiaries with asthma and other measures around issues like food insecurity in a broad shift to recognizing social determinants of health. Read More »

    3. Apple debuts medical records on iPhone

      Outside players such as Apple, Amazon and Google moved forward in their bids to disrupt healthcare in 2018. Apple rang in the New Year with its announcement that customers would now be able to access their medical records on the Health app following months of speculation and buzz.

      The move looks to put access to personal, sensitive data back in the patients’ hands, an objective a lot of the entrenched healthcare ecosystem can get behind as well. Heavy hitters on the EHR side (Epic, Cerner, athenahealth) and the provider side (Johns Hopkins, Cedars-Sinai, Geisinger) are taking place in the initiative. Read More »

    4. At least 14 states have legislation addressing safe staffing currently, but California is the only one to implement a strict ratio at one nurse per every five patients. Looking to 2019, in Pennsylvania voters elected a governor who has voiced support for state legislation. Read More »

    5. More employers go direct to providers, sidestepping payers

      Employers ramped up their cost-containment creativity in 2018. One method? Cutting out the middleman and forging direct relationships with providers themselves, whether it’s contracting with an accountable care organization to manage an entire employee population or a simple advocacy role to fight for payment reform.

      Aside from some correlated CMS interest, big names forging inroads in the arena include General Motors, Walmart, Whole Foods, Boeing, Walt Disney and Intel, all with various levels of investment.

      Although only 6% of employers are doing so currently, 22% are considering solidifying some sort of provider relationship for next year according to a Willis Towers Watson survey. It’s also likely the Amazon-J.P. Morgan-Berkshire Hathaway venture will look at direct contracting in its (still vague) mission to lower employer costs. Read More »

    6. Amazon Business’ medical supply chain ambitions: 4 things to know

      Amazon’s B2B purchasing arm reached out and grabbed the healthcare supply chain this year, shaking a once-predictable business model.

      Under intense operating headwinds, supply chain professionals looked to trim the fat from traditional distribution and supplier models in 2018. Some looked to Amazon Business, which generated more than a billion dollars in sales its first year alone by relying on its marketplace model, streamlined ordering and a “tail spend” strategy.

      1. Healthcare Dive discussed this and more with global healthcare leader at Amazon Chris Holt in an exclusive interview that drove a lot of interest. Read More »

GE, Medtronic among those linking with hospitals for value-based care

Value-based care was a buzzword over the past year, with providers, payers and healthcare execs across the board looking (or saying they’re looking) for ways to cut costs and improve quality.

Although legal barriers stemming from the Anti-Kickback Statute and Stark Law persist, medical technology companies jumped on the bandwagon, with big names like GE, Philips and Medtronic coupling with hospitals to promote VBC initiatives. Read More »

  1. How Amazon, JPM, Berkshire Hathaway could disrupt healthcare (or not)

The combination of the e-commerce giant, a 200-year-old multinational investment bank and Warren Buffet’s redoubtable holding company joining forces to take on healthcare costs spooked investors in traditional industry players. The venture added a slew of big names to its C-suite, including Atul Gawande and Jack Stoddard for CEO and COO, respectively. Read More »

 

 

 

What We Learned in 2018: Health and Medicine

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Developments in medicine and health that we’re still thinking about at year’s end.

We learned many doctors do not disclose financial ties when they publish research.

Dr. José Baselga, a towering figure in the cancer world, resigned from his post at Memorial Sloan Kettering Cancer Center in New York in September. An investigation by The Times and ProPublica had found that he failed to disclose millions of dollars in payments from health care companies in dozens of research articles. But Dr. Baselga wasn’t the only medical researcher who failed to make such disclosures, a problem that is aggravated by confusing advice from medical journals and a failure to adequately vet the contributors to their pages.

We were reminded about how bad the flu can really be.

In the winter of 2017-2018, 80,000 Americans died from the flu. It was the highest number in over a decade, and included 180 young children and teenagers. Some hospitals had to bring out their “surge tents” to treat the overflow of patients. While no flu vaccine is perfect at this time, the shots are particularly effective with children, and the secretary of health and human services, Alex M. Azar II, compared getting vaccinated with wearing your seatbelt. You already do that, don’t you?

We learned that when hospitals combine, patients can end up paying more.

Everywhere in the United States, hospitals are merging. Instead of creating savings that get passed on to consumers, an analysis found that in some regions, the opposite occurred. From 2010 through 2013, the price of an average hospital stay soared, with prices in most areas going up between 11 percent and 54 percent.

We learned how one city has started to turn the corner on the opioids epidemic.

Dayton, Ohio, had one of the highest opioid overdose death rates in the nation. Now, it may be at the leading edge of a waning phase of the epidemic. While the data are preliminary, a variety of factors contributed to the reduction in deaths: Medicaid expansion paying for treatment; dwindling availability of one particular drug; greater use of naloxone, which can reverse overdoses; a large network of recovery support groups; and, law enforcement and public health workers improving their coordination.

We learned that vaping among young people is a growing national problem.

E-cigarettes may help some people quit smoking, but the soaring use of Juul and other vaping devices by teenagers has motivated the Food and Drug Administration to place new limits on the sales of e-cigarette flavors. Schools are grappling with students furtively vaping, as teenagers who may never have smoked a cigarette find themselves struggling to shake a new addiction to nicotine.

We learned the disease may no longer be “a lifelong thing,” as one patient put it.

People with hemophilia, the inability to form blood clots, spend their lives menaced by the prospect of uncontrolled bleeding into a muscle or joint, or even the brain. Experimental gene therapy treatments have rid a few patients — for now, at least — of the condition. It does not yet amount to a cure, and the treatment is imperfect. But some who received the treatments are finding themselves uneasily adjusting to a life with new freedoms.

We learned untreated strep throat leads to heart failure in poor countries.

In the United States and other rich countries, cheap antibiotics cure children with strep throat easily. But in poor countries, strep can result in rheumatic heart disease and a long, slow death sentence. In Rwanda, doctors from a group called Team Heart visit once a year to perform heart valve-replacement surgery for 16 people. But there are thousands more people who need the procedure in a country that has no heart surgeons.

We learned how public health research can be compromised by private interests.

In June, the National Institutes of Health shut down a study of the effects of moderate drinking on heart attacks and stroke, following an investigation by The Times. The researchers who proposed the study sought funding from beer and liquor companies, and suggested that the results would support a daily drink as a healthy choice. The N.I.H.’s director, Dr. Francis Collins, said the trial seemed to be “set up in a way that would maximize the chances of showing a positive effect of alcohol.”

 

 

 

 

Healthcare as a zero-sum game: 7 key points

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https://www.beckershospitalreview.com/hospital-management-administration/healthcare-as-a-zero-sum-game-7-key-points.html?origin=cfoe&utm_source=cfoe

This article sets out seven thoughts on healthcare systems.

The article discusses:

  1. Types of Healthcare Systems
  2. Mergers and Key Questions to Assess Mergers
  3. Headwinds Facing Systems
  4. The Great Fear of Systems
  5. What has Worked the Last 10 Years
  6. What is Likely to Work the Next 10 Years
  7. A Few Other Issues

Before starting the core of the article, we note two thoughts. First, we view a core strategy of systems to spend a great percentage of their time on those things that currently work and bring in profits and revenues. As a general rule, we advise systems to spend 70 to 80 percent of their time doubling down on what works (i.e., their core strengths) and 20 to 30 percent of their time on new efforts.

Second, when we talk about healthcare as a zero-sum game, we mean the total increases in healthcare spend are slowing down and there are greater threats to the hospital portion of that spend. I.e., the pie is growing at a slower pace and profits in the hospital sector are decreasing.

I. Types of Healthcare Systems

We generally see six to eight types of healthcare systems. There is some overlap, with some organizations falling into several types.

1. Elite Systems. These systems generally make U.S. News & World Report’s annual “Best Hospitals” ranking. These are systems like Mayo Clinic, Cleveland Clinic, Johns Hopkins Hospital, NewYork-Presbyterian, Massachusetts General, UPMC and a number of others. These systems are often academic medical centers or teaching hospitals.

2. Regionally Dominant Systems. These systems are very strong in their geographic area. The core concept behind these systems has been to make them so good and so important that payers and patients can’t easily go around them. Generally, this market position allows systems to generate slightly higher prices, which are important to their longevity and profitability.

3. Kaiser Permanente. A third type of system is Oakland-based Kaiser Permanente itself. We view Kaiser as a type in and of itself since it is both so large and completely vertically integrated with Kaiser Foundation Health Plan, Kaiser Foundation Hospitals and Permanente Medical Groups. Kaiser was established as a company looking to control healthcare costs for construction, shipyard and steel mill workers for the Kaiser industrial companies in the late 1930s and 1940s. As companies like Amazon, Berkshire Hathaway and JPMorgan Chase try to reduce costs, it is worth noting that they are copying Kaiser’s purpose but not building hospitals. However, they are after the same goal that Kaiser originally sought. Making Kaiser even more interesting is its ability to take advantage of remote and virtual care as a mechanism to lower costs and expand access to care.

4. Community Hospitals. Community hospitals is an umbrella term for smaller hospital systems or hospitals. They can be suburban, rural or urban. Community hospitals are often associated with rural or suburban markets, but large cities can contain community hospitals if they serve a market segment distinct from a major tertiary care center. Community hospitals are typically one- to three-hospital systems often characterized by relatively limited resources. For purposes of this article, community hospitals are not classified as teaching hospitals — meaning they have minimal intern- and resident-per-bed ratios and involvement in GME programs.

5. Safety-Net Hospitals. When we think of safety-net hospitals, we typically recall hospitals that truly function as safety nets in their communities by treating the most medically vulnerable populations, including Medicaid enrollees and the uninsured. These organizations receive a great percentage of revenue from Medicaid, supplemental government payments and self-paying patients. Overall, they have very little commercial business. Safety-net hospitals exist in different areas, urban or rural. Many of the other types of systems noted in this article may also be considered safety-net systems.

6. National Chains. We divide national chains largely based on how their market position has developed. National chains that have developed markets and are dominant in them tend to be more successful. Chains tend to be less successful when they are largely developed out of disparate health systems and don’t possess a lot of market clout in certain areas.

7. Specialty Hospitals. These are typically orthopedic hospitals, psychiatric hospitals, women’s hospitals, children’s hospital or other types of hospitals that specialize in a field of medicine or have a very specific purpose.

II. Mergers and Acquisitions

There have seen several large mergers over the last few years, including those of Aurora-Advocate, Baylor Scott & White-Memorial Hermann, CHI-Dignity and Mercy-Bon Secours, among others.

In evaluating a merger, the No. 1 question we ask is, “Is there a clear and compelling reason or purpose for the merger?” This is the quintessential discussion piece around a merger. The types of compelling reasons often come in one of several varieties. First: Is the merger intended to double down and create greater market strength? In other words, will the merger make a system regionally dominant or more dominant?

Second: Does the merger make the system better capitalized and able to make more investments that it otherwise could not make? For example, a large number of community hospitals don’t have the finances to invest in the health IT they need, the business and practices they need, the labor they need or other initiatives.

Third: Does the merger allow the amortization of central costs? Due to a variety of political reasons, many systems have a hard time taking advantage of the amortization of costs that would otherwise come from either reducing numbers of locations or reducing some of the administrative leadership.

Finally, fourth: Does the merger make the system less fragile?

Each of these four questions tie back to the core query: Does the merger have a compelling reason or not?

III. Headwinds

Hospitals face many different headwinds. This goes into the concept of healthcare as a zero-sum game. There is only so much pie to be shared, and the hospital slice of pie is being attacked or threatened in various areas. Certain headwinds include:

1. Pharma Costs. The increasing cost of pharmaceuticals and the inability to control this cost particularly in the non-generic area. Here, increasingly the one cost area that payers are trying to merge with relates to pharma/PBM the one cost that hospitals can’t seem to control is pharma costs. There is little wonder there is so much attention paid to pharma costs in D.C.

2. Labor Costs. Notwithstanding all the discussions of technology and saving healthcare through technology, healthcare is often a labor-intensive business. Human care, especially as the population ages, requires lots of people — and people are expensive.

3. Bricks and Mortar. Most systems have extensive real estate costs. Hospitals that have tried to win the competitive game by owning more sites on the map find it is very expensive to maintain lots of sites.

4. Slowing Rises in Reimbursement – Federal and Commercial. Increasingly, due to federal and state financial issues, governments (and interest by employers) have less ability to keep raising healthcare prices. Instead, there is greater movement toward softer increases or reduced reimbursement.

5. Lower Commercial Mix. Most hospitals and health systems do better when their payer mix contains a higher percentage of commercial business versus Medicare or Medicaid. In essence, the greater percentage of commercial business, the better a health system does. Hospital executives have traditionally talked about their commercial business subsidizing the Medicare/Medicaid business. As the population ages and as companies get more aggressive about managing their own healthcare costs, you see a shift — even if just a few percentage points — to a higher percentage of Medicare/Medicaid business. There is serious potential for this to impact the long-term profitability of hospitals and health systems. Big companies like JPMorgan, Amazon, Berkshire Hathaway and some other giants like Google and Apple are first and foremost seeking to control their own healthcare costs. This often means steering certain types of business toward narrow networks, which can translate to less commercial business for hospitals.

6. Cybersecurity and Health IT Costs. Most systems could spend their entire budgets on cybersecurity if they wanted to. That’s impossible, of course, but the potential costs of a security breach or incident loom large and there are only so many dollars to cover these costs.

7. The Loss of Ancillary Income. Health systems traditionally relied on a handful of key specialties —cardiology, orthopedics, spine and oncology, for example — and ancillaries like imaging, labs, radiation therapy and others to make a good deal of their profits. Now ancillaries are increasingly shifted away from systems toward for-profits and other providers. For example, Quest Diagnostics and Laboratory Corporation of America have aggressively expanded their market share in the diagnostic lab industry by acquiring labs from health systems or striking management partnerships for diagnostic services.

8. Payers Less Reliant on Systems. Payers have signaled less reliance on hospitals and health systems. This headwind is indicated in a couple of trends. One is payers increasingly buying outpatient providers and investing in many other types of providers. Another is payers looking to merge with pharmaceutical providers or pharmacy and benefit managers.

9. Supergroups. Increasingly in certain specialties and multispecialty groups, especially orthopedics and a couple other specialties, there is an effort to develop strong “super groups.” The idea of some of these super groups is to work toward managing the top line of costs, then dole out and subcontract the other costs. Again, this could potentially move hospitals further and further downstream as cost centers instead of leaders.

IV. The Great Fear

The great fear of health systems is really twofold. First: that more and more systems end up in bankruptcy because they just can’t make the margins they need. We usually see this unfold with smaller hospitals, but over the last 20 years, we have seen bankruptcies periodically affect big hospital systems as well. (Here are 14 hospitals that have filed for bankruptcy in 2018 to date. According to data compiled by Bloomberg, at least 26 nonprofit hospitals across the nation are already in default or distress.)

Second, and more likely, is that hospitals in general become more like mid-level safety net systems for certain types of care — with the best business moving away. I.e., as margins slide, hospitals will handle more and more of the essential types of care. This is problematic, in that many hospitals and health systems have infrastructures that were built to provide care for a wide range of patient needs. The counterpoint to these two great fears is that there is a massive need for healthcare and healthcare is expensive. In essence, there are 325,700,000 people in the United States, and it’s not easy to provide care for an aging population.

V. The Last 10 Years – What Worked

What has worked over the last five to 10 years is some mix of the following:

  1. Being an elite system has remained a recipe for financial success.
  1. Being regionally dominant has been a recipe for success.
  1. Being very special at something or being very great at something has been a recipe for success.
  1. Being great in high paying specialties like orthopedics, oncology, and spine has been a recipe for success.
  1. Systems have benefited where they provide extensive ancillaries to make great profits.

VI. The Next 10 Years

Over the next 10 years, we advise systems to consider the following.

  1. Double down on what works.
  1. Do not give up dominance where they have it. Although it may be politically unpopular and expensive to maintain, dominance remains important.
  1. Systems will need a new level of cost control. For years hospitals focused on expanding patient volume, expanding revenue and enlarging their footprint. Now cost control has surpassed revenue growth as the top priority for hospital and health system CEOs in 2018.
  1. Systems will have to be great at remote and virtual care. More and more patients want care where and when they want it.
  1. Because there will be so much change, systems must continue to have great leadership and great teams to adjust and remain successful.
  1. As systems become more consumer-centric, hospitals will have to lead with great patient experience and great patient navigation. These two competencies have to become systemwide strengths for organizations to excel over the next decade.

VII. Other Issues

Other issues we find fascinating today are as follows.

1. First, payers are more likely to look at pharma and pharma benefit companies as merger partners than health systems. We think this is a fascinating change that reflects a few things, including the role and costs of pharmaceuticals in our country, the slowly lessening importance of health systems, and payers’ disinterest in carrying the costs of hospitals.

2. Second, for many years everyone wanted to be Kaiser. What’s fascinating today is how Kaiser now worries about Amazon, Apple and other companies that are doing what Kaiser did 50 to 100 years ago. In essence, large companies’ strategies to design their own health systems, networks or clinics to reduce healthcare costs and provide better care is a force that once created legacy systems like Kaiser and now threatens those same systems.

3. Third, we find politicians are largely tone deaf. On one side of the table is a call for a national single payer system, which at least in other countries of large size has not been a great answer and is very expensive. On the other hand, you still have politicians on the right saying just “let the free market work.” This reminds me of people who held up posters saying, “Get the government out of my Medicare.” We seem to be past a true and pure free market in healthcare. There is some place between these two extremes that probably works, and there is probably a need for some sort of public option.

4. Fourth, care navigation in many elite systems is still a debacle. There is still a lot of room for improvement in this area, but unfortunately, it is not an area that payers directly tend to pay for.

5. Fifth, we periodically hear speakers say “this app is the answer” to every problem. I contrast that by watching care given to elderly patients, and I think the app is unlikely to solve that much. It is not that there is not room for lots of apps and changes in healthcare — because there is. However, healthcare remains as a great mix of technology and a labor- and care-intensive business.

 

HEALTHLEADERS TOP 10 FINANCE STORIES OF 2018

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https://www.healthleadersmedia.com/finance/healthleaders-top-10-finance-stories-2018

Here’s a roundup of our most popular finance stories of the year.

KEY TAKEAWAYS

M&A activity among health systems and payers were a dominant narrative throughout 2018.

Policy changes affecting payment models also drew widespread attention from health leaders across the country.

The entrance of corporate disruptors stirred discussion and speculation among traditional healthcare industry players.

This year was marked by changing dynamics relating to healthcare finance, most notably from outside corporate disruptors like Amazon eyeing entry into the industry and widespread M&A activity across most sectors.

HealthLeaders has been on the front line covering the news and policy changes coming out of Washington, D.C., Wall Street, Nashville, and how it is going impact healthcare organizations as they shape their business strategies.

Below are the top 10 healthcare finance stories of 2018:

10. 4 TAKEAWAYS AS ATHENAHEALTH SELLS FOR LESS, BOARD INVESTIGATED

“Months of public negotiations and tribulations have resulted in a $5.7 billion acquisition of athenahealth set to close in Q1 2019, but it’s not a done deal yet.”

9. CMS DELAYS E/M PAYMENT CHANGES TO 2021 IN PHYSICIAN FEE SCHEDULE FINAL RULE

“A plan to simplify the way physicians bill Medicare for evaluation and management (E/M) visits has been finalized and will begin to take effect next year, but the controversial payment component of the plan will be delayed until 2021, giving stakeholders more time to influence policymaking, the Centers for Medicare & Medicaid Services announced.”

8. FIDELIS-CENTENE DEAL CLOSES, CATHOLIC CHURCH CREATES $3.2B HEALTH FOUNDATION

“The sale of the nonprofit health plan came after months of review from state regulators and final approval from interim Attorney General Barbara Underwood. ‘We are pleased to have completed our transaction with Fidelis Care on schedule and to enter the New York market by joining with a company with which we are closely aligned on many levels,’ Michael F. Neidorff, CEO of Centene, said in a statement.”

7. MEMORIAL HERMANN CFO BRIAN DEAN TALKS INNOVATION AND GROWTH

“Since joining Memorial Hermann Health System in 2013, Brian Dean served as both CFO and CEO of Memorial Hermann-Texas Medical Center, before his promotion last month to CFO of the entire system effective this August. Dean spoke to HealthLeaders about ascending to the new role, the lessons he’s learned in his years at the system, and the strategies he’s pursuing to further strengthen the organization’s finances.”

6. NATIONAL PENSION CRISIS COMING STORM FOR HOSPITALS

“Healthcare organizations are feeling the effects of the national shortfall of $645 billion in pension liabilities and are pursuing the ‘least bad option’ for handling the problem. The nationwide pension crisis has organizations scrambling to properly fund employee’ retirement packages and represents a self-inflicted dilemma that will have a dramatic impact on the healthcare industry without a clear solution.”

5. ‘SITE-NEUTRAL’ PAYMENTS? HOSPITALS UNHAPPY WITH OPPS 2019

“One observer praised CMS for ‘picking a fight with powerful hospitals’ in the agency’s annual update to payment proposals for outpatient services. Under OPPS 2019, reimbursement for clinic visits in outpatient hospital settings would be capped at the rate paid for clinic visits in physician offices.”

4. HOW DATA WILL DRIVE THE CVS-AETNA MERGER

“Through a vertical integration without significant precedence in healthcare, CVS and Aetna have the opportunity to use their increased scale to pursue several innovative business strategies going forward. Many industry players are interested in what the newly merged company could accomplish to further assist consumers at multiple points along the healthcare experience.”

3. WALMART-HUMANA ‘SIGNIFIES THE BEGINNING OF THE AVALANCHE’ IN HEALTHCARE

“PBMs, retailers, and providers are getting together to integrate health plans, with Walmart-Humana taking mergers to another level of complexity and transformation, says one healthcare consultant. The Walmart merger with Humana is another strong sign that the healthcare industry is rapidly merging with disparate parts of the retail world, intermingling so much and so quickly that some traditional parts of healthcare may be absorbed and cease to exist as we now know them.”

2. HEALTHCARE RIDESHARING MAKES INROADS IN LOST REVENUE

“Health systems are recouping lost patient revenues by removing barriers to access treatment, and reducing operational costs by coordinating with ridesharing services.Nearly 4 million patients per year miss out on care due to lack of available transportation options related to cost or geographic barriers, according to the 2017 American Hospital Association study, ‘Transportation and the Role of Hospitals.'”

1. TRUMP ADMINISTRATION RELEASES FINAL ACA RULE FOR 2019

“After attempts to repeal the Obama administration’s signature healthcare law faltered, the Trump administration set an agenda for the Affordable Care Act’s implementation next year.In signing a major tax reform bill into law late last year, President Donald Trump claimed to have “essentially repealed Obamacare” by neutralizing the legislation’s individual mandate penalty.”

 

 

 

FastMed, NextCare announce merger

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https://www.healthcaredive.com/news/fastmed-nextcare-announce-merger/544538/

Dive Brief:

  • Phoenix-based FastMed Urgent Care has signed a definitive agreement to acquire NextCare Holdings of America, a Mesa, Arizona-based provider of urgent care and occupational medical services.
  • The combined company will have 251 clinics in 10 states — merging FastMed’s 110 clinics in Arizona, Texas and North Carolina with NextCare’s 141 in Arizona, Colorado, Kansas, Missouri, New Mexico, North Carolina, Oklahoma, Texas, Virginia and Wyoming.
  • The deal, which is subject to regulatory approvals, is expected to close within 60 days.

Dive Insight:

The shift to value-based care and greater use of alternative care sites is one factor fueling growth in urgent care centers. Meanwhile, the million of Americans newly insured under the Affordable Care Act and a growing aging population has driven up emergency room volumes.

In a 2015 survey, 75% of emergency department physicians said visits had increased over the past year. The result is an overtaxed emergency staff and long wait times for patients. By contrast, urgent care offers medical care when and where patients need it and at a lower price point.

According to MarketsandMarkets, the global urgent care market will reach $26 billion by 2023, growing at a compound annual growth rate of 5.3%. Driving growth are lower costs and shorter wait times, growing investment in the sector, aging of populations and strategic partnerships between urgent care providers and hospitals.

In July, Morristown, New Jersey-based Atlantic Health System and MedExpress partnered to improve urgent care access and care coordination between the companies. The collaboration will allow MedExpress’ urgent care patients to get care at an Atlantic Health facility if more advanced care is needed.

And in October, Walgreens announced a strategic collaboration with Michigan-based McLaren Health Care aimed at improving health and pharmacy services. The vertical pact came as CVS Health and Aetna were wrapping up their megamerger.

 

 

Hospital mergers and acquisitions: They keep happening but let’s face it, the big ones rarely work

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https://www.healthcarefinancenews.com/news/hospital-mergers-and-acquisitions-they-keep-happening-lets-face-it-big-ones-rarely-work?mkt_tok=eyJpIjoiWlRsa05XRmlObVl4WVRReCIsInQiOiJ5bFRKWGVoSGdPZStLb3Y2TWc4NmNhRkwzaWo4UncxcUR2ZzUzQUpycWpOcTlDamxkRDFWano2YXI4bUlLVGRRWStZN1B6K21ZRTg3aENUaW02ZHVHak9SU3BYRnJDRXFWNFd3R05jaEY2R2FPMzdLWDIzRE1PYlRZVlcyOHJRMiJ9

 

The first installment of our two-part series looks at many of the things that can, and commonly do, go wrong.

Mergers and acquisitions have been a common occurrence in healthcare for years now, and of late, mega-mergers have become the norm — giant organizations that join forces, often in an attempt to leverage their newfound scale and keep dollars flowing in.

The problem is that these mega-mergers often don’t deliver on their promises. Organizations want more negotiating power when hashing out contracts with insurance companies, and they rarely get it. Credit ratings are being downgraded. Costs often rise, quality deteriorates, and some companies want out of these deals altogether six or seven years down the road.

Others work out just fine, of course, but for every healthcare entity that sees success in these deals, there’s another which just bet the farm and lost it.

The mission then becomes: How to avoid that fate?

HARD LOOK AT REALITY

RIta Numerof, PhD, president of healthcare consulting firm Numerof and Associates, expects a rocky road going forward. Mergers are difficult to do well under normal circumstances, but a mega-merger is rarely a normal circumstance — it’s more complex, and more challenging to do well given that the healthcare industry is going through a fairly big transition.

In most of these scenarios, said Numerof, the intent was honorable. They wanted to lower costs and improve quality and do better by the consumers who depend on them. That’s the message that’s expressed publicly, anyway, and the Federal Trade Commission and the Department of Justice have generally been willing to accept these sentiments.

Numerof said regulators should be taking a closer look at whether these deals are sound from a financial perspective, and in fact will deliver on that promise.

“I am very skeptical of this,” she said. “The reality is that around 40 percent of M&A in general, across industries, fail to deliver on the financial performance that the parents coming together in the first place wanted to achieve. The fact that there is so much evidence against the likelihood of success should be a data point the Department of Justice takes into account.”

A lot of the healthcare mergers that have taken place over the past five to eight years have been a response to the Affordable Care Act, said Numerof, and were intended as a bulwark against negotiations with insurance companies, essentially giving the buyers more negotiating clout when coming to the table as contract rates are being revisited.

It has also, she said, become a mechanism for these delivery systems to put more pressure on independent physicians, something of a dying breed in the industry.

The issue for these merging organizations is that, while they feel there’s safety in numbers, the deals add another layer of complexity into their business models.

CHANGING BUSINESS MODELS

Even under the best circumstances, M&A often fails to live up to the promise that was established.

“It’s because merger and acquisition integration, which would allow these mergers to realize the potential behind them, requires an enormous amount of work, and most organizations don’t take into account the time that’s required, the focus that’s required, and some of the cultural dynamics that are going to be at play,” said Numerof. “And many don’t take these considerations into account when they evaluate potential partners.”

When these deals are completed, there’s often a “glow” that follows, with a general sentiment that the decision will be good for business. Then reality sets in.

As an example, there’s one very successful pharmaceutical company that has a set of products centered around a speciality disease. The company was acquired for a significant chunk of change by one of the major pharma companies, which promised the smaller company that, due to its success, it would be allowed to operate as independently as possible.

Less than a year later, the company is being broken apart, and the components are being integrated into the infrastructure of the larger company. That has led to some bureaucratic overlay, and defections from people who don’t want to work for a larger company.

In some cases, mergers occur and then the participating parties want to jump ship.

“You have companies coming together, healthcare systems that came together with a lot of fanfare, and after about five to seven years they all agree this was not a good situation, and the company divests all of the assets and individual units,” said Numerof. “So this is very expensive, and not necessarily very good for the community.”

Size is almost never protective, she said. Bond ratings are going down. Some deals, like CVS-Aetna, which was recently approved by the DOJ, will have to do things very different than they have historically in order to be successful — and that will be a struggle in a challenging market environment.

PROPOSAL

In order to avoid risk, there are certain elements companies should consider.

“One of the first tenets is you’ve got to be very clear when defining the joined vision of the company, and articulate how the separate histories of these companies is going to come together to create a different whole,” said Numerof.

“One of the key points here is the strength of each of the companies. When two companies are weak, it’s like entering into a marriage. With two weak people, it doesn’t work. If you have strong companies coming together strategically because they both see opportunities for growth, where they can leverage each others’ trends, that puts them in a much better position.”

There are always opportunities for cost reduction, but they’ve got to have a new business model. That model has to take into account a new go-to-market strategy, and take into account what’s going to happen in terms of the portfolio — how customers are going to be taken care of, are what the infrastructure requirements are going to be.

An important consideration is redefining core roles and competencies, and sorting out which core values will endure in the combined entity. That will essentially be the glue that holds the enterprise together, and it will require communication; management structure will be crucially important in making the endeavor work long-term.

They’re all factors to consider, especially given that Numerof expects more mega-mergers in the future.

“I think we’re going to see more mega-mergers until the DOJ says,’This is not in the best interest of consumers, the economy, and the ability to compete,'” she said.

BETH ISRAEL, LAHEY HEALTH MERGER GETS FTC, MASSACHUSETTS AG’S APPROVAL

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he condition-laden approval stipulates a seven-year price cap that guarantees that the merged health system’s price increases will be kept below the state’s healthcare cost growth benchmarks.

KEY TAKEAWAYS

The Federal Trade Commission calls the merger ‘a close call’ but defers to state regulators.

The merged health system will provide $71 million for care in underserved areas.

The merged, 13-hospital health system will be one of the largest in the Bay State.

The proposed merger of Beth Israel Deaconess Medical Center and Lahey Health System cleared a huge hurdle today when Massachusetts Attorney General Maura Healey announced her conditional support.

The approval comes with what Healey called an “unprecedented” seven-year price cap that guarantees that the merged health system’s price increases will be kept below the state’s Health Care Cost Growth benchmark.

“Through this settlement, Beth Israel Lahey Health will cap its prices, strengthen safety net providers across the region, and invest in needed behavioral health services,” Healey said in a media release.

“These enforceable conditions, combined with rigorous monitoring and public reporting, create the right incentives to keep care in community settings and ensure all our residents can access the high-quality health care they deserve,” she said.

The deal also cleared a key federal hurdle when the Federal Trade Commission voted to close its investigation in light of Healey’s agreement.

“The assessment of whether to take enforcement action was a close call. However, based on Commission staff’s work and in light of the settlement obtained by the Massachusetts AG, we have decided to close this investigation,” the FTC said in a media release.

Kevin Tabb, MD, CEO of Beth Israel Deaconess Medical Center, who will serve as CEO of Beth Israel Lahey Health, called the state and federal approvals “an important step forward in making our vision a reality.”

“We appreciate the enormous effort that the Attorney General, her staff and the Federal Trade Commission have devoted to our proposal.  We share their commitment to health care innovation in Massachusetts, and we are eager to build on the strengths of our legacy organizations and deliver on our promise to our patients, their families and our communities,” Tabb said.

Massachusetts’ Health Care Cost Growth benchmark controls the annual growth of total medical spending in the state and is now set at 3.1%. Over the seven-year term, the cap will avoid more than $1 billion of the potential cost increases projected by the state’s Health Policy Commission.

When finalized, the merged, 13-hospital health system will be will one of the largest in the Bay State.

The merger push began in 2017, with Beth Israel and Lahey justifying the consolidation as a market-based attempt to address rising costs, price disparities, and healthcare access issues.

However, the deal has faced headwinds since its inception.

Even as late as this September, the Massachusetts Health Policy Commission noted that the merger would create a health system roughly the same size as Partner’s HealthCare System, the state’s largest health system, which would “increase substantially” market concentration in eastern Massachusetts.

“BILH’s enhanced bargaining leverage would enable it to substantially increase commercial prices that could increase total healthcare spending by an estimated $128.4 million to $170.8 million annually for inpatient, outpatient, and adult primary care services,” MHPC said.

In addition, the commission said spending on specialty physician services could increase by as much as $60 million annually if the merged health system obtains similar prices increases for those services.

“These would be in addition to the price increases the parties would have otherwise received,” the commission wrote. “These figures are likely to be conservative. The parties could obtain these projected price increases, significantly increasing healthcare spending, while remaining lower-priced than Partners.”

Those concerns appeared to have been alleviated on Thursday, when MHPC Commissioner Martin Cohen said “the investments required by the settlement will have a real impact on access to treatment for mental health and substance use disorders for patients across Eastern Massachusetts.”

Healey’s assurance of discontinuance also includes requirements that the merged Beth Israel Lahey Health pledge $71.6 million to support healthcare services for underserved areas.

The deal also requires BILH to strengthen its commitment to MassHealth; engage in business planning with its safety net hospital affiliates; enhance access to mental health and substance use disorder treatment; and retain a third-party monitor to ensure compliance with the terms.

The deal exempts affiliated safety net hospitals from the price-cap constraints. Lawrence General Hospital CEO Dianne J. Anderson said the exemption for her safety net will “ensure a commitment to joint, long-term planning for distribution of health care resources across the region.”

The $71.6 million that BILH will spend over eight years for underserved areas will include:

  • $41 million to fund affiliated community health centers and safety net hospitals, which guarantees support at the systems’ historic levels.
  • At least $8.8 million in additional financial support for affiliated community health centers and safety net hospitals.
  • At least $5 million in strategic investment to expand access to healthcare for low-income communities through community health centers.
  • At least $16.9 million to develop and expand behavioral health services across the BILH system.

“THROUGH THIS SETTLEMENT, BETH ISRAEL LAHEY HEALTH WILL CAP ITS PRICES, STRENGTHEN SAFETY NET PROVIDERS ACROSS THE REGION, AND INVEST IN NEEDED BEHAVIORAL HEALTH SERVICES.”