Anna Wilde Mathews | September 21, 2015
Dozens of mergers among hospitals, medical practices are side effect of health-care law
This year is on pace to notch the most U.S. hospital deals since 1999, with 71 announced through the end of August.
Five years after the Affordable Care Act helped set off a health-care merger frenzy, the pace of consolidation is accelerating, transforming the medical marketplace into a land of giants.
The trend is under a new spotlight now, as Congress zeroes in on the competitive and cost impact of proposed deals that would collapse the health-insurance industry’s top five players into just three massive companies, each with more than $100 billion in annual revenue. On Tuesday, a Senate subcommittee is set to hear testimony from the chief executives of Aetna Inc., which plans to acquire Humana Inc., and Anthem Inc., which is seeking to buy Cigna Corp., as well as the head of the American Hospital Association.
The other big insurer, which isn’t testifying, is UnitedHealth Group Inc.
The managed-care deals parallel what has been happening among health-care providers—2015 is on pace to notch the most U.S. hospital deals since 1999, with 71 announced through the end of August, according to Irving Levin Associates, a research firm that tracks health-care transactions. That comes on top of an already torrid spate of deal-making—in 2010, the year the health law passed, there were 72 hospital acquisitions, up from just 50 the year before. Last year, there were 100.
The supersizing, which hasn’t been slowed so far by signals of regulatory concern about health-care consolidation, reflects efforts by companies in both industries to gain the scale and heft to succeed amid changes unleashed or accelerated by the health law. Those include growing pressures to constrain costs, and new forms of payment that require providers to meet efficiency and care-quality goals. Health systems are adding hospitals, doctor practices and a range of other services that enable them to manage all of a patient’s care. And each industry is bulking up to amass leverage in contract negotiations against the other.
The CEO of Anthem, which is seeking to buy Cigna, is slated to testify on the Hill.
“The ACA is a trigger,” said Robert Kocher, a former White House health adviser now at venture-capital firm Venrock. Now, he said, “as providers have gotten consolidated, payers have been finding they’re getting pushed by providers saying, ‘Take my rates or you’ll have no network.’ ” The health-plan deals aim “to help balance the power.”
In the latest sign of momentum, the Everett Clinic, a medical group with around 360 physicians in Washington state, on Monday said it would be acquired by publicly traded DaVita HealthCare Partners Inc., which is based in Denver but has medical groups in multiple states. Rick Cooper, Everett clinic’s CEO, said it sought a larger partner because it needed more capital to expand beyond its base region north of Seattle. Hospital systems “have consolidated and we needed greater size and scale so we could grow to effectively compete with those systems,” he said. DaVita didn’t disclose the value of the transaction.
“Everybody is getting larger,” said Michael J. Dowling, chief executive of New York’s North Shore-Long Island Jewish Health System, which is changing its name to Northwell Health. “The big payers are going to be doing deals with big providers. The big providers are going to compete on quality and service and price. You have to be large enough to be able to compete in that world.”
His huge nonprofit, with 21 hospitals and about 10,300 affiliated doctors, recently announced it would expand in Brooklyn through a phased-in merger with Maimonides Medical Center. It also launched its own insurance plan in 2013. Mr. Dowling said he needs to offer a full range of medical services and cover a broad geographic span—as well as have the clout to go toe-to-toe with large insurers: “You want to be able to sit across the table and in a position to negotiate. You don’t just want to be told what they are going to pay you.”
Smaller players like Ingalls Health System, with one hospital in Harvey, Ill., south of Chicago, are deciding they can’t go it alone. Earlier this year, Ingalls began looking for a merger partner, partly out of concern that it might be cut out as insurers move toward smaller networks of health-care providers.
“You need to be part of a large, successful, horizontally and vertically integrated organization,” said Kurt E. Johnson, CEO of Ingalls.
Indeed, Moody’s Investors Service found that the median operating margin for the 50 largest nonprofit hospital systems it monitors was 3.4% last year, but for the 50 smallest it was just 1.5%.
But as Tuesday’s scheduled hearing in the Senate Judiciary antitrust subcommittee shows, health-sector deals are drawing increased concern from state and federal officials worried that the combinations damp competition and push up prices. Recently, the Pennsylvania attorney general withheld approval of the University of Pittsburgh Medical Center system’s planned acquisition of a hospital in New Castle, Pa., urging the smaller operator to seek another partner.
In February, the Federal Trade Commission and the Justice Department’s Antitrust Division held a two-day conference about health-care competition that focused closely on the effects of consolidation. The FTC has challenged several hospital acquisitions in recent years. The Justice Department, which is reviewing the proposed insurance deals, has signaled that their potential impact on consumers will get close scrutiny. Still, the moves from regulators so far don’t seem to have given pause to health-care industry dealmakers, who say that the reasons for their combinations outweigh the potential regulatory risk.
Hospital executives say their combinations don’t drive up prices, and they seek to squeeze out costs as they get bigger, eliminating duplicative services and waste. “That scale enables us to continually address the cost issue,” said Robert J. Henkel, chief executive of the health-care operations arm of Ascension, a Catholic system with 131 hospitals. Larger systems that can coordinate all aspects of patients’ care can improve health and be more efficient, he and other hospital executives say.
Aetna and Anthem, for their part, have said their planned acquisitions will lead to lower costs and more health-care provider partnerships. In a statement, Aetna said it was “focused on helping to evolve the health care industry to a new model—one in which insurers, doctors and hospitals work together to give people as many healthy days as possible.”
Anthem said that health provider consolidation wasn’t a driver for the Cigna acquisition, and the two insurers’ “complementary platforms give us the ability to have a better conversation and be a better partner with providers” in efforts to move forward new forms of payment.
Source: Wall Street Journal
http://www.wsj.com/articles/health-care-providers-insurers-supersize-1442850400