During the most intense period of healthcare consolidation in recent memory (see the exhibit below), many hospitals and health systems are uniting through formal mergers and acquisitions. Meanwhile, their independent-minded peers are seeking scale and efficiencies through strategic partnerships.
For two Texas healthcare giants—Baylor Health Care System and Scott & White Healthcare—a mega-merger was the chosen approach. As the CEOs of the two organizations met over breakfast to discuss ways to collaborate, they agreed that half-measures would not work. “We determined that a full merger was the most efficient and appropriate way to address what we want to see happen in the transformation of health care,” said Joel Allison, CEO of Baylor Scott & White Health.
In contrast, when Missouri’s BJC HealthCare evaluated alternatives for the future, the merger option was swept off the table early on. Instead, BJC joined with three other large systems to create a collaborative focused on increasing efficiency for its members. “We look at this as a way to get many of the benefits and efficiencies of collaboration without a lot of the difficult issues of a full-blown merger,” said Sandra Van Trease, BJC’s group president.
Like most things in healthcare business, there is no single right way to add needed scale. Providers are learning as they go.
In the last few years, many healthcare providers have gone from asking “if” they should merge or partner with other healthcare organizations to “how” and “when.” While the level of consolidation varies from market to market, current strategic and financial realities (e.g., lower payment rates, reduced volumes, needed investments to obtain value-based payer contracts, the desire to coordinate care across the continuum) have become such that many small or independent providers are having a more difficult time remaining autonomous.
The need for scale. Independent hospitals still maintain important competitive advantages over large health systems, including strategic agility and a positive public perception (i.e., the ability to provide a warmer touch), said CFOs of four stand-alone hospitals who gathered for a roundtable discussion at HFMA’s annual conference in June. However, the CFOs pointed to a number of challenges that stand-alone hospitals face due to their lack of scale, including recruiting physicians and obtaining value-based payer contracts.
“I think it is possible for community hospitals to provide value and compete on the quality-cost equation,” said Harold T. Dupper, CHFP, vice president finance and CFO, Platte Valley Medical Center, Brighton, Colo. “However, if you don’t have the size, it is a little difficult to participate in some of the commercial products. The challenge is having enough size and clout to influence the way that commercial payers structure their products to recognize a hospital that is on the fringe of the market.”
Colorado launched its health insurance exchange on Oct. 1, and payers continue to put together narrow network options. “We’re not sure how the networks will develop yet or how we will fit into that,” Dupper said.
Meanwhile, in northern California, independent Enloe Medical Center is “dabbling with affiliations” to ensure patients have access to needed clinical services, said Myron Machula, CFO. For instance, when Enloe’s cancer center can’t handle certain types of treatment, the patients are referred to an affiliated health system.
“I don’t believe where we are, we can avoid looking at other kinds of associations short of full mergers,” said Machula. “So we’ve reached out tentatively. At some point, we may have to decide if these associations should become something larger.”
Consolidation pushback. On the other side of the consolidation trend is a concern about mega-mergers expressed by healthcare purchasers, payers, and in some cases, regulators. Those questioning the appropriateness of mergers are concerned that consolidation generally results in higher healthcare prices, pointing to recent Robert Wood Johnson Foundation (RWJF) research (RWJF, The Impact of Hospital Consolidation—Update, June 2012).
Joseph J. Fifer, FHFMA, CPA, HFMA president and CEO, points out that the Federal Trade Commission can—and will—challenge and block mergers that it believes would stifle competition and run up prices; in fact, it did so 17 times in federal FY11.
Beyond that, increased transparency of prices and out-of-pocket patient financial obligations will force large, consolidated providers to be competitive, regardless of their market penetration, he said. “Mergers only make sense when they drive a lower-cost offering to the market (as measured by total cost per member per month) and create a better value proposition for consumers.”
The leaders at Catholic Health Initiatives (CHI), one of the nation’s largest systems, would concur. “Our focus is about moving from focusing on total revenues to total value—meaning the value of population health management—and how we deliver that,” said John F. DiCola, CHI’s senior vice president for strategy and business development.
CHI was officially born in 1996 with the mega-merger of three Catholic health systems that united in the hopes of creating a national Catholic health ministry. Since then, CHI has grown to include 87 hospitals and other facilities in 18 states with annual operating revenues of $12.5 billion.
CHI’s goal is to build clinically integrated networks that allow patient care to be coordinated across a full spectrum of owned and affiliated providers. To this end, the pace of CHI acquisitions—of hospitals as well as ambulatory, post-acute, and physician providers—has picked up in recent years. Just this year, CHI acquired a six-hospital system in Houston and two medical centers in Washington state, where it also became majority owner of a physician-owned health plan. Last year, it became the sole sponsor of Alegent Creighton Health, the largest not-for-profit provider in Nebraska and southern Iowa.
Two growth strategies. CHI is primarily expanding in the markets it currently serves. For example, CHI expanded its presence in Kentucky in early 2012 when it consolidated its St. Joseph Health System (a major Lexington provider) with Jewish Hospital and St. Mary’s HealthCare (a dominant Louisville force) to form KentuckyOne Health, the largest system in the state. Several months later, CHI further consolidated its position in Kentucky by entering into a joint operating agreement with the University of Louisville for the operations of University Medical Center and the James Graham Brown Cancer Center as part of KentuckyOne.
At the same time, CHI plans to continue entering new markets when it finds the right mix of services, facilities, and capacity to create a major presence. The most recent example is its acquisition of the six-hospital St. Luke’s Episcopal Health System in Houston for more than $2 billion. “When we find those opportunities, either already in place or where we think there is the opportunity to build on a strong platform, then that kind of growth will make sense for us,” DiCola said. “We will continue to look for ways in which we strengthen CHI overall through some new market activity.”
Last year, CHI experimented with a different type of affiliation when it agreed to put roughly 20 percent of its hospitals in a new health system serving the Pacific Northwest via a joint venture with PeaceHealth. That deal fell apart this spring when CHI realized it was not going to achieve the value needed to make it worthwhile, DiCola said.
Even with a shared vision, a deal can be doomed if the parties are not aligned on how the deal needs to be configured to benefit both of them. “When you have not been clear about the value proposition to both organizations, you can find yourselves talking past one another when it comes to tackling some of the difficult technical issues that are always going to be there,” he said.
Growth decisions. Healthcare organizations that seek to be acquired by CHI are typically in need of capital for IT or other big-ticket expenses. Or they want access to CHI’s centralized corporate services, which include an integrated supply chain, human resources, revenue cycle improvement, and IT support. Initiatives to improve the efficiency and effectiveness of these support functions are expected to reduce costs by more than $400 million per year when they are fully implemented at the end of FY15. For example, supply chain initiatives, such as product standardization and inventory management, have cut supply costs nationwide by $16 million in the past year and are projected to save $70 million by FY15.
Importance of shared vision and standards. CHI gradually brings all of its new partners into the fold. “It doesn’t happen overnight, but we have a lot of programs and communications that help staff in all of our markets understand who we are—not just what we do, but how we do it,” DiCola said. “We also bring organizations into CHI by setting some standards and reinforcing those standards.”
For example, CHI’s national service lines set clinical standards with the goal of reducing variability and increasing the quality of care. National clinical programs in oncology, cardiovascular care, and hospitalist medicine are already setting care protocols, supply standards, and utilization guidelines. By collaborating with physicians to standardize clinical supplies, CHI is saving at least $4 million a year on cardiac rhythm management devices and $3 million on drug-eluting coronary stents. The next phase will target orthopedics, neurology/spine care, and general surgery.
In another initiative, CHI is asking all of its hospitals to improve quality and efficiency in clinical operations with an initial focus on emergency departments (EDs), inpatient care, and operating room utilization. Early results at the first two sites show what is possible: In Lincoln, Neb., a CHI hospital improved short-stay surgical preparation time by 13 percent, and in DesMoines, Iowa, a CHI hospital is discharging patients, on average, two hours earlier because of a change in the way discharge orders are prepared.
Completing a 10-month journey, Baylor Health Care system and Scott & White Healthcare finalized their merger on Sep. 30, creating the largest not-for-profit health system in Texas. The combined $8.3 billion entity, which is called Baylor Scott & White Health, has more than 43 hospitals, 500 patient care sites, more than 6,000 affiliated physicians, and a health plan.
Mutual benefits. Both were big, financially successful organizations before they decided to come together. However, as each organization started moving to population health management, their needs became as clear as their strengths.
Scott & White will see economy-of-scale opportunities in merging with Baylor, which is roughly double its size in assets and revenues. And Baylor will benefit from access to the Scott & White Health Plan, which covers more than 200,000 lives in 50 counties in central Texas.
Baylor’s strategic plan called for developing a mechanism to take on the financial risk associated with emerging payment models, such as shared savings, that emphasize population health management. “We considered whether to buy an insurance company, build one, joint venture, or partner,” said CEO Joel Allison. “Then we started our discussions with Scott & White and, of course, they have a very good health plan, and we said ‘That’s our opportunity.’”
Scott & White Health Plan pays hospitals and clinics on a capitated basis, so contracted providers have long been incentivized to provide care at the lowest possible cost. The health plan is among the highest-ranked Texas plans, according to the National Committee for Quality Assurance.
Like other savvy insurers, Scott & White uses its claims data to inform operations. “The health plan is the focal point of our population health management efforts because it has the claims data that show the cost per person, not just the cost per visit,” said Robert Pryor, MD, president, COO, and chief medical officer of the newly combined health system.
Scott & White uses its operational assistance group—composed of clinicians, operations executives, and finance professionals—to help departments use patient-level cost data and identify opportunities for improvement related to both quality and costs. Quality improvement initiatives currently under way target catheter-associated urinary tract infections and bloodstream infections, unnecessary radiation from procedures, and ED patient flow.
Joined forces. The two systems have worked together as members of the High Value Healthcare Collaborative (HVHC), a group of 20 health systems that are seeking ways to improve the value of healthcare services. HVHC members are collaborating to identify best practices to improve care and lower costs for total knee replacements, diabetes, and other conditions.
The merger takes the standardization of best practices to a new level. “We’re going to look at best practices by saying there’s a Scott & White way of doing things, there’s a Baylor way of doing things—which is the best?” Pryor said. “Or now that we have combined our resources, is there a third way that we can create?”
Board approval. While the benefits of merging were obvious to the two CEOs, they were not immediately clear to the two boards of directors. “There was some effort to convince board members that this was the right thing to do because they are community trustees and they hold these assets in trust for the communities,” Allison said. “These are big decisions, and they really had to work through whether this is the right thing.”
Before they signed a letter of intent to merge, leaders of the two organizations had to reach some key decisions, such as the name of the merged health system (Baylor Scott & White Health), the headquarters location, and the top leadership of the merged organization. After the letter of intent was signed, the next step was a culture survey of all employees in both organizations to determine whether the cultures of the two organizations would work well together.
“While we always believed our cultures were a good match, the survey results confirmed it,” Allison wrote in a memo to Baylor employees that reported the survey highlights:
The parent company (Baylor Scott & White Health) of the newly merged health system is based in Dallas with responsibility for finance, human resources, mission and ministry, compliance, and other corporate functions. In addition, a service company in charge of operations will be based in Temple, Texas.
Allison is CEO of both companies; Pryor is president, COO, and chief medical officer of the parent company and president of the service company.
Based in the Midwest, BJC Collaborative, LLC, is owned by four equal partners:
Together, the four systems own 35 hospitals in Missouri, Illinois, and Kansas and have annual revenues of $7.5 billion.
The Collaborative was organized in late 2012. Since then, it has added two nonowner participants: Blessing Health System in Quincy, Ill., and Southern Illinois Healthcare in Carbondale, Ill. “We are approaching this from the perspective of managing for the future, recognizing the challenges that we are all facing,” said Sandra Van Trease, group president.
Value of independence. The idea for the Collaborative sprang from BJC HealthCare’s internal decisions about its own path forward. Its leaders identified several priorities, including:
“We believe that health care is local, and it was important to us that BJC HealthCare not lose that. We respected the fact that our Collaborative member partners also had that vision,” Van Trease said.
The Collaborative’s board is composed of the chair, the CEO, and one other senior executive from each of the four systems that own it.
Shared expenses and practices. The organization has two primary goals:
All four systems already belong to the same group purchasing organization, and the Collaborative has identified additional potential savings opportunities for both commodities and physician preference items. “Certainly, each of our health systems is engaging physicians very aggressively around supply chain costs, and that’s a clear objective of what we can do in the Collaborative,” Van Trease said.
In clinical engineering, Collaborative leaders are exploring operational efficiencies—for example, centralized maintenance of CT scans, MRIs, and other equipment—as well as opportunities to save money through the larger purchasing power of the Collaborative. In its first six months, the Collaborative saved its owners “in the several millions of dollars related to clinical engineering opportunities alone,” Van Trease said— and that’s just the beginning.
Meanwhile, Collaborative groups are being convened in various specialties (human resources, compliance, clinical quality, population health, marketing, and others) to identify best practices and spread them from one organization to the others.
Lessons learned. The Collaborative approach requires hands-on participation from each partner’s top leaders, creating a new time-consuming priority for people who are already extremely busy. Likewise, work groups for specific areas require leadership from the top.
“They have to be staffed with the senior-most people in your organization,” Van Trease said. “If they’re not, they will crumble from the bottom.”
To date, the Collaborative has no staff or infrastructure. BJC HealthCare provides resources, including much of Van Trease’s time, until the new organization proves its worth and its staffing needs become evident. “We didn’t go in throwing a whole lot of bodies or money at this,” she said. “The objective is to save money, not add another layer, ideally. That’s our first focus.”
That said, maintaining the momentum of a virtual organization is a challenge that requires organization, diligence, and visibility. “The easy part is setting something like this up,” Van Trease said. “The hard part is when you start actually getting into the work, and focus on delivering the results that the boards expect.”
Ingalls Health System, serving Chicago’s south suburbs, is a one-hospital system with annual revenues of more than $300 million. Ingalls just opened its fifth outpatient clinic, and about 55 percent of revenues now come from outpatient services.
That means Ingalls is well-positioned for the future, said Andrew Stefo, senior vice president and CFO. “We think ambulatory is where the profitability lies, and it dovetails very well with the accountable care philosophy, which includes moving to a more cost-effective model,” he said.
He and other Ingalls leaders believe that a health system’s size should be measured not by its inpatient capacity but by the number of lives managed and the effectiveness of that management. They used that perspective to consider how to grow—and decided that merging with another organization held little appeal.
Strategic analysis. “If you’re looking to merge or to be acquired, you should do it to address the deficiencies that you see in your future ability to thrive,” Stefo said. “You shouldn’t do it just because you think it’s a neat idea.”
Ingalls’ analysis considered these factors:
Thus, for the foreseeable future, Ingalls’ board has chosen to remain independent. But that does not mean maintaining the status quo. “If you are going to remain independent, you are going to have to be more innovative than larger organizations,” Stefo said. “You cannot mirror someone who is bigger than you are and hope to survive that type of competitive landscape.”
Power of relationships. To address marketplace challenges, Ingalls has developed strategic relationships with other organizations. For example, Ingalls serves low-income neighborhoods that are associated with high 30-day readmission rates, leading to a nearly 1 percent penalty on Medicare revenues. Most of its local competitors have the same problem, which is exacerbated by the fact that patients bounce from one hospital to the next, making it difficult to track readmissions, let alone manage those patients’ care.
To address these issues, Ingalls teamed with four competing hospitals in one of the Community Care Transitions programs supported by the Centers for Medicare & Medicaid Services. Staff hired by Catholic Charities connect with recently discharged patients from all five hospitals to help avoid readmissions. So far, it looks to be effective, Stefo said.
In a bid to achieve scale without merging, Ingalls is also working with other independent systems across the Chicago market to build the Founders Network. Still under development, the Network’s goal is to create a vehicle in which several health systems can jointly enter into shared-savings contracts with commercial payers without violating antitrust laws.
Ingalls also recently became an affiliate member of Catholic Contracting Group (CCG), an alliance of six Catholic health systems that combine their purchasing power to get the best prices from their group purchasing organization. In addition to lower supply prices, CCG also helps its affiliates narrow the range of orthopedic implants and other physician preference items they purchase. The CCG relationship helps Ingalls communicate with its physicians about how the standardization of devices and implants both improves quality and reduces costs. In the first year, Ingalls saved more than $800,000 on physician preference items.
As the healthcare industry restructures itself, the forces encouraging consolidation are not likely to dissipate soon, and every organization’s board should analyze the options and set the strategic direction. A wait-and-see approach may allow competitors to decide an organization’s fate.
“As I have told our board, if you want me to sell the hospital, I could write a work plan for that. If you want me to merge, I could write a work plan for that. If you want me to acquire another provider, I could write you a work plan for that,” Stefo said. “And if you want to remain independent, there is a work plan for that, and we have to be very realistic about what that means.”
Even as Ingalls leadership works its stay-independent plan, Stefo constantly monitors the competitive landscape, prepared to pivot if changes occur that jeopardize it. “We are very sensitive to the fact that the local marketplace is very fluid,” he said. “You have to continually reassess what’s going on and whether the tactics that you had adopted 18 months ago are still appropriate.”
Lola Butcher is a freelance writer and editor based in Missouri and a regular contributing writer to Leadership.
Quoted in this article (in order of appearance): Joel Allison, CEO, Baylor Scott & White Health, Dallas. Sandra Van Trease is group president, BJC HealthCare, St. Louis. Harold T. Dupper, CHFP, is vice president finance and CFO, Platte Valley Medical Center, Brighton, Colo., and a member of HFMA’s Colorado Chapter. Myron Machula is CFO, Enloe Medical Center, Chico, Calif., and a member of HFMA’s Northern California Chapter. Joseph J. Fifer, FHFMA, CPA, is president and CEO, HFMA, Westchester, Ill. John F. DiCola is senior vice president, strategy and business development, Catholic Health Initiatives, Englewood, Colo. Robert Pryor, MD, president, COO, and chief medical officer, Baylor Scott & White Health, Dallas. Andrew Stefo is senior vice president and CFO, Ingalls Health System, Harvey, Ill., and a member of HFMA’s First Illinois Chapter.
Healthcare executives in the midst of expansion efforts offer these pieces of advice:
Be realistic. For organizations that choose to consolidate, an honest assessment of potential relationships is essential. Robert Pryor, MD, president, COO, and chief medical officer, Baylor Scott & White Health, said his system’s long history of collaborating with Baylor Health Care System bodes well for their merger. Equally important, however, is the fact that they were never enemies. “We never had a history of competing with each other,” Pryor said. “I think it’s difficult for two close neighbors that, historically, have had a competitive relationship, to suddenly become friends.”
Make communication a top priority. Different organizations may use different terminologies, and their protocols and processes may be so different that leaders cannot track what one another is talking about. And staff members assigned to implement a new vision may have even more trouble.
“Clarity is a key to success, and you cannot go into this assuming that anyone understands anything,” said Sandra Van Trease, the BJC Collaborative leader who is helping six health systems learn to work together. “You cannot underestimate the challenges of organizations the size and scale of all of ours cascading information across, between, and throughout. The big objective here is to try to make communication a strength, not a weakness.”
Monitoring success. Regardless of how organizations work together to build scale, successful relationships require that benefits accrue to all parties. But those benefits must be measured with a broad view over the long term.
In the collaborative model, for example, different benefits will accrue to each organization at different points in time, depending on the focus of a particular initiative, Van Trease said. “The parties don’t all expect to win at the same amounts at the same time in all the same respects,” she said. “And everyone has to be comfortable with that.”
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