Mark Keroack, MD

Health System Consolidation:
Implications for Baystate Health
Mark A. Keroack, MD, MPH
President & CEO
ACHE Symposium
November 7, 2014
1
What Is Driving
Partnerships?
Economies of scale
(e.g., admin,
purchasing, IT, etc.)
Critical mass
of Primary Care
Physicians across
broad geography
Clinical excellence
across the Network
(e.g., superior outcomes at
lower cost)
In search of…
Partnership in/
ownership of a health
plan or licensed
insurance product
Clinical integration
to become part of
ACO/contracting
entity
Infrastructure to
manage population
health
2
Bombarded With Messages
Consolidation pace quickens…
Providers ink 93 transactions in third quarter [2013]
Source: Modern Healthcare, October 19, 2013.
Source: The New York Times, August 12, 2013.
Source: Ponder & Company, “Update on Mergers & Acquisitions Activity
in the Hospital Industry,” Q1 2014.
3
Some Recent Mega-Deals
CHP to assume minority
ownership (30%) of Summa
Q1 2014
Q3 2013
St. Luke’s Episcopal
Health System,
Q3 2013
Q2 2013
Sources: The New York Times, August 12, 2013 and System Web sites.
Q4 2013
Q4 2013
4
Significant Changes In Largest Markets
Reconfiguration in the Top 75 Metropolitan Statistical Areas in
2003-2011 was more dramatic and driven by three forces:
-44
%
3x
2.
Source: Navigant Pulse 2013, Issue III. Data based on AHA Guide, 2005 and
2013, with adjustments for known mergers pending/announced.
Springfield
is the nation’s
86th largest
MSA
5
Relatively Slow Movement of
Independents to Systems
More community hospitals joining systems
•
Between 2009 and 2012, 208
formerly independent hospitals
joined systems.
•
Between 2008 and 2012, growing portion
of community hospitals in systems.
+243
+11.3%
increase in
number of
system
hospitals
+208
+6.1%
increase
Source: AHA Guide. Includes new hospitals built by Systems.
Source: AHA Hospital Statistics, 2014.
6
Changes to the New England Provider
Landscape Since 2010
Southwestern Vermont Medical Group joins
Dartmouth Hitchcock (July 2012)
Northern Berkshire Health System in
Bankruptcy
(2011 and again in 2014)
Steward Healthcare acquires Nashoba
Valley Medical Center from Essent
(2010)
MaineHealth acquires Pen Bay Healthcare
(2010)
Central Vermont Medical Center
joins Fletcher Allen
(October 2011)
Eastern Maine Healthcare acquires
Mercy Hospital in Portland
(October 2013)
Steward Healthcare acquires Merrimack Valley
Hospital from Essent
(2010)
Cooley Dickinson Hospital merges into
MGH (announced 2012)
Lahey Clinic affiliates with Northeast Health System
(2011)
Johnson Memorial Medical Center and St.
Francis Care sign affiliation agreement
(2012)
Winchester Hospital announces affiliation agreement with Lahey Clinic
(September 2013)
Hartford Healthcare acquires Central
Connecticut Health Alliance
(2011)
Hallmark Health to merge into Partners Healthcare
(announced October 2013)
Milton Hospital merges into Beth Israel Deaconess
(2012)
Essent Healthcare signs a definitive agreement to
merger with RegionalCare Hospital Partners(1)
(2011)
Cerberus Capital Mgmt. acquires Caritas Christi Health Care – Six Hospitals
(2010)
Beth Israel Deaconess acquires Jordan Hospital
(October 2013)
Danbury Hospital merger into Western
Connecticut Health Network approved
(December 2013)
Steward Healthcare acquires Quincy Medical Center
(2011)
Tenet (formerly Vanguard) announces plans to take
over 4 hospitals: Bristol Hospital, ECHN
(2 hospitals), and 2 Waterbury hospitals
(October 2013)
Steward Healthcare acquires Morton Hospital and Medical Center
(2011)
Prime Health acquires Landmark Medical Center
(October 2013)
Yale New Haven acquires
Hospital of Saint Raphael (2011)
Backus Hospital merges into Hartford
Healthcare (July 2013)
Lawrence & Memorial Hospital
acquires Westerly Hospital (2013)
Care New England acquires Memorial Hospital of RI
Tufts MC and Lowell General
(2013)
CharterCare
to
be
acquired
announce plans to form new
by
Prospect
Medical
Group
health system (April 2014)
(announced October 2013)
Developed in 2011 by Kaufman Hall, updated by M. Jennings Consulting through 2014
7
What Would Warren Do?
“For in many of these
acquisitions, managerial
intellect wilted in competition
to managerial adrenaline.
The thrill of the chase blinded
pursuers to the consequences
of the catch.”
Warren Buffet,
1983 Annual Chairman’
Chairman’s Letter
Berkshire Hathaway
8
So…“Curb Your Enthusiasm”
Selected Failed Mergers
1994-1997
“Too far away,
philosophically &
geographically”
Source: Boston Business Journal,
9/20/1999.
1997-1999
Economies of scale not
realized
Cultural differences
(academics vs clinicians)
led to persistence of two
clinical organizations
Lack of PA community
provider support
Repercussions of a
Failed Merger
Damaged reputations & lost
community good will
Ability to recruit and retain
physicians, employees & Board
Members
Financial costs of diligence, as
well as potential “break-up”
costs
Source: Managed Care, Nov 2003.
2014
Discussions failed over
“who would lead the new
organization and serve on
its board”
Source: The Boston Globe,
2/15/14.
Not all CEOs/leaders survive a
failed merger
Source: “Calling it Off: Why Some Hospital Mergers Fail
and Others Don’t,” Becker’s Hospital Review, Sept. 3,
2011.
9
Potential Approaches: Prototypes
More Independence
Full Integration
Greater Sustainability
* JOA – Joint Operating Agreement, also knows as a “virtual merger”
10
Alliances/Networks
Description of Option
Alliances or networks other regional providers often focus on creating a
“value network” and/or developing population health management capabilities.
These networks often partner with insurers or leverage health plans owned by
one or more members to create select or narrow networks of providers.
Pros/Factors in Favor
Cons/Factors Against
Lowers individual organization’s financial
risk of creating population health
infrastructure.
Appeals to stronger organizations
uninterested in merging/forming integrated
health system – may provide a
springboard for tighter alignment down the
road.
Similar to “Super-PHOs” of 1990s,
most of which have disbanded.
Cumbersome structure of
independent organizations, each of
whom will act in own self-interest.
Organizations are competitors and,
without assuming significant risk, may
face anti-trust challenges.
11
AllSpire Health Partners
Hospitals/Health Systems
•Atlantic Health System (NJ)
•Hackensack University Health Network (NJ)
•Lancaster General Health (PA)
•Lehigh Valley Health Network (Allentown, PA)
•Meridian Health (NJ)
•Reading Health System (PA)
•WellSpan Health (York, PA)
Source: AllSpire Health Partners Web site.
12
Master Affiliation Agreement
Description of Option
Multiple affiliations and/or JVs with a single organization while each maintains its
independence under a master affiliation agreement (MAA) . Typically each
organization looks to the other first for services/ventures needed.
Pros/Factors in Favor
Cons/Factors Against
Move toward aligning when one or both
organizations not ready to merge since it
maintains “status quo” in terms of
governance and management.
May build “trust” and relationships to
support more tightly integrated model.
Potential to share capital costs
associated with investments via selected
JVs.
Potential to access corporate expertise
more easily.
Questions about long term sustainability.
Independent organizations cannot collude
or even appear to collude (e.g., need
arms’ length transactions).
Each organization will act in own selfinterest.
Complex to manage multi-relationships,
especially when parties’ objectives may
conflict.
Limited economic alignment.
Capital access limited to individual joint
ventures.
13
Johns Hopkins Medicine: Two Major Strategic Affiliations
The affiliation agreement includes service
line arrangements and describes the
intent of the hospitals to offer varied
clinical services in several areas, with
cardiology services and pediatric
surgery already underway. The parties
have agreed to explore additional joint
clinical practices, shared satellite
healthcare centers, and collaboration
on clinical research… John Hopkins
University physicians manage GBMC’s
Cardiac Care Unit, oversee cardiology
services in GBMC’s Emergency
Department and supervise all heartrelated inpatient and outpatient testing.
Based upon GBMC press release, July 2007
Anne Arundel Medical Center
(AAMC) and Johns Hopkins Medicine
renewed their strategic alliance
agreement in January 2012. AAMC
and Hopkins formed the alliance in
2007.
The wide-ranging strategic
agreement includes a shared focus
on health care reform, the potential
of joint clinical programs, satellite
health care centers, collaboration on
clinical research, and exploration of
the development of joint physician
graduate medical education
programs.
Anne Arundel Web site
14
Merger or JOA with
Smaller Organization
Description of Option
A smaller hospital, provider organization, or health system merges into or
enters into a Joint Operating Agreement (JOA).
Pros/Factors in Favor
Cons/Factors Against
Alignment of mission and vision in
corporate model.
Ability to execute through unified
governance and management structure.
Creation of “critical mass” and ability to
rationalize/consolidate services if
geographically proximate.
Retention of governance, management,
and identity of larger entity
Many smaller organizations seek
merger option only when they need
access to capital/are financially
challenged. Depending on partner, may
weaken balance sheet and/or reduce
access to capital.
Local community opposition to larger
health system governance/control.
“We only wanted your money” can leave
smaller entity resistant to changes once
that initial need is met.
15
Merger or JOA with
Similarly-Sized Organization
Description of Option
Merger or JOA with a similarly-sized organization creates a new organization.
Neither organization is dominant; a new image and identity may be created to
brand entire health system.
Pros/Factors in Favor
Cons/Factors Against
Create critical mass and, if
geographically proximate, could
consolidate selected services to
improve cost effectiveness.
Potentially difficult to determine
governance, leadership structures with
two relatively equal partners –
no clear “parent” or leader
Could enhance access to capital (or not
depending on partner).
Politically difficult to distribute (rather
than duplicate) high-end services
between locations.
Possible retention of identity/brand,
depending on terms of agreement.
Spread corporate and administrative
services over a large base.
Cultural challenges can be real: similar
mission, vision and values may be
interpreted in vastly different ways.
Hard to find strong, similar sized,
interested party!
16
Rochester Regional Health System
•
The boards of directors of both Rochester systems
signed a merger agreement in September 2013
(completed in Summer 2014) that combined the two
into one organization under a single parent company
with equal representation from both systems. The
new system:
Includes 528-based
flagship Rochester
General Hospital, a 120bed community hospital,
Rochester General
Medical Group (40
practices), as well as
ambulatory and longterm care components.
Comprises 5 hospitals spanning 4 counties.
Is the second-largest employer in the region, with Includes three hospitals
with 703 total beds, as
13K employees.
well as ambulatory and
long-term care
components.
Sources: Becker’s Hospital Review, September 26, 2013 and March 28,
2014; Rochester Business Journal, March 27, 2014; system Web sites.
17
“Mergers of Equals”
Rarely Work Out As Intended
Schumpeter, “Love on the Rocks”
The Economist 5/17/14
Baystate: The Bird’s Eye View
4 hospitals with 900 beds,
including sole AMC in western MA
Baycare PHO with 1200 MDs
• 500 employed MDs
• 9 practices (34 sites) at level 1
NCQA PCMH certification
• 60% of patients in alternative
payment contracts
Owned Health Plan (Health New
England) with 150,000 lives in
commercial, Medicare and
Medicaid product lines
VNA, hospice, infusion services
Health Information Exchange
19
Prom Queen or Trojan Horse?
Strong fundamentals in quality &
finance with unusual system
discipline
LEAN PI infrastructure
Far along in adaptation to health
reform
Market dominant
Likely to experience $100M in cuts
due to Rural Wage Index, DSH
cuts and GME cuts
High Medicaid mix but shut out of
Mass waiver
New competitors
New management team and new
strategic plan
20
A Fragile Operating Model
$25,000,000
$25,000,000
$20,000,000
$20,000,000
$15,000,000
$15,000,000
$10,000,000
$10,000,000
$5,000,000
$5,000,000
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$0
$0
$5,000,000
-$5,000,000
$10,000,000
-$10,000,000
$15,000,000
-$15,000,000
$20,000,000
-$20,000,000
-$25,000,000
$25,000,000
Note: Each
represents combined
direct
margin for 385 Cases
Each
BarbarRepresents
385
discharges
fromin FY2013
FY 2013 (1%)
Height corresponds to total operating margin per case
21
Key Principles and Questions
Partnerships are a means to an end.
That end is the value they bring toward the
fulfillment of the mission
1. What do we want from a strategic partnership?
2. What do we need from a strategic partnership
(i.e., we would not pursue this relationship unless
it offered us the following…)?
3. What value do we bring to the partnership –
and what would we like our future partner
to recognize as the value that we bring?
22