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Hospital giants vie for patients in effort to fend off new rivals

Catholic Health Initiatives (CHI) is a national nonprofit health system with headquarters in Englewood, Colorado.
Jordangruener | Wikipedia
Catholic Health Initiatives (CHI) is a national nonprofit health system with headquarters in Englewood, Colorado.

It's all about the patient.

Or at least about keeping patients and the revenue generated for their medical care.

As health care is rocked by deals aimed at shattering traditional boundaries between businesses, some of the nation's biggest hospital groups are doubling down on mergers that seem much more conventional. Skeptics say some of these hospital deals are more of the same: systems seeking to increase their leverage with insurance companies and charge more for care.

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In just the last few weeks, several of the nation's largest nonprofit hospital systems have announced plans to become even larger behemoths. Dignity Health and Catholic Health Initiatives said they planned to become a national chain of Catholic hospitals and clinics that spanned 28 states. Two Midwestern systems want to combine to become one of the country's largest nonprofits, and Ascension, which is already the nation's largest nonprofit health system, is said to be in talks to become even bigger, according to The Wall Street Journal. Ascension declined to comment.

But the frenzy of mergers and other alliances taking place also reveals a frantic attempt to court and capture patients as people have more choices about where to go for care. Patients are increasingly relying on walk-in clinics, urgent care centers or an app on their cellphone to check out a nasty rash or monitor their diabetes, and they are looking for places that are both less expensive and more convenient than a hospital emergency room or doctor's office.

The battle is over "the control of the patient," said Rob Fuller, a heath care lawyer at Nelson Hardiman and a former hospital administrator. As hospital executives see the continued decline of care being delivered within a hospital's four walls, he said they want to make sure they still have a say over where patients go after a hospital stay or to get treatment for a chronic condition.

Hospitals competing for patients is a game of musical chairs, and "there might not be a chair for you," agreed Kenneth Kaufman, chair of Kaufman Hall, a firm that consults with hospitals. Hospital executives are realizing that someone else, including an insurance company employing the nurse at a walk-in clinic or the doctor at a surgery center, wants to take over their relationship with patients — and the potential revenue that those patients represent.

And the move by the insurers into their traditional territory is making some institutions very nervous. UnitedHealth Group, the giant insurer, is viewed as the greatest threat, underscored by its recent purchase of DaVita Medical Group. The company, which has a diverse portfolio of health care businesses, already has a roster of some 30,000 doctors under its Optum unit, and a chain of surgery centers. The company "has moved out ahead from a competitive perspective and a model perspective," Mr. Kaufman said.

The proposed merger of CVS Health, which operates drugstores and a large pharmacy benefit manager, with Aetna, an insurer, also promises to reinvent care by transforming CVS' roughly 10,000 drugstores into "health care hubs," where patients can easily seek advice or treatment for anything from a sore throat to heart disease. There is also the rumor that Amazon, which has already upended retailers like book stores and grocery chains, could enter the pharmacy business.

"Hospitals are very nervous about being small fry in the changing health care landscape," said Leemore S. Dafny, a professor at Harvard Business School. Consumers frequently pay more when hospitals combine in the same market because the larger entity has more clout, she said, and there is some evidence that prices rise even when the hospital groups are in different markets in the same state.

But these combinations will create more than large chains of hospitals. The hospital systems already include medical clinics, employ doctors and provide services ranging from imaging to care at home. Dignity and Catholic Health Initiatives say their proposed deal would create a system that would consist of 139 hospitals, more than 700 sites of care and employ more than 25,000 doctors and other clinicians. The two systems will have annual revenue of roughly $30 billion a year.

The mergers allow these systems to become much larger "and have much stronger tentacles into the patient population they are trying to reach,' said W. Kenneth Marlow, a health care lawyer with Waller Lansden Dortch and Davis.

The Affordable Care Act masked some of those underlying challenges facing hospitals by supplying a new source of insured patients, and the relative lull in merger activity since the law took effect reflected better financial footing. But the industry is now back to looking at shrinking profit margins and a decline in their core revenues. The Republicans' proposed tax overhaul could make it even worse by forcing cuts to government programs like Medicare and Medicaid.

"Coming together will allow us to be better prepared to weather the storms," acknowledged Jim Skogsbergh, the chief executive of Advocate Health Care, which had been foiled by antitrust officials in its earlier attempt to merge with another Chicago-area health system before deciding to combine with Aurora Health Care.

The changing industry dynamics have also caused some of the nation's largest chains of for-profit hospitals, like Tenet Healthcare and Community Health Systems, to struggle. In addition to shifting their focus to outpatient care, those groups have been shedding some of their weakest hospitals.

In talking about the most recent mergers, much of the reasoning sounds familiar, including the promises around how being bigger will allow the hospital systems to achieve cost savings. Dignity and Catholic Health Initiatives, for example, estimate about $500 million in efficiencies through their merger, and many of the groups point to a larger scale being necessary to pay for the sophisticated computer systems needed to better oversee patients.

But many point to the promises of past mergers as reason to doubt whether the hospital mergers allow much more than an ability to demand higher prices from insurers. After the last wave of mergers that took place a few years ago, the hospitals didn't use that opportunity to bring their costs down, said Bret Schroeder at PA Consulting Group. They "still aren't that much more efficient than they were," he said.

Getting hospitals to change as a result of these mergers will remain difficult, Mr. Schroeder said. "It's very hard for an industry that has been fairly monopolistic within a region to think way outside of the box," he said.

Although all of the mergers and acquisitions will have to pass muster with federal and state antitrust officials, the recent combinations, even among hospitals merging with hospitals, generally involve facilities that are not direct competitors. Advocate, based in Illinois, is merging with a system in the neighboring state of Wisconsin. Dignity, which is based in San Francisco, and Catholic Health Initiatives, from Englewood, Colo., both products of earlier mergers, also say their locations do not overlap.

The systems also insist they are not looking to get bigger for the sake of being able to throw their size around. "It's a very old model of thinking about size and higher price," said Dr. Nick Turkal, the chief executive of Aurora.

They say they are already investing in new ways to deliver care at less expense, and the combinations will allow them to intensify those efforts. "We're going to be focusing on becoming more efficient, certainly, and creating products that can be sold very competitively," said Mr. Skogsbergh of Advocate.

In announcing their planned merger earlier this month, Dignity and Catholic Health Initiatives, which declined requests for interviews, said they plan to use the merger to amplify their investments in "community-based care," which they describe as "a variety of outpatient and virtual care settings closer to home" as well as programs aimed at people with chronic health conditions.

"We believe together we can build a stronger platform to foster healthier communities," Lloyd Dean, the chief executive of Dignity, said in speaking about the deal earlier this year.

Hospitals will have no choice but to use these mergers to reinvent themselves rather than simply raise prices, said Thomas Cassels, a consultant at the Advisory Board, which was recently acquired by UnitedHealth Group's Optum unit. They know patients can go somewhere else, he said.

"Health systems are considerably more concerned with being convenient and not unaffordable than they are making services less desirable because they are more expensive and on the hospital campus," he said.

The fundamental question is whether hospital groups have what it takes to use their increased scale to radically change, Mr. Cassels said. Advocate and Aurora have been making strides to improve how they oversee care to reduce costs, and larger systems will be able to invest in the sophisticated technology and other changes necessary, he said.

But the challenge cannot be underestimated in asking these massive institutions to come together and change into something radically different. "You're taking a zebra and a zebra," Mr. Cassels said. "What they want to become is a unicorn."