Tip Sheets

Finding the full story behind hospital mergers, consolidations

By Dan Goldberg

Across the country, health systems are getting larger, gobbling up community hospitals or smaller chains. Some of this has to do with payment incentives in Obamacare, but just as much has to do with changes to Medicare, Medicaid and providers’ desire for leverage as they negotiate payments with insurance companies.

The recent HHS announcement that Medicare would tie 30 percent of payments to alternative models, such as accountable care organizations or bundled payment arrangements by the end of 2016, and 50 percent by the end of 2018, furthered many health system executives' beliefs that the key to survival is the ability to manage population health. And that is best done with large populations. That's a big reason why we see so much consolidation, but in crowded markets, such as New York, New Jersey and California, it's only a part of the story. (In smaller markets, such as Idaho, the FTC 's view of whether a merger will create an anti-competitive environment is the most important question.)

In the February issue of Capital Magazine, I looked at New York's five large health systems and the strategies they were employing to diversify their revenue base while preparing to play in a post-ACA, value-based world.

Health systems have to be strategic about where they invest their time and money. Some will be more aggressive than others. Some will veer in seemingly counterintuitive directions, but they all have one goal: increase revenue.

No chief executive of a private hospital, whether for-profit or not, wants to lose money. So every deal they make generally has financial reasoning behind it, and every deal they don't make usually carried some financial risk that seemed too great to bear.

Here are some questions to keep in mind:

Where does a health system's revenue come from?

Rarely is it just treating sick people. Large health systems should be thought of the way we think of Johnson & Johnson or other multinational corporations, which have several lines of business and diverse revenue streams. Health systems may operate an insurance company, or run a medical school. In western Pennsylvania, for instance, Allegheny Health Network recently acquired the Klingensmith Healthcare medical equipment company so that it could sell discharged patients wheelchairs, hospital beds, oxygen tanks and other equipment.

Understand the relationship with payers.

It's not just about Medicare, Medicaid and commercial insurance. It's also about understanding which companies offer care management programs, and which insurers offer capitated or bundled payment arrangements with the hospital. The heavier reliance on so-called value-based payments, the more aggressive a health system is likely to be in its growth.

Where was it? Where is it? Where is it going?

Look at utilization stats and other trends. If outpatient visits are soaring during the past five years, it might help explain a health system's interest in ambulatory care. Hospital executives are usually happy to tell you what they think the future will look like but their visions don't always agree. And if you pay attention to those differences, you may detect ways in which the strategies for survival in the next phase of health system reform are also different.

Milliman, an actuarial firm with claims data for about half of the nation’s commercial insurers, predicted that inpatient admissions per 1,000 patients will decline through 2021 in all markets, according to darkdaily.com. But the pace of that decline, and a specific health system's reliance on specialty care, can impact decisions.

The physician role

Physicians are often taken for granted but their attitudes often explain a lot, and understanding the relationship between physicians and a health system is crucial. At academic medical centers, physicians  can have enormous influence over hospital boards. And it doesn't hurt to understand the backgrounds of the chief executive officers or presidents of a health system. What's their relationship to the board? Are they overtly political? Do they come from an entrepreneurial background? If they are a physician, what type? Yes, it's a cliché that surgeons are less likely to collaborate than physiologists but it's cliché for a reason.

The back end

Administrators love to say that mergers and affiliations will improve efficiencies in the back end – billing, purchasing, etc. Often that's true but just as often it's a small part of the deal. It's good to find out what the health system spends on the back end and see if this new affiliation is really producing meaningful savings, and if those savings will be passed on to consumers, reinvested in the health system or used to fund some kind of other program.

Not all mergers are equal

How much control a health system is seeking can tell a lot about its plans. Is it an active parent relationship or an affiliation agreement? Whose board retains control over hiring and firing? Who is in charge of strategic initiatives?

Dan Goldberg is a reporter for Capital New York covering health politics and policy in New York City and New York State. Previously he covered health for the Newark Star-Ledger.