Peering Into The Healthcare Merger Tea Leaves
In the past 12 months, there has been a raft of multi-billion-dollar mergers in health care. What do these deals tell us about the emerging health care landscape, and what will they mean for patients/consumers and the incumbent actors in the health system?
Health Systems
There have been a few large health system mergers in the past year, notably the $11 billion multi-market combinations of Aurora Health Care and Advocate Health Care Network in Milwaukee and suburban Chicago, as well as the proposed (but not yet consummated) $28 billion merger of Catholic Health Initiatives and Dignity Health. However, the bigger news may be the several mega-mergers that failed to happen, notably Atrium (Carolinas) and UNC Health Care and Providence St. Joseph Health and Ascension. In the latter case, which would have created a $45 billion colossus the size of HCA, both parties (and Ascension publicly) seemed to disavow their intention to grow further in hospital operations.
However, the most noteworthy hospital deal of the last five years was a much smaller one: this spring’s acquisition of $1.7 billion non-profit Mission Health of Asheville, NC, by HCA. This was remarkable in several respects. First, it was the first significant non-profit acquisition by HCA in 15 years (since Kansas City’s Health Midwest in 2003) and HCA’s first holdings in North Carolina. While Mission’s search for partnerships may have been catalyzed by a fear of being isolated in North Carolina by the Atrium/UNC combination, Mission Health certainly controlled its own destiny in its core market, with a 50% share of western North Carolina. Mission was not only well managed, clinically strong and solidly profitable, but its profits rose from 2016 to 2017, both from operations and in total.
HCA’s willingness to be patient and wait for the right deals, and crucially, its ability to break even at Medicare rates, are the real sources of its long-term strength. It may well be that HCA’s ability NOT to follow the herd, and to decide which assets, markets, and relationships make sense long term is more valuable than mass and scale. The Rick Scott Columbia HCA had 360 hospitals at “peak roll-up.” The present, better focused HCA is a much stronger company at half the number of hospitals.
So many large non-profit and investor-owned health systems formed as roll-ups of smaller enterprises are struggling to generate operating earnings just now, including many prominent market leading systems. For this reason, many other potential roll-ups in the vein of Ascension-Providence and Atrium-UNC might not survive the courtship stage. Those roll-ups might actually weaken the combined enterprise by burdening them with hospitals that could not have survived on their own and which probably should close. Bigger may no longer equal stronger in hospital management.
It has never been clear how actual patients would benefit from vastly greater scale of hospital operations. The burden of proof is on the industry that patients will notice a difference in service quality or lower prices from further consolidation of hospital systems. It is not clear that benefits to patients or their physicians has played any meaningful role in the flurry of post-Obamacare deals.
Physicians – Is Vertical Integration Inevitable?
In December 2017, United HealthGroup’s $100 billion subsidiary Optum purchased the troubled DaVita Medical Group for $4.9 billion. This deal set off a frenzy of speculation that United was positioning itself to become the next Kaiser Permanante. Industry pundits opined that Optum and United will transform itself into a closed panel vertically integrated care system that would enable United to sell a comprehensive exclusive care system product. I believe this is not a strong likelihood.
Optum’s first entry into the physician group business was opportunistic, obtaining a captive physician delivery system in Nevada as part of United’s 2008 acquisition of Sierra Health Plan. The physician group asset did not belong in the health plan part of United and was therefore lodged in Optum as a one-off. Subsequent Optum acquisitions in California, Texas and Florida consisted of successful risk contracting Independent Practice Associations with significant and diverse (e.g. non-United) contracts. Some of those IPAs had a core multi-specialty employed medical group at its core. Optum’s early strategy was not a “physician employment” strategy, but rather not dissimilar to that of MedPartners or Phycor in the 1990’s: buying risk-bearing contracts through the acquisition of physician enterprises that had negotiated them.
Obamacare was expected to catalyze a wave of capitation. Owning risk-bearing physician groups was an asset-light way of playing this presumed shift to capitation. However, the expected post-ACA surge in delegated risk contracting did not materialize. Optum ceased buying care system assets in 2012 because the bidding for physician groups, particularly from health systems, had gotten out of hand. They resumed buying in 2016, adding urgent care centers and ambulatory surgical centers to the portfolio, in addition to the DaVita deal.
Despite its large footprint, I believe that Optum’s strategy in the physician space is disciplined but opportunistic “conglomerate” style diversification. In only two markets, greater Los Angeles and San Antonio, does Optum have a significant local market share in the risk-bearing care system market. Optum has not shown any interest in canceling the substantial number of non-United network contracts and going “closed panel.” Nor is there yet evidence of a backlash from non-United insurers in anticipation of a closed panel strategy that would cause United’s health insurance competitors to shun contracting with Optum care system assets. United/Optum has more to lose than to gain in contracting advantage by closing their panels.
The challenge hospitals face is making money at publicly funded rates and driving out the unnecessary or inappropriate use of its services. Hospitals can learn from Optum’s long time horizons, its market-by-market pragmatism about organizational models and insistence on deals being “accretive” rather than “mission driven.” Strategic discipline is the best response to the threat posed by Optum and other organizers of physician care.
The Future of Mega-Medicine
In his 2012 book “Anti-Fragile: Things that Gain from Disorder,” finance guru Nassim Taleb makes a convincing argument that scale and the search for security in the corporate and financial world actually increased those institutions’ fragility and exposure to franchise risk. The reciprocal drive of health systems and health insurers, in particular, to become larger and more “unavoidable” may, ironically, have made them more, rather than less, vulnerable to economic shocks. This includes the effects of the inevitable economic downturn that awaits the American economy in the next year or two. Larger health care organizations are inevitably more bureaucratic and take far longer to make decisions.
On the narrower issue of “integration,” the economic literature on the effectiveness or economic benefits of vertical integration in health care is remarkably devoid of evidence of consumer or societal benefits, or even benefits to the organizations themselves.
Healthcare remains the most intimate personal service in the U.S. economy. Healthcare organizations that wish to consolidate are increasingly constrained by the legal and political consequences of their actions. They are also increasingly tempting targets for the hostile populist sentiments accumulating on both the left and right sides of the political spectrum.
The lack of evidence of measurable consumer benefits and the rising risks haven’t yet stopped the wave of consolidation in healthcare. Despite the pro-merger puffery of prominent strategy consulting firms and bankers, it remains to be seen if $50 billion-plus mega-corporations can connect with real people on a consistent basis and deliver measurable benefits that meaningfully affect their health.
Jeff Goldsmith is the national adviser to Navigant Consulting and President of Health Futures, Inc. He is a veteran health care industry analyst and forecaster.
