"A billion dollars won’t make you competitive with the most prestigious healthcare organizations. They have intangible assets you can’t buy."
Consolidation in healthcare is rampant, as hospitals and health systems make deals to help ensure their success in a shifting healthcare environment. As an owner and co-founder of Healthcare Transaction Advisors — a national healthcare-focused M&A advisory services firm — Nicholas A. Newsad knows the ins and outs of business deals between physicians, hospitals and other types of healthcare organizations, as he and his business partner Kyle Tormoehlen have been involved in more than 600 of them. Mr. Newsad along with Mr. Tormoehlen are also the authors of a new book that shares their observations during those hundreds of deals and shares the "linchpins" that are holding the American healthcare system together.
"Doctor Deals," provides insight into many of the challenges hospitals and health systems are facing in today's healthcare environment. For example, the book opens with a section entitled, "What Money Can and Cannot Buy in the Healthcare Industry."
Question: In your book, you discuss how even if billions of dollars were poured into some health systems they still couldn't compete with the top-tier systems. Although they may never be able to make it to the top, in your opinion, what are some of the investments health systems can make to help them get close to the same realm of care that is offered at prestigious institutions across the country?
Mr. Newsad: If you have a billion dollars, you can build and staff a big hospital. However, in my opinion, a billion dollars won’t make you competitive with the most prestigious healthcare organizations. They have intangible assets you can’t buy.
Investing in the development and retention of high quality front-line staff and middle managers creates reputable organizations where medical professionals intrinsically want to practice. An official at one successful hospital told us they have made it a policy to have the CEO call every nurse who voluntarily resigns and ask what can be done to get them to stay. As a result, they have created high retention of valued employees, which is a competitive advantage for attracting physicians to the medical staff.
An extreme example of this is how the Salvation Army attracts millions of employees worldwide who are willing to work long hours for very little compensation because they are intrinsically motivated by the fulfilling work. Similarly, Johns Hopkins, Mayo Clinic, and the Cleveland Clinic don’t pay medical professionals more than competing healthcare organizations. There is prestige associated with working there.
That being said, Cleveland Clinic also invests in employee innovation by splitting licensing royalties for intellectual property with the employee inventors. Whereas many employers claim ownership of employees’ creations and innovations, thereby diminishing personal motivation, The Clinic hardwired incentives to promote innovation and subsequently collected $10 million per year in royalties. The Clinic’s commercialization company, Cleveland Clinic Innovations, has transacted 450 licenses and enabled the creation of 66 new companies.
Q: In your book you write "If health systems continue to function like they did before they became ACOs, then there is no reason to believe that they will achieve different outcomes as an ACO." With such a small number of ACOs in the Medicare pilot programs receiving bonuses this year, do you believe the problem is the organizations are still practicing as they did under a fee-for-service model? Or, do you believe changes need to be made to the benchmarks to allow more ACOs to share in savings?
NN: Both. ACOs operated by physicians, as well as health systems, have told us a major challenge is operating with ACO participants functioning in two opposing reimbursement models at once. While Medicare ACOs must achieve per member per month cost benchmarks to receive their bonuses, in some markets, most or all of the commercial insurers still pay fee-for-service (FFS) with no offsetting bonus for reducing costs. Inpatient volume reductions benefit Medicare ACOs, but crush hospital and post-acute participants on the commercial side. Providers are still living in two payment universes at once.
A higher minimum savings threshold also applies to the smallest ACOs under the one-sided model which makes it harder for them to receive bonuses. So an ACO under the one-sided model with 5,000 to 5,999 beneficiaries has to achieve a minimum of 3.9 percent cost savings, while an ACO with over 60,000 beneficiaries only has a minimum cost savings of 2 percent. A flat 2 percent minimum savings threshold for ACOs of all sizes under the one-sided model would push more ACOs into bonus payments.
Q: In your book, you discuss the Anti-Kickback statute and Stark Law. In regard to ACOs, do you expect to see an increase in cases brought under those laws in coming years?
NN: No. Medicare ACOs were granted several federal waivers which should lessen their risk exposure to these two laws and the civil monetary penalties laws, relative to other forms of Medicare reimbursement.
We do expect more anti-trust cases involving ACO participants and the Federal Trade Commission. Mergers and acquisitions are being used as a means to develop integrated networks. However, as we saw in the St. Luke’s/Saltzer case, the government knows that there are ways to integrate providers other than M&A. The government will continue to block and break-up M&A deals, regardless of whether they are part of ACOs.