New IDS merger aims to improve value and access for its communities
Two health systems in the Pacific Northwest decided the time is ripe for the kind of merger that can begin to meaningfully transform our nation’s healthcare system.
The focus of healthcare M&A transactions has been shifting today, with a growing emphasis on creating transformative partnerships aimed at improving value and overall cost effectiveness. As health system M&A transactions declined from a high of 117 in 2017 to 49 in 2021, the average deal size increased with a growing number of megamergers, where the smaller partners’ revenues exceeded $1 billion. The reduced number of transactions reflects a dwindling number of independent community hospitals available for potential mergers. As a result, provider systems are beginning to seek merger partners that can help them transform healthcare by developing new models of care delivery, supporting the growth of population health capabilities, expanding at-risk/value-based arrangements and strengthening consumer access to specialty product lines. Improved access to capital is a frequent priority.
This type of transaction promises to drive industry transformation amid heightened antitrust scrutiny of prospective M&A deals by the FTC and state attorneys general.a
A prominent example is the January 2021 merger in the Pacific Northwest of Tacoma-based CHI Franciscan Health and Seattle-based Virginia Mason Medical Center (VMMC) to form a new regional integrated delivery system (IDS): Virginia Mason Franciscan Health (VMFH).
Health systems whose market situations and objectives are similar to those of VMFH can benefit from lessons learned by the formation of this new IDS.
Combining unique competencies to better serve the healthcare market
VMFH now operates as a subsidiary of CommonSpirit Health, the nation’s largest Catholic health system by revenue, with a focus on becoming a model for consumer-driven, value-based healthcare.
The new IDS will serve the rapidly growing Greater Puget Sound region in a single new operating company with system level care delivery and a unified approach to value-based care models of the future. The IDS acknowledged both VMMC’s secular status and CHI Franciscan’s Catholic identity, with a single senior management team and board of directors under a common operating company.
Both of the merging organizations gained important benefits from the merger. VMMC received a much-needed infusion of capital and financial stability, which has strengthened regional community access to key clinical services. Franciscan Health gained access to market-leading intellectual capital and VMMC’s unique healthcare operating model, the Virginia Mason Production System, which will help realize its goals of delivering outstanding consumer-focused healthcare and becoming an industry leader in transforming healthcare delivery.
The consolidated health system also is expected to surpass many industry leaders in the quality of service it can deliver in its market, including offering greater consumer choice and improved access.
VMFH now operates 11 hospitals and nearly 300 sites of care across Western Washington, including primary and specialty clinics, same-day surgery centers and Virginia Mason’s Benaroya Research Institute for autoimmune diseases, including diabetes, lupus, cancer and multiple sclerosis. VMFH also operates the Bailey-Boushay House, a nationally recognized skilled nursing facility with a particular focus of HIV/AIDS patients. The IDS also is carrying forth the previous partnerships of CHI Franciscan and Virginia Mason in obstetrics/women’s health services and radiation oncology.
The IDS has articulated eight specific merger goals:
- Develop patient-centered models of whole-person care that engage and empower patients by improving their health and healthcare outcomes
- Restructure care delivery to ensure improved access and value and to excel in managing population health
- Build the infrastructure needed to optimize access to information for critical thinking and clinical decision-making
- Build primary care access and specialist alignment to shape integrated care models beyond the acute care setting
- Develop and engage the clinical and management talent required for long-term success
- Create appropriate regional scale to realize a truly integrated regional delivery system
- Develop a value proposition around how to meet the community’s desire for high-quality services closer to home, including high-impact specialty service lines
- Pursue network and value-based purchasing opportunities
Success depends on a rigorous planning process
Over an 18-month period, executive leaders of the two organizations explored the strategic rationale for the partnership and considered affiliation alternatives as they focused on the value the new regional entity could deliver (See the sidebar “Organizational and affiliation planning considerations”). They employed a rigorous seven-step process to define the path forward, addressing core issues and potential stumbling blocks ranging from key cultural and identity issues to capital, integration and operational commitments required under the agreement. Other organizations contemplating a potential merger can benefit from adopting these steps to guide such an effort.
1 Craft a vision. For three years prior to the merger, the two organizations pursued joint activities under a contractual strategic affiliation agreement (e.g., joint ventures on obstetrics, radiation oncology and an ambulatory center). Success in these endeavors prompted further examination of their long-term partnership and provided a basis for crafting a vision for a new, joint organization developed by the governing boards and executive leaders.
2 Develop a value proposition and fact-based business case. To support the vision, the parties formed a working group to perform high-level feasibility studies focused on evaluating strategic initiatives and potential partnership structures. These studies provided the foundation of the partnership strategy, value proposition and business case.
3 Vet clinical service opportunities and plans. The parties created detailed service-line growth plans from the bottom-up. Involved in this effort were key service-line medical and administrative leaders from the two organizations’ internal medical groups along with independent physician leaders. Vetted plans resulted in enhanced services and tapped into the potential for clinical synergies in inpatient, ambulatory and virtual settings.
4 Evaluate organizational models and options. Several different organizational models were developed and evaluated for their ability to meet organizational goals of both parties and their fit with the strategic vision (e.g., expanded contractual strategic affiliation, joint venture, joint operating company and merger). Ultimately, the parties elected to merge.
5 Create rigorous financial and operational plans. The two organizations developed financial and operational plans that included planned budgets and performance targets at the market level. These plans considered time to execution, market-based service requirements and capital investment commitments. The plans ultimately were vetted and refined by the parent health system, CommonSpirit.
6 Agree on a capital investment schedule. Site- and project-specific capital investment schedules were formed and prioritized according to the capital needs of each organization, with expected capital investments clearly delineated for all constituencies.
7 Delineate post-merger integration steps. A master integration plan was developed, with accretive steps to move the merger forward and timelines and commitments to be fulfilled, adopted and updated continuously throughout the process.
Merger opportunity supported primarily by volume
The following considerations informed this analysis:
- As of 2020, 4 million people reside in the Seattle/Tacoma metro area.
- The Seattle/Tacoma area is among the fastest growing healthcare markets in the nation, with population growth in Seattle, surrounding King County and nearby Pierce County (including Tacoma) amounting to 21%, 16% and 6.5%, respectively, since the 2010 census.
- Comprehensive coverage and access to world-class specialty care are expected among major employers and a population that skews younger, more educated and having a higher average income than the national average.
- Fortune 100 employers include Amazon, Boeing, Costco, Microsoft and Starbucks.
- About 60% of the population is commercially insured.
The market analysis concluded that about 46,000 outbound referrals in 2019 migrated into Seattle (King County) from Pierce and Kitsap Counties and that 4,000 admissions from King County residents went to competing providers in Pierce County.
Managed care enrollment in the Puget Sound area is projected to grow steadily over the next six years, with Medicare Advantage enrollment increasing fastest at a projected 7% rate year-over-year. This growth will afford the system the option to pursue network- and value-based contracting opportunities. VMFH expects to gain a competitive advantage in attracting consumers as a result of its commitment to value-based care, system-level contracting and a medical group culture and approach to care, along with its single-system service lines and physician-led clinical institutes.
Positive merger outcomes reported to date
Early results following the official launch of VMFH in January 2021 are positive; the new organization is meeting goals for better serving patients across the broader Seattle/Tacoma markets and operational synergies from combining operations to support service. Throughout 2021, executives worked to integrate and develop coordinated clinical care in a system that focuses on quality, safety and the patient experience. The revised system of care shows preliminary dividends. VMFH’s goal is to become a destination health system serving the Pacific Northwest.b The plan for achieving this goal requires enhancing clinical service competencies and VMFH’s consumer-value proposition through foundational investments in systems, facilities and initiatives that deepen targeted clinical, research and academic capabilities.
VMFH’s distinguishing feature is its clear vision and mission for improving care in the community, meeting changing consumer demands and coordinating and managing care for defined populations. Accordingly, core guiding principles baked into the newly-formed organization ensure appropriate focus on these overarching goals (see the sidebar “Hallmarks of a consumer-focused IDS” at the end of this article).
As with any newly merged organization, it takes time to integrate the culture, achieve strategic and operational measures and establish a refined market identity. VMFH owes its current success to the careful planning that firmly established its vision, goals and market imperative and helped the legacy organizations remain focused on accomplishing the merger.
a. The federal appeals court barred Hackensack Meridian Health, New Jersey’s largest health system, from acquiring Englewood Hospital, for example.
b. A destination health system features clinical, research, teaching and education competencies within select clinical programs in order to serve patients from a broader geographic region.