How Consolidation Is Reshaping Health Care

The shift from volume- to value-based care, exploration of ways to manage population health, and the increasing influence of consumerism have challenged healthcare stakeholders to improve care delivery by reducing clinical variation while increasing access to capital. As a result, consolidation has become a defining factor in healthcare business models.

With national healthcare expenditures increasing from 12.5 percent of GDP in 1990 to nearly 18 percent today, healthcare organizations are aiming to bend the cost curve. “If you’re going to figure out a way to slow down the increase of healthcare cost, you’ve got to figure out a way to get certain efficiencies and economies of scale,” notes Harry Kraemer, executive partner with Madison Dearborn Partners and clinical professor of strategy at Northwestern University’s Kellogg School of Management.

Consolidation activity has increased steadily since 2009 and even doubled between 2011 and 2015. ¹ While change-of-control integration decreased last year, combination continues and increasingly is taking on a variety of forms other than mergers and acquisitions, such as joint ventures and affiliations. 

“We’re seeing a more organized way to deliver care and greater coordination among participants in what were once distinct verticals to provide that care,” says Anu Singh, managing director, Mergers, Acquisitions and Partnerships, Kaufman, Hall & Associates, LLC.

A major question surrounding consolidation is whether this activity will lead to better care delivery and reduced costs. Although instances of clinical integration have demonstrated strengthened ability to manage patient health across the care continuum, there are concerns. Mergers and acquisitions may decrease competition, for example, while looser affiliations are not guaranteed to achieve aligned incentives.

Industry Trends Guiding Consolidation

The shift from volume- to value-based payment and care delivery has driven healthcare providers to reshape their approach to care operations, such as by investing in technology to improve patient care and eliminate waste.

“If reimbursement is now tied to population health measures along with the ability to use and make available electronic health records and to measure quality, you now need a new fixed infrastructure and group that you have to put in place just to be able to measure those things and keep them on the right side of the ledger,” says Howard Forman, MD (pictured at right), professor of Radiology, Economics, Public Health, and Management at Yale.

Access to patient populations and management of patient health across the care continuum are central to population health management, challenging health systems to examine their resources and enhance their capabilities. 

For instance, to strengthen care delivery through a population health management focus, Denver-based kidney care provider, medical group, and management company DaVita HealthCare Partners acquired Everett, Wash.-based physician group The Everett Clinic last year. Drawing from a robust physician network and broadening DaVita’s operations, the partnership aims to facilitate integrated care delivery in northwestern Washington. 

“This partnership exemplifies the renewed collaboration between once-distinct verticals within the healthcare services space,” Singh says. “Today, clinicians, providers, and payers are starting to organize themselves in a way where they can jointly manage the health of wider population bases.”

Consumerism has required organizations to exhibit the value of their services and provide care in a more user-friendly fashion. For Danville, Pa.-based Geisinger Health System, which acquired Atlantic City, N.J.-based AtlantiCare in 2015, patient feedback has informed efforts to improve the patient experience across the care continuum. 

Both organizations have brought internal best practices to the partnership, including use of the C-I-CARE communication process to inform how providers and other staff interact with patients and each other, as well as sharing patient experience stories to identify opportunities for improvement. “Ultimately, healthcare consolidation will be judged by listening to our patients and learning how best to care for their needs,” Dominic Moffa, executive vice president and chief strategy officer, Geisinger, states in an email.

The Consolidation Spectrum

Achieving financial strength, reducing clinical variation, increasing scale, and forming clinically integrated networks for improved care delivery are major considerations in various forms of consolidation, which encompasses activity ranging from mergers and acquisitions to affiliations and joint-operating agreements. ²  (Click on the exhibit below for more examples.)

Regardless of the type of consolidation taking place, “The motivations remain around how to transition care from being volume-based to being more value-based and driving increased efficiency and efficacy of care delivery, which can result in geographic growth, deeper capabilities, or stronger infrastructure in supporting that care,” Singh says.

Mergers and acquisitions . Vertical and horizontal integration allows health systems to tighten operations, streamline services, and increase access to capital. Kraemer notes that assorted reasons can influence the decision to merge. “Possibilities include but are not limited to increasing market share, improving cost position for efficiency and economy of scale, achieving aligned extension by moving into another product category, acquiring talent, and global expansion,” he says. 

Moffa (pictured at right) states that elements of the Triple Aim—decreased costs, improved patient experience of care, and better management of population health—should guide any consolidation, citing a firm grasp of the population health model as the basis of integration between AtlantiCare and Geisinger: “We were health systems with common points of view and complementary goals.”

In this effort to more quickly achieve population health management goals to better serve the southern New Jersey community, AtlantiCare has extended its capabilities by utilizing Geisinger’s technology and care redesign model. The health system has implemented an integration plan involving shared goal setting and joint planning along with transformation metrics related to Triple Aim goals—metrics include overall patient satisfaction, readmission rates, and cost per member—to determine the acquisition’s success.

“For Geisinger, the partnership enabled growth through scalability of its clinical operations and health plan into a larger geography, thereby providing ‘proof of concept’ of its integrated provider-payer healthcare model,” Moffa says.

Affiliations and joint-operating agreements. Seeking to enhance the value of care while retaining their independence, some organizations are forging partnerships without change of control. These consolidations range from looser affiliations such as contractual relationships to more extensive financial alignments such as joint-operating agreements.

In 2011, Rochester, Minn.-based Mayo Clinic launched Mayo Clinic Care Network, partnering with member organizations following a thorough evaluation process to lend its brand and expertise through telehealth. ³ This contractual relationship provides members with access to clinically based services, including telehealth consultations with Mayo Clinic specialists for patient care; care tools; and for member staff, consultations with Mayo Clinic experts in areas such as patient care, finance, and human resources.

Based on current industry trends, “You must have the ability to invest in technology, and make sure that nearly all clinicians and caregivers associated with the care continuum have access to a single technology platform,” Singh notes. The Mayo Clinic Care Network equips more than 40 member organizations with needed resources for their patients without financial integration or additional cost to patients.

In an instance of increased financial alignment, Denver-based academic medical center University of Colorado and Fort Collins, Colo.-based community health system Poudre Valley formed University of Colorado Health through a joint-operating agreement in 2012. University of Colorado Health aims to increase quality of care for an expanded patient population while the two consolidating entities retain control of their assets.

“You have some flexibility in terms of how you capitalize and finance organizations, but you’re contributing the operations of the business to a new entity,” Singh says regarding joint-operating agreements. “We’ve seen joint-operating agreements pick up in pace, number, and size in terms of the revenue bases of the partnering organizations.”

Effect on Healthcare Consumers

Whether and to what extent consolidations will benefit consumers remains central to the conversation. In the past, for instance, health plan and provider consolidations have not necessarily resulted in lower prices for consumers. ² Patient experience and changes in cost will help determine the impact of partnerships and integrations.

In a joint venture with Procure Proton Therapy Center, Oklahoma City-based INTEGRIS secured access to proton treatment equipment in its market. Instead of having to finance equipment or refer patients out of area, the organizations can combine their strengths to facilitate management of patient health in the community.

The consolidation has ensured increased access to care for patients in the Oklahoma City area. “You’re blending technology and financial and capital strategies to bring greater capabilities to health systems to offer patients new services locally,” Singh (pictured at right) says.

Recent proposals for combinations among national health plans have produced concern over decreased competition, which in the past has resulted in higher premiums for consumers and lower payments to providers. ² Such fears have influenced recent decisions to block Aetna’s acquisition of Humana and Anthem’s purchase of Cigna. 

With change-of-control transactions, the outcome may depend on the competitive environment, Kraemer says. “A merger or acquisition will benefit the consumer if two things happen: If the companies’ coming together gets the benefit of efficiency and economy of scale, and at the same time doesn’t reduce competition to the point where the combined company denies the customer at least as good of a price.” 

Noting that potentially higher costs for patients in a less competitive marketplace is cause for concern, Moffa confirms that the potential value of each consolidation should be evaluated on a case-by-case basis, as recommended by America’s Health Insurance Plans. “I share AHIP’s view that consolidation may help advance the goals that the health system is demanding—specifically coordinated, high-quality care. We believe that’s been the case here at Geisinger.”

With AtlantiCare’s diverse patient population in mind, Geisinger secured $5.5 million from the National Institutes of Health in 2016 to administer the Precision Medicine Initiative Cohort Program, a research initiative exploring ways to improve disease prevention and treatment. The program engages patients to participate in their own health management by sharing information about their lifestyle, environment, and genetics.

“If we can keep patients healthy and actually prevent higher-cost diseases, the savings can reduce the cost of care to all patients while saving lives,” Moffa states.

The Outlook for Consolidation

When looking at the amount of consolidations and partnerships taking place, Singh states, “It’s not a positive or negative outcome; it’s simply a reality that all organizations in the industry will have to undergo some level of collaboration.”

The amount of activity and variety of opportunities to partner reflect the willingness of organizations to actively examine and rework their business models—albeit with limitations in mind (for instance, looser affiliations may result in issues with access to capital and alignment of incentives, while mergers and acquisitions require substantial capital investment and change of control, and may invite regulatory scrutiny). 

While concerned about pricing monopolies that may result from change-of-control transactions, Forman says, “Mergers that allow for better coordination of care in theory should lead to better outcomes and maybe even better pricing.” Still, he notes that it is too soon to tell how the recent wave of integrations and partnerships will affect the industry.

The success of consolidations may depend on different standards than before, considering industry changes that demand increased cost transparency, attention to patient feedback, and the ability to manage patient populations. ² Research reveals that partnerships founded on achieving value-based care have generated more positive feedback in the industry than those focused on market power. ⁴ As Geisinger’s Moffa notes, “Healthcare organizations will need to prove that these changes have created an environment in which consolidation does in fact improve value to the healthcare consumer.”

Although he sees benefits to the consumer through investments to move toward value-based care, manage population health, and address the dictates of consumerism, Singh notes, “We need more time to fully grasp the level of investment and the change in thinking that consolidating entities are in the process of doing to improve outcomes for patients.”

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Elizabeth Barker is a digital communications professional and freelance writer in Chicago. 

Interviewed for this article:  Howard Forman, MD, professor of Radiology, Economics, Public Health, and Management; director of the MD/MBA program; director of healthcare curriculum, MBA for Executives Program; and lecturer in Ethics, Politics, and Economics, Yale University, New Haven, Conn. Twitter: @thehowie; Harry Kraemer, executive partner, Madison Dearborn Partners, and clinical professor of strategy, Kellogg School of Management, Northwestern University; Dominic Moffa, executive vice president and chief strategy officer, Geisinger Health System; Anu Singh, managing director, Mergers, Acquisitions and Partnerships, Kaufman, Hall & Associates, LLC.

Footnotes

1. “ Mergers and Acquisitions: Strategy Takes Precedence Over Scale,” HFMA Buyer’s Resource Guide, 2017.

2. “Health Care 2020: Consolidation,” HFMA, November 2016.

3. “Guide to Health Care Partnerships for Population Health Management and Value-based Care,” American Hospital Association and Kaufman Hall, July 2016.

4. “Acquisition and Affiliation Strategies,” an HFMA Value Project Report, June 2014.