Strategic Partnerships Mergers and Acquisitions

Likely Government Responses to Hospital M&A Trends

June 14, 2018 1:02 pm

Some analysts see the most likely M&A response as designating hospitals as public utilities and using rate setting and global budgets.

June 14—Ongoing hospital merger-and-acquisition (M&A) trends may soon spawn more state and federal actions beyond antitrust enforcement, longtime policy advisers say.

Government initiatives could include allowing more insurer consolidation, placing hospitals under a public utility model, funding public competitor hospitals, or encouraging more alternative sites of care.

Hospital deals accelerated during the first part of 2018, according to analyses by deal-tracking companies.  For instance, Irving Levin Associates found hospitals were involved in 25 transactions in the first quarter of 2018, which would translate to the highest annual rate since 2015.

Those figures followed several years of accelerating deals, including those involving hospitals and other types of providers. Hospital leaders and advocates say the trend was fueled by efforts to move toward coordinated care and risk-bearing value-based payment models, which require size. Such combinations also are seen as the only way to preserve some small and rural hospitals, which face unique financial challenges.

But some federal officials and other critics argue the deals are largely about market domination, and worry the trend is fueling hospital price increases.

Gail Wilensky, PhD, a leader of Medicare and Medicaid under President George H.W. Bush, said she has wondered why for years the federal government has not filed more anti-competitiveness challenges to hospital deals.

Competition “is pretty lost in so many markets where you’ve had so much consolidation that it’s kind of late” for antitrust enforcement, Wilensky said at the recent ACO Summit in Washington, D.C. “We frequently see that if you have a single player in a region, you literally have a single player in a region and you have to decide what else you are going to do.”

Robert Berenson, MD, a fellow at the Urban Institute and former vice-chair of Congress’s primary Medicare panel, the Medicare Payment Advisory Commission (MedPAC), had a similar assessment.

“It’s too late for antitrust enforcement,” Berenson said.

Tactical M&A Responses

A possible policy response would allow health insurers to consolidate in a range of ways to even out bargaining power between payers and providers, said Michael Chernew, PhD, director of the Healthcare Markets and Regulation Lab at Harvard Medical School. However, insurers don’t always pass along to patients any savings they obtain.

Wilensky agreed that the use of “alternative power blocks” as a response to hospital consolidation could help control price increases by balancing power between insurers and providers.

Another possibility is that policymakers will encourage hospital alternatives by promoting telemedicine and ambulatory care providers, Wilensky said.

In recent years, “There has been a wave [of alternative sites of care] against the hospital industry,” said Ana Gupte, PhD, senior analyst and managing director at Leerink Partners.

The proliferation of alternatives to hospital care has included urgent care centers, freestanding emergency departments, retail clinics, and home health providers, she said.

Additionally, hospitals are bracing for the impact of a range of high-profile, unconventional deals by large entities that are new to health care. One that could have the biggest impact on hospitals is the possible merger between Walmart and Humana, Gupte said. That’s because the insurer already owns a large number of physician practices, which offer alternative sites of care.

Additionally, states may implement more price transparency requirements for hospitals that will allow consumers to make better comparisons, including comparing prices to Medicare rates.

“Naming and shaming is underrated as a strategy,” Wilensky said.

An Expanded Government Role

Reduced Medicare payments to practices acquired by hospitals, tightened 340B requirements, more telemedicine funding, and increased transparency requirements were among the possible federal responses to M&A trends as discussed in a February hearing by members of Congress.

Other government responses are likely to include moving hospitals in markets with heavy consolidation into a public utility model, Chernew said.

“I tend not to be a fan of those models, in the grand scheme of things, but if you have providers that have excessive market power and can’t control their spending, one way or another something is going to have to happen,” Chernew said.

Wilensky was critical of treating hospitals like public utilities because such models are “terrible at innovation or ever putting anybody out of business—that doesn’t happen in rate-setting models—and that’s basically what public utility regulation would [create].”

Wilensky said effective competition could occur with as few as two to three hospital options in a local market.

“It’s a different kind of competition than if you have a lot of small players, but it can be competitive,” Wilensky said

Berenson said he doubted most states want to set up a complex public price-setting model for hospitals, like the one used in Maryland.

Maryland is in its fifth year of an all-payer hospital model that includes individual-hospital global budgets. The early returns in the Maryland model have generally been positive. For instance, during the first three years of the pilot, Medicare expenditures and hospital service spending per beneficiary declined relative to a matched comparison group, according to a recent third-party analysis.

However, another study found global budgets in rural Maryland hospitals did not reduce hospital use or price-standardized spending among Medicare patients, as policymakers had anticipated.

But hospital financials have generally improved under the model, said Donna Kinzer, executive director of the Maryland Health Services Cost Review Commission.

Questions remain about the ability to expand that model to other states. Pennsylvania’s attempt to use a version for its rural hospitals has been delayed from January 2018 to January 2019. Challenges there have included the struggles of rural hospitals to cut costs (one way of succeeding under global budgets), the reliance on historical budgets when half of the hospitals already were losing money, and a lack of clarity about the extent to which executives would remain in control of their hospitals, said Kate Slatt, a senior director for the Hospital and Healthsystem Association of Pennsylvania.

On the other hand, hospital leaders have told her the model has appeal in that it allows hospitals to leapfrog over the difficult stage of operating in both a fee-for-service (FFS) and value-based payment (VBP) environment.

“This is an opportunity to just jump from one [FFS] to the other [VBP],” Slatt said.

More likely than a proliferation of Maryland-like models is that other states would implement upper limits on hospital prices that are linked to Medicare rates, Berenson said. Alternatives also include the Massachusetts approach, which requires a range of publicly available price reporting.

“We need to just move toward some form of regulation, short of what most states don’t want to do, which is to do the Maryland rate-setting model,” Berenson said.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare


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