Healthcare’s Consolidation Landscape

Market and regulatory factors have unleashed a wave of merger, acquisition, and partnership activity that is changing the delivery of healthcare services.

This article first appeared in the June 2017 issue of HealthLeaders magazine.

Consolidation in the healthcare-provider sector has accelerated in recent years, reshaping the relationships between health systems, hospitals, and independent physicians across the country.

In the Buckeye State, healthcare consolidation activity has been a transformational force at OhioHealth, says Michael Louge, CPA, who serves as executive vice president and chief operating officer at the 11-hospital health system based in Columbus.

"When you look at OhioHealth, and you go back two or three decades, it was a much different organization. The reason it is different today is because of philosophy and the way we approach regional partnerships—how we have worked with physicians and hospitals in the region. Our whole organization’s evolution has been through successful partnerships and consolidations with regional players."

Over the past year, statistics have been gathered on the pace of healthcare-provider consolidation.

In a recent HealthLeaders Media survey, 159 healthcare executives—mainly from health systems, hospitals, and physician practices—were asked about their merger, acquisition, and partnership (MAP) deals.

Eighty-seven percent of the respondents said their organizations were expected to both explore potential deals and complete deals that were underway in the next 12–18 months. Only 13% of the respondents said their organizations were not planning MAP deals in that same time period.

From the passage of the Patient Protection and Affordable Care Act (PPACA) in 2010 through the end of last year, merger and acquisition transactions involving acute-care hospitals increased 55% from 66 announced deals to 102, according to Skokie, Illinois–based Kaufman Hall. Last year, the operating revenue of acquired organizations was more than $22 billion, according to the consultancy.

Kit Kamholz, managing director at Kaufman Hall, says two sets of drivers are propelling consolidation activity among health systems and hospitals.

"There are transactions that are driven by financial rationale. This is driven by a level of distress at the smaller organization, either from a historical-financial standpoint, an access-to-capital standpoint, or they are experiencing some significant clinical deficiencies. … The second bucket is in the category of strategic rationale. These are organizations that tend to be relatively strong financially, that are considered to be strong community-based providers in their marketplaces; but they are looking at the landscape of the evolving healthcare environment and saying, 'Do we have the skills and capabilities to be successful in this new era of value-based care?' "

Healthcare consolidation activity is impacting the country’s physician practices and physician-employment trends.

In the same HealthLeaders Media MAP survey, physician practices were among the top targets for recent MAP deals, with survey respondents citing that 27% of the entities involved in a recent transaction were physician practices.

''Our whole organization’s evolution has been through successful partnerships and consolidations with regional players.''

The respondents reported that health systems also accounted for 27% of recent MAP transactions. Hospitals were next in line as the top target for MAP transactions, accounting for 20% of recent MAP activity.

In the survey, physician practices were the most sought-after entities for MAP activity within the next year, with 59% of the respondents reporting that their organization was interested in pursuing MAP deals with physician practices. The next-highest category of sought-after entities for MAP deals were physician organizations such as independent practice associations at 30%.

In September 2016, Physicians Advocacy Institute (PAI), a nonprofit advocacy organization dedicated to examining the challenges that physicians face and educating policymakers about those challenges, published a national report that shows the impact of consolidation activity on doctors: Physician Practice Acquisition Study: National and Regional Employment Changes.

Data for the PAI report was drawn from seven points in time from July 2012 to July 2015. During the study period, the percentage of hospital-employed physicians increased 49%, with increases posted over each six-month period examined in the report. The percentage of hospital-employed physicians nationwide jumped from 26% in July 2012 to 38% in July 2015.

The report shows a 31,000-practice increase in the number of physician practices employed by hospitals over the three-year period, which amounted to an 86% hike.

"This change in employment status has occurred across the country," says Kelly Kenney, JD, executive vice president of PAI. "The thought was that urban areas would outpace the rural side because it would not make as much sense for a rural hospital to employ physicians, but we found that the rural employment rates have gone up considerably and are converging into the urban rates."

Unfavorable financial factors are driving many physicians out of independent practices, says Robert Seligson, MBA, MA, president of PAI, and executive vice president and CEO of the North Carolina Medical Society. "In a rural area, you have less paying patients in most cases, so that creates a process of trying to find a formula and a strategy that will make your practice viable based on your payer mix."

In North Carolina, young physicians are seeking hospital employment rather than coping with the financial pressure and other challenges associated with independent practices in rural markets, he says.

"We have a community practitioner program here in North Carolina that places doctors in underserved areas of the state, and in return, we pay up to 50% of their tuition loans. They have to stay in that area for at least five years. Twenty years ago, it was an easier sell to get doctors to do that. Now, with the changing dynamics of the marketplace—whether it is the rural or the urban areas—it is harder for a practice to maintain its viability when its payer base is weak and it is trying to be competitive and meet all the requirements that are coming down the pike."

With a high level of uncertainty about the future direction of healthcare regulation and the ongoing evolution of value-based care models, consolidation poses daunting risks for physicians, Kenney says.

"There is a rush to consolidate as we all know and as our study confirmed. We are very concerned that if the economics do not play out in a fairly quick time frame—because we know that health systems often lose money on the first few years of purchasing physician practices—that health systems will shed those purchasing agreements. Then what happens to those physicians? They have sold their practice. They have no practice to return to."

OhioHealth’s strategy for MAP success

OhioHealth, which reported total operating revenue at $3.5 billion in fiscal year 2016, has enjoyed a significant measure of consolidation success acquiring community hospitals, Louge says.

"This is where we have been active and successful for a long time. The problem for those hospitals is usually an inability to recruit and retain physicians and physician specialties in their market. So, it is increasingly difficult for them to keep patients local because you need physicians and specialists to do that."

The demanding regulatory environment for hospitals in recent years has been another impetus for community hospitals to seek membership in OhioHealth, he says. "When you look at the requirements that are being placed on all healthcare providers, the community setting has a lack of depth and breadth of resources. When they see readmissions and other regulations coming—and the penalties that come with them—community hospitals need a depth and breadth of resources to comply."

Louge says a prime example of OhioHealth’s approach to acquiring a community hospital is 64-bed O’Bleness Hospital in Athens, Ohio, which became an OhioHealth managed affiliate in May 2010 and a full member of the health system in a noncash transaction in January 2014.

"We had an affiliation for supply chain and other low-hanging fruit. As the market got tougher, and reimbursement was a challenge, and O’Bleness struggled with lack of depth and breadth of resources, we entered into an agreement where we assumed management of the facility. We helped them recruit and retain physicians."

Membership had several advantages for O’Bleness. "Most of that revolved around: recruiting and retaining physicians in their community; doing outreach from Athens to the surrounding rural areas to help ensure those patients would come to Athens for care; guaranteeing that certain kinds of specialty care would be delivered in Athens—an example of that is radiation oncology; negotiating their managed care contracts, which was something that we could not do before the acquisition; and offering the depth and breadth of the resources we have in central Ohio."

The acquisition deal reached in 2013 also generated benefits for OhioHealth, Louge says.

"For one, we have a stable medical community in Athens, where we have always had a presence. We are working to make healthcare better there by keeping care local to the extent that is reasonable and logical. And there are now trusting relationships between the physicians in Columbus and Athens that bring patients to us here in Columbus, while at the same time sending patients back to Athens once advanced care has been delivered. It is a win-win for the community of Athens; it is a win-win for the physicians in Athens; and it is a win-win for OhioHealth both in Athens and Columbus."

The financial impact has been positive for both parties, he says.

"Today, O’Bleness is making a healthy, stable profit. When you see that kind of performance, what you see in that community is that healthcare is starting to thrive. They are keeping patients in Athens. They are seeing more volume. We have also seen the level of quality rise, … which also helps keep care local and helps the financial picture. And Athens County is one of the top counties in terms of referrals into OhioHealth outside of the Columbus metro area."

For the fiscal year ending June 2016, O’Bleness posted net operating income at $9.7 million. In the previous two fiscal years, operating costs outpaced income for a $2.6 million loss in 2015 and a $1.1 million loss in 2014. 

Since the hospital’s acquisition deal, OhioHealth’s balanced scorecard rating for O’Bleness has trended positively, with a 3.1 rating in fiscal year 2014, a 3.7 rating in 2015, and a 4.0 rating in 2016. The balanced scorecard reflects four sets of metrics: patient care, patient satisfaction, employee satisfaction, and financial performance.

OhioHealth also has achieved consolidation success with a physician-practice acquisition in the Athens market.

"We already had an employed physicians group called Athens Medical Associates, and we have combined them with University Medical Associates. UMA was an independent practice that has provided the teaching for Ohio University’s Heritage College of Osteopathic Medicine. The beauty of putting those two groups together is having a member hospital in Athens and having a piece of the medical community employed by us. We now have a strong relationship with the Heritage College of Osteopathic Medicine at Ohio University. This not only allows us to consolidate but also to have stability in the teaching ranks and stability in the clinical practice of medicine by stabilizing the physician group."

''The whole transformation to value, and the people who are going to be successful there are the large integrated groups."

In its market, OhioHealth has observed three factors spurring physician practices into MAP deals with hospitals and health systems, Louge says.

"There are economic reasons; there are regulatory issues; and, as we look forward in the march to value, physicians in the smaller practices see the need to be part of a new healthcare model. The economic reasons are myriad. It is just much harder for practices to stand alone today economically. Whether it is Medicare, Medicaid, or even commercial insurance, the tightening of the financial reins makes it harder for them individually to stand up. You couple that with the regulatory changes coming at the state and federal level, where there are many more regulations. … Then there is the whole transformation to value, and the people who are going to be successful there are the large integrated groups."

OhioHealth also has established partnership transactions.

"We have two exclusive clinical and operational affiliations. One of them is with the Berger Health System in Circleville. And effective January 1, we finalized an affiliation with Southeastern Med, which is in Cambridge in Guernsey County. With those partnerships, we make commitments to the local community to partner with them to look for efficiencies. There also is common governance. We have strategic partnership councils with both of those organizations that have their board members and executives and people from Columbus who are responsible for fulfilling our commitments," Louge says.

As is the case with OhioHealth’s acquisition deals, partnership transactions are structured as win-win scenarios for both parties.

"With Berger in Circleville, we have two employed cardiologists who are there full-time. That is something they would have struggled to do on their own. Now, we have a robust cardiac and vascular program in Circleville, which has helped that hospital and that physician community to keep the appropriate amount of cardiac care local; and when that can’t happen, patients are referred to Columbus."

IU Health rolls with hub-and-spoke organizational structure

''We have not done a full acquisition recently, and that has been intentional.''

While other healthcare organizations are consolidating, at Indianapolis-based Indiana University Health, senior executives have spent much of the past five years in a concerted effort to recast their organization after a consolidation spree, says Ryan Kitchell, executive vice president and chief administrative officer of the 14-hospital health system.

"We have not done a full acquisition recently, and that has been intentional," he says of IU Health, which posted total operating revenue at $6.2 billion for the 2016 fiscal year.

"I became CFO in 2012, and at that time we had either acquired or built a hospital on average every year for 15 years. Given that rapid pace of growth, we had not done a really deep focus on integrating what we had in our system. So, we took a timeout on acquisitions to focus on becoming a true operating company, rather than the holding company model."

IU Health now features an integrated hub-and-spoke structure, with rural "spoke" hospitals linked to regional "hub" hospitals that send patients for the highest level of care to three hospitals in Indianapolis: IU Health University Hospital, IU Health Methodist Hospital, and Riley Hospital for Children at IU Health.

The most ambitious aspect of IU Health’s consolidation activity "timeout" was a $50 million upgrade of the health system’s information technology infrastructure, Kitchell says.

"It started with the core IT systems. When I started as CFO, we had seven different electronic health record systems. As patients moved within our system’s hub-and-spoke structure, while we were branded as one system, it really didn’t feel like it. We spent about two-and-a-half years and moved all of our hospitals to a common electronic health record, a common revenue cycle system, and a common enterprise resource planning system. Now, we have all the financial, human resources, supply chain, clinical, and billing all in one system, and it has helped to glue everything together. Before, people were not really even talking the same language. They didn’t have the same data, and we were not getting the advantages of being a system, where we could compare how we were doing on measures like infection rates and be able to decide that somebody had gotten it figured out and we should spread that elsewhere."

Related Link: Payer Perspective on Healthcare Consolidation Activity

Measuring the return on investment from the systemwide IT upgrade has been a challenge, he says. "Starting with the electronic health record, the cost side of that is easy to measure. The return side is the harder part.

"A return could come when a patient moves from Bloomington Hospital to Indianapolis; now that we are on the same electronic health record, we can check on patients faster because we have a complete record of their health. We don’t have to order as many lab tests because we already have lab results in the record, so there is a savings there from an expense standpoint. There are a lot of those little things, and you could probably make estimates for them, but we are much more focused on lowering our overall cost structure over the long term as reimbursements are reduced. So, we viewed this IT investment as a key driver to get us to a reduced cost per patient."

While IU Health has shied away from acquisition transactions in recent years, the organization has embraced several partnership deals. For example, the health system signed a five-year lease agreement last year to manage Frankfort Hospital, a 25-bed county-owned facility.

"We already had a significant primary care presence in that county. Of the eight primary care physicians, four of those were our doctors and they had been in that community for decades," Kitchell says.

The financial impact of the partnership with Frankfort Hospital is limited for IU Health, but it is an excellent fit with the health system’s hub-and-spoke organizational structure.

"Frankfort was a supplement to the regional hub hospital in the Lafayette region. It will help us draw more volume to the Lafayette region and expand what we are doing in the Frankfort community. But from a financial standpoint, this is a very modest part of our organization. It is about $50 million in revenue compared to our total operating revenue of about $6.2 billion. We like the coordination of the care and the strengthening of that region. As we continue to get into the population health space—we have commercial insurers, Medicare, and Medicaid in our payer mix—we are managing members of multiple health plans and are finding it very helpful to have strong partnerships in communities such as Frankfort."

In 2016, Medicare and other government programs accounted for 40% of gross patient service revenue at IU Health, Medicaid and HIP (Healthy Indiana Plan) for 21%, and commercial/managed care for 36%, with self-pay and other at 3%.

DuPage Medical Group offers physicians an alternative to hospital consolidation

Downers Grove, Illinois–based DuPage Medical Group, a physician organization in the Chicagoland market, is offering doctors and physician practices an alternative to MAP deals with health systems and hospitals. 

"Where we have had success driving some of our growth is that we are a physician-driven organization," says Michael Kasper, MHA, CEO of DuPage, which features more than 600 primary care and specialty doctors in more than 80 locations. For the 2016 fiscal year, DuPage reported net patient revenue at $741 million.

"I report to a board of doctors; and a lot of physicians, whether they are newly graduated or in the market, are faced with the challenges of information technology or surviving through the changes of Medicare reimbursement. We have the wherewithal of a sophisticated health system, but we try to protect the clinical environment and the entrepreneurial spirit of physicians. So we end up being very competitive in offering an alternative to physicians."

DuPage features facilities and equipment that small physician practices would struggle to finance one their own, he says.

"If you look at some of our subspecialties, we have a radiation-oncology center, we have multiple surgery centers, and we buy equipment that is specific to the needs of the individual physicians. For those physicians—if they were trying to stay within a small physician practice—it would be very difficult to produce the resources to buy the equipment necessary to do surgical procedures. When some of these practices try to do it on their own, they take on an inordinate amount of debt that overleverages their practice. By pooling economics, we are able to offer these services without the individual physician taking on the full brunt of the financial responsibility."

Examples of costly equipment purchases at DuPage include 3T MRI scanners that generate high-strength magnetic fields and two Varian TrueBeam x-ray linear accelerators, which deliver radiation therapy featuring real-time tumor imaging.

Outpatient-service capabilities are a key element of DuPage’s growth strategy.

"As we go into new markets—and even in the markets we are in today—we try to make sure we are providing as many services as possible in the outpatient continuum. The validation we get from that process is not just the cost savings. There is clinical outcome improvement as well; because when all of our service information gets contained within one medical record, it creates a lot more power as it relates to our doctors having more information at their disposal to make clinical decisions.

"A robust EMR capability supports cost-effective patient care," he says.

''If we can’t go in and help a practice grow and help the physicians from a compensation perspective to remain whole or enhance their economics, and if we can’t establish a retained earnings model, then we shy away from those types of deals."

"Through Epic, there are numerous clinical benefits, including the ability for providers to have a holistic view of their patient’s health information at all times. This reduces unnecessary medical testing and medical errors and facilitates highly coordinated care with a strong focus on ongoing communication between providers. For patients, MyChart—Epic’s secure, online patient portal—offers a place to securely view medical records, request or schedule appointments, and communicate with physicians."

When DuPage acquires a physician practice, the targeted entity has to meet a minimum set of scale and financial criteria, Kasper says. "We are seeing some practices trying to individually grow their practices. They will go into a community and try to cobble together several practices. That is not our model. We like to go into markets where there is some base of physicians—there is a group of reasonable size of 35 to 50 physicians. We have shied away from markets where we would have to start from scratch to put together a medical group."

ROI also is a key consideration in DuPage’s acquisition deals.

"If we can’t go in and help a practice grow and help the physicians from a compensation perspective to remain whole or enhance their economics, and if we can’t establish a retained earnings model, then we shy away from those types of deals. We do not create profitability at the expense of physician compensation."

One of the criticisms of healthcare-provider consolidation is that it leads to higher unit pricing for medical services. DuPage’s consolidation strategy has held the line on pricing, Kasper says. "We are the lowest-cost ACO in the Chicagoland area. We are top-quartile performance in cost, and we are roughly top 10 performance in quality based on MSSP quality metrics."

DuPage is a member of Illinois Health Partners, a Medicare Shared Savings Program accountable care organization. For the 2015 MSSP performance year, data from the Centers for Medicare & Medicaid Services show Illinois Health Partners posted a $8,847 cost of care per Medicare beneficiary, which was the lowest figure in the Chicagoland area for any MSSP ACO.

As cited in the September 9, 2016, Health Affairs Blog, for other ACOs earning MSSP shared savings payments in 2015, the average cost of care per beneficiary was $10,555 nationwide.

Health systems and hospitals generally pursue an inpatient-driven model when acquiring physician practices, which helps drive higher-patient costs, Kasper says.

"We are an outpatient-driven model. When physicians join a hospital, those physicians use the hospital for imaging, for labs, and for outpatient services. All those services go to the hospital, and any insurance carrier will tell you it is more expensive to use hospital services than it is to use freestanding outpatient services. As we build out our capabilities and add physicians and patients to our model, we bring down costs almost effective immediately."

Gazing into the healthcare-provider consolidation crystal ball

Senior leaders at DuPage say their physician-practice consolidation strategy can be replicated across the country.

"There are three strategies: the publicly traded companies that are in the physician-practice space; there are the health systems and hospitals that are in the space; and there are very few physician-driven models, especially those that are willing to take their model outside of their local market, which we are willing to do. There is a real opportunity for DuPage Medical Group to become a regional or national company, and to help create some alternatives for doctors," says Kasper.

In addition to having a 10-member board drawn from practicing physicians, Kasper says DuPage has a "sustainable ownership model" that encourages physicians to invest in their practices. DuPage gives member practices a measure of independence, he says. "The physicians have autonomy over their own schedules, practice approach, and philosophies."

DuPage’s consolidation strategy has believers in the financial world, too. In December 2015, the physician organization secured a $250 million investment from Boston-based Summit Partners, a global growth equity firm.

At Kaufman Hall, Kamholz is bullish on DuPage’s odds for consolidation activity and growth success. "They are taking private equity investment to get bigger and stronger to make the investments necessary to be successful in the new environment. They have a high degree of confidence in their strategic direction, they have strong financial performance, and they have a balance sheet that helps them withstand some of the pressures that they are facing."

Last year, DuPage demonstrated strong growth, adding 211 providers and 16 locations in DuPage, Kane, Kendall, Will, Cook, and Grundy counties.

Despite the apparent success DuPage is enjoying in northern Illinois, the future survival scenarios for many physician practices across the country are far less rosy.

Given the trends identified in the PAI acquisitions study, physician practices and the doctors who work in them are facing daunting challenges, Seligson says.

"There is a sense of a need to provide better outcomes and to work collaboratively. Physicians are obviously at the forefront of providing the care. In order for value-based care to really work, doctors have to be at the forefront and have the autonomy and the ability to make good clinical decisions in a collaborative way—whether it is in an outpatient setting, working in a hospital setting, or working with other providers to make sure a patient’s care is the appropriate care when he or she needs it."

Health systems acquiring independent physician practices is often at odds with the adoption of value-based care models, Seligson says. "We feel that sometimes the big systems are not really conducive to value-based care, which needs to be more of a collaborative effort. A lot of the hospital CEOs say there is a strong need for the private practice of medicine to support what they are doing to deliver value-based care."

When health systems and hospitals pursue consolidation strategies with much more than the financial bottom line in mind, MAP transactions generate value for all of the stakeholders involved—including patients in the form of better care coordination, Louge and Kitchell say.

In physician-practice MAP activity, OhioHealth is committed to pursuing win-win scenarios, Louge says.

"Our partnership philosophy with our physicians is that we will joint venture with them in the appropriate outpatient-therapy settings and other places for both parties’ economic benefit, but it is always with the intent to benefit the local patient and to adhere to our charity-care guidelines. When you look at our outpatient profitability, a significant piece of that is generated by joint ventures we have with our independent medical staff. We have those in surgery, we have those in sleep services, and we have those in other areas."

In recent years, mutually beneficial partnerships have been the crucial component of IU Health’s MAP strategy with community hospitals and independent physician practices, he says.

"There are more conversations around service lines and specific physician needs. In Indiana, the demand for healthcare has increased with Medicaid expansion and the PPACA exchange, and that expansion of demand in many places has led to outstripping the physician manpower that exists. So, we are in a lot of conversations to find new ways to partner."

Healthcare consolidation activity is far from over, and the healthcare industry landscape will continue to evolve for years to come, Kamholz says. "We are entering a long period where there is going to be no right answer."