Hospital merger and acquisition activity in fiscal year 2015 is set to outpace what went down in 2014. From a distance, it may seem the healthcare industry is teaming up at a feverish pace, defensively and with little rhyme or reason. Just how quickly is this really happening — and what is the end goal?
In a panel discussion at the Becker's Hospital Review 4th Annual CEO Roundtable + CFO/CIO Roundtable in Chicago, Chuck Lauer, former publisher of Modern Healthcare, asked panelists to offer their outlook on provider consolidation, the impetus driving it and the partners they are seeking.
Here is how three industry leaders responded.
"I still believe 5,300 hospitals are probably too many. We talk about consolidation — it's going to take a long, long time for any real meaningful consolidation to occur in the U.S.," said Greg Koonsman, senior managing director, VMG Health.
According to Mr. Koonsman, every single market has a unique set of facts and circumstances that makes the speed of consolidation very different. While it may seem as if consolidation is rampant, "It's hard to imagine how huge this market is and how fragmented it is," he said. Rather, what is happening in the healthcare space is more along the lines of physician partnerships than M&A, he said, both in the for-profit and nonprofit sectors.
However, consolidation is accelerated by financial need. Mr. Koonsman noted, "You have to have an economically viable facility. There is some reality to that situation." According to Mr. Koonsman, most hospitals have a 10 percent operating margin and have to channel half of that back into the facility. For many smaller hospitals to stay afloat, they will have to look to innovative solutions and employ "micro hospital" concepts, like urgent care facilities or freestanding emergency departments.
Along those lines, Mr. Koonsman believes health systems have an opportunity to partner with retail providers, which are still playing on the fringe. "When they get a patient into their urgent care facility, that person walks out with a prescription and they walk right over and get the prescription filled at the store," he said.
The retailers have the economies of scale but not necessarily the depth of expertise of a hospital or health system. For providers grappling with economies of scale, retail partnerships could be part of the future solution.
"We can't survive by only talking about 5,000-plus hospitals. We have to be more than that. Most people are patients four or five days out of the year... The rest of the time they are community members, and we don't spend enough time talking about that. Until we can make those changes, be much more innovative, we run the risk of still trying to hold onto those 5,300 hospitals, even though I don't know that all of us are needed," said Julie Manas, president and CEO of Hospital Sisters Sisters Health System Sacred Heart Hospital in Eau Claire, Wis., and president and CEO of HSHS Western Wisconsin Division.
Because she sees consolidation as inevitable, Ms. Manas believes physician alignment will be essential. Ms. Manas' system has 2,000 integrated physicians, the majority of whom practice through its clinically integrated network and the minority through traditional employment. Physicians are an autonomous group by nature, said Ms. Manas, so providing a variety of affiliation options can help drive alignment.
"If you can provide more of a menu, or really a gradation of [physicians from] employed to affiliated to a loose partnership, then you are going to be far better off,"she said.
Ms. Manas is also well aware of the new entrants in the healthcare space, like Walgreens, CVS and urgent care. She sees those entities as potential partners, for now. "At times, we may be able to collaborate. They are in the 'health' space — I don't know if they are in the healthcare space," she said.
"We are really talking now about the evolution to value ... and how we bring in and serve a population, but at the same time consolidate the institutions and the entities we are a part of, so they can meet these questions of quality, price and access," said Steven Goldstein, president and CEO of Rochester, N.Y.-based Strong Memorial Hospital, part of University of Rochester Medical Center.
His 900-bed Strong Memorial Hospital is unique to the state of New York in that it operates at more than 100 percent occupancy and has maintained double-digit margins for many years, he said. The hospital's success has helped drive education and research and contributes significantly to the university.
Mr. Goldstein said the top challenges the hospital and health system face are driving quality of care, affordability and access to care. Yet, rather than focusing on traditional M&A to accomplish these goals, Strong Memorial has its sights set on building strategic partnerships. For example, Strong Memorial and its physicians created Accountable Health Partners. About 2,000 physicians and six hospitals strong, the organization contracts with providers across a range of gainsharing and risk contracts.
"That has been a vehicle that really allowed us to reach out and extend our institution to other communities," he said. This is essential in New York, where 20 percent of the population is on Medicaid. This share is anticipated to grow to 30 percent, which will likely force change at safety nets and rural hospitals.
The key will be to work regionally to make transformations, according to Mr. Goldstein. Hospitals need to work together to find a viable model for healthcare that serves multiple cities, and that may not come through traditional consolidation.
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