Merger Transactions Trend Upward in 2018, But at Higher Rate

Several deal-tracking companies reported an increase in hospital transactions in the first quarter of 2018—from 25 to 36 transactions depending on the tracking company. All noted it’s the second highest number of quarterly transactions in the last 10 years.

 

Transactions included:

  • For-profit divestures
  • Mega mergers worth more than $1 billion
  • Announced transactions involving teaching hospitals and academic medical centers

 

Moody’s Investors Service noted that industry pressures will continue to drive consolidation in the hospital industry. Increasing payment issues and “ongoing wage and supply cost inflation will pressure margins for hospitals that are not able to gain operating efficiencies,” Moody’s analysts’ wrote in an April 10 report.

 

Revenue pressures include rising bad debt, as patients face higher out-of-pocket payments, and payers increasingly encourage patients to seek care in lower-cost settings instead of hospitals. Additionally, state Medicaid programs are expected to seek ways to limit eligibility or reduce payments to providers. (“Hospital Deals Accelerate in 2018,” HFMA Weekly, April 20, 2018)

 

“Many smaller hospitals lack the capital to invest in new facilities to drive growth or make necessary investments in information technology and clinical systems that are required in order to operate efficiently and effectively in the current environment,” Moody’s wrote.

 

Smaller hospitals necessarily will look to larger organizations as capital partners, or they may choose to align with other hospitals. “They will need to do this in order to leverage purchasing and pricing power in negotiating with commercial payers in local markets,” Moody’s noted.

 

Experts Weigh In

 

A former director of the Medicare Payment Advisory Commission said recently at a conference that hospital and physician prices are related to increasing market concentration. He noted that while well-functioning markets can control costs and potentially improve quality, many U.S. markets don’t have that level of functioning even after many years of hospital concentration and increasing levels of vertical integration.

 

Hospital advocates have countered that a high level of consolidation is needed to provide the type of coordinated care that is increasingly sought by public and private payers. One healthcare executive noted that health care is consolidating to provide the scale that allows for improving care at a lower cost.

 

Congress has discussed possible federal responses to hospital merger and acquisition trends, including a reduction in Medicare payments to practices acquired by hospitals.

 

The merger trend also is affecting hospitals’ credit standing, according to a March 5 report by Moody’s. “Consolidation strategies may result in immediate improvement—or immediate decline—in credit quality, depending on the terms and materiality of the consolidation,” Moody’s wrote.

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

Coming soon: The Volume to Value Paradox featuring Nate Kaufman, Marian Jennings and Dan Grauman.

 

 

For a complete list of iProtean courses, click here.

 

For more information about iProtean, click here.

Due Diligence: A Strategic Opportunity

When hospitals merge or enter into transactions, or a larger health system acquires a hospital, due diligence becomes a step to the process. During due diligence, an organization can “look under the hood,” if you will, and take a very deep dive into the operations of a hospital to identify any significant red flags that would cause the acquirer perhaps to walk away from the deal, said Dan Grauman, President and CEO of Veralon, during a recent interview with iProtean.

 

“The due diligence process should focus on the multiple dimensions of what defines a hospital organization.”

 

As a preview to iProtean’s upcoming course on due diligence, we’re presenting a recent article, “Don’t Lose Sight of the Strategic Value of Due Diligence,” Veralon Experience & Insights, from the Veralon team.

 

Performing due diligence can seem like a “check the boxes” exercise as organizations verify material facts, gain a clear view of the risks involved, and more. But there is strategic value in due diligence, especially in identifying the impact of the transaction on existing partnerships and relationships. Such insight empowers post-transaction planning and sets the stage for successful integration.

 

A “strategic” approach to due diligence seeks to develop a strong understanding of the relationships, market dynamics, competitive forces, and other factors that could affect the success and viability of the transaction. For example, organizations that elevate due diligence from a required exercise to a strategic opportunity:

 

  • Evaluate the “What if?” scenarios of competitors’ response to the transaction
  • Assess the potential impact of the transaction on physician alignment
  • Consider whether and how the transaction will affect partnerships with competitors

 

There are three standard areas of due diligence that, when strategically leveraged, play a critical role in preparing for integration.

 

Affiliations and Ventures

 

Standard due diligence includes review of an organization’s existing affiliations and business relationships (e.g., joint ventures, clinical affiliations, contracted services). Strategic due diligence goes beyond understanding the terms and legal considerations associated with these arrangements and seeks to understand the following:

 

Competitive and marketplace implications: Take the time to assess the potential impact of a competitor’s response to the transaction on the organization’s existing relationships. For example, one health system sought to acquire a community hospital whose primary competitor was a health system that was similar in size to the organization that wished to purchase the hospital. All of the hospital’s gastrointestinal and orthopedic physicians were employed by the competitor. Additionally, the hospital had entered into a joint venture with the competitor to operate a cancer center.

 

During strategic due diligence, health system leaders:

 

  • Considered how to respond if the hospital’s physician competitors chose not to provide care at the hospital
  • Established plans to align independent orthopedic practices in the area
  • Assessed the potential to pull out of existing joint venture relationships and partnerships
  • Evaluated the near-term integration priorities for the hospital and health system

 

Potential sources of future redundancy: For example, if a potential partner has a strong cancer program or a cancer center, the acquiring organization should consider how this program will fit within its existing service line.

 

Implications for accountable care organizations (ACOs) and clinically integrated networks (CINs). This is especially important in transactions that involve hospitals or health systems with multisystem physician networks.

 

Physician Services and Alignment

 

Standard due diligence will include a review of medical staff, physician/clinical relationships, medical staff composition (e.g., employed vs. independent, affiliations with competitors, age) and coverage arrangements. Strategic due diligence goes a step further, taking into consideration:

 

Gaps in medical staff/physician coverage: In addition to identifying current gaps in physician services, consider potential gaps in service that could arise in response to the transaction, such as changes in patient flow between facilities. Early identification of areas where stop-gap coverage may be needed ensures continued service delivery.

 

Impact on referral patterns: Consider the competitive dynamics that could influence post-transaction operations, including clinical referral patterns.

 

Implications for executive leadership. When reviewing contracts, keep an eye out for change-of-control provisions in place for the organization’s executive leaders. For example, if an executive leader has a change-of-control clause that states the leader may leave voluntarily after the transaction is complete and receive severance and full benefits for a specified period of time, this could present relevant financial risk.

 

Management and Administrative Services

 

Standard due diligence includes a review of management contracts with third parties and contracts for outsourced services, such as IT, billing, coding, and food services. Strategic due diligence seeks to strike a balance between the desire to eliminate expensive outsourced contracts and the need to retain on-the-ground insight and organizational knowledge that will be critical during integration . . .

 

 

(Special thank you to Veralon for permission to print significant parts of this article. For the full article, please email clockee@iprotean.com)

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

MedPAC Targets Stand-Alone EDs for Payment Cuts

Earlier this month, the Medicare Payment Advisory Commission (MedPAC) voted to cut reimbursement for some freestanding emergency rooms in urban areas. Industry analysts warned that the cuts could undermine access to care.

 

Freestanding emergency departments receive Medicare payments equal to hospital emergency departments even though they have lower standby costs than on-campus emergency rooms, do not maintain operating rooms, do not have trauma teams and do not have specialists on call 24/7. Ambulance companies typically bypass stand-alone emergency departments in favor of an on-campus one to ensure access to inpatient care if needed.

 

The MedPAC proposal asks federal lawmakers to reduce stand-alone emergency department payment rates by 30 percent for those that are within six miles of a hospital-based emergency department. This could save Medicare up to $250 million annually if adopted by Congress.

 

Of the approximately 575 freestanding emergency departments in 2017, two-thirds were hospital-owned versus independent centers without affiliation. In five large markets, for example, approximately 75 percent of the stand-alone emergency departments were located within six miles of the nearest hospital emergency department.

 

MedPAC noted that between 2010 and 2016, Medicare outpatient emergency department payments per beneficiary increased by 72 percent.

 

A payment policy executive at the American Hospital Association noted, “The [MedPAC] recommendation is not based on any analysis of Medicare beneficiaries, Medicare costs or Medicare payments, and would make Medicare’s record underpayment of outpatient departments and hospitals even worse . . . Even more troubling to us is that [the recommendation] has the potential to reduce patient access to care, particularly in vulnerable communities, following a year in which hospital EDs responded to record-setting natural disasters and flu infections.”

 

Congress tends to accept MedPAC recommendations to reduce payments for stand-alone facilities, most recently passing a site-neutral policy cutting pay for stand-alone hospital outpatient departments.

 

(Source: “MedPAC votes to cut payments for free-standing ERs,” Modern Healthcare, April 5, 2018)

 

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

What Is Value?

Continuing with excerpts from recent interviews with our experts, Marian Jennings and Nate Kaufman talked about moving from volume to value, and what that means to them.

 

Interviewer: What is Value?

 

Nate Kaufman: Value relates to the fact that the benefits being provided are worth the cost. The question that a healthcare provider needs to ask when they’re referring to value is, “How are we going to be sustainably differently better?” Or, “How are we going to be worth the cost?”

 

If healthcare services are not worth the cost or not sustainably differently better, they are all the same. And if they are all the same, they are just a commodity. All that matters is price.

 

There are four benefits in healthcare: appropriateness, outcomes, service and access. And then, of course, there’s cost. To be a high value provider, essentially one has to make sure that wherever a patient receives care, that care will be appropriate. The outcomes will be optimal. The service will be consistent and excellent, and most importantly, the patient can get in to see the provider when they need to see them. And that all this will be packaged in such a way that it will be done at the best possible cost. That’s a high value provider.

 

At this point, very few healthcare delivery systems have been able to organize themselves in such a way that they can present a high value delivery system to the market and differentiate themselves from others.

 

Value means different things to different components of the healthcare system. For example: for a purchaser of healthcare, two critical elements are appropriateness and outcomes. For the patient, who can’t judge appropriateness and outcomes, the primary area of value are service and, most importantly, access. Access drives patient choice in healthcare. Now, of course, cost is an important component, but for the most part, access is the primary driver of market share today when it comes to patient choice.

 

Marian Jennings: Value is a ratio or a relationship between quality as measured by the consumer compared to or divided by the cost as measured by the consumer. So why did I add that language, “by the consumer?” The consumer can be the patient, the consumer can be the insurance company or the consumer can be your physicians. As we move into the future, it will be increasingly important to focus not just on volume— that is, how many patients come through our system—but whether we can demonstrate a distinctive value proposition.

 

For patients, we actually know what matters to them. On the quality side, they define quality as number affordability timely access to services, clinical expertise, convenience and the ability to communicate with clinicians electronically (this will become increasingly important over time).

 

So, if we think about value from a consumer perspective, they are looking at affordability, as part of quality in the numerator, and then they’re looking at cost in the denominator as part of the ratio. So we can drive value up by offering more of the attributes they’re looking for or we can drive it up by reducing cost, which helps us both with the affordability question and with the overall ratio.

 

Interviewer: What are your thoughts about moving from volume to value?

 

Nate Kaufman: I don’t believe we are moving from volume to value, I think that is a gross misconception. I do believe value is important but I believe the reason it’s important is because value will drive volume, and volume will drive revenue income and market share. I think we will always be rewarded in some form or fashion by the volume of care we provide. But it is value that will drive that volume to our organizations and our providers.

 

Marian Jennings: When thinking about volume and value, there is a preconceived notion that more volume drives greater value. That can be the case, but it’s certainly not always the case . . . counting on scale to deliver value just because you’re bigger is not really objectively borne out. That doesn’t mean it can’t be borne out. It doesn’t mean that over time larger organizations can’t drive best practices in a way that actually improve value, but just thinking if we merge and get bigger, we will have more value to the people in our market is probably unrealistic.

 

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.