Bypassing merger, four systems look for buying power, reduced costs with collaboration
Hospitals have been active dealmakers in an era of shrinking patient volumes and increasing reimbursement pressure—trading autonomy and independence for scale and access to capital.
But even systems in a position of financial strength are finding a need to align with other providers to take advantage of the increased buying power that comes from having more beds and more patients.
Call it merger-lite.
Last week, four health systems—BJC HealthCare, St. Louis; St. Luke's Health System, Kansas City, Mo.; CoxHealth, Springfield, Mo.; and Memorial Health System, Springfield, Ill.—formed a collaboration that will cover three states and about 30 hospitals.
Known as the BJC Collaborative, the nonownership agreement aims to reduce costs for the four not-for-profit systems by allowing them to coordinate purchases and realize economies of scale. The systems reported combined annual revenue of almost $7 billion.
The collaborative won't have a physical location or its own employees, and instead “operating committees” representing the leadership teams from each system will carry out the work.
The CEOs and a board member from each system will serve as voting members.
A news release describing the deal gave a nod to the Patient Protection and Affordable Care Act, noting that it encourages partnerships to reduce costs and improve patient outcomes. “We're all faced with trying to provide greater value in healthcare,” Dr. Melinda Estes, president and CEO of St. Luke's, said in an interview.
Their announcement came days after Trinity Health and Catholic Health East, citing similar goals and motivations, unveiled plans for a merger that would create a system with nearly 80 hospitals and $13 billion in annual operating revenue.
But the BJC Collaborative is about the back office, not the front—and each system will maintain its independence. Estes noted that none of the parties are contributing any money or assets to the collaboration. “A merger wasn't discussed,” she said.
“We favor the idea of local control and local governance,” said Steven Edwards, president and CEO of CoxHealth. “It's not financial because we've had as good a financial year as we've had in a decade.”
The deal is specifically not being called an affiliation or an alliance, noted Steven Lipstein, president and CEO of BJC HealthCare and board chairman of the collaborative. “The most compelling reason for hospital mergers is financial distress,” he said, adding that in a typical merger agreement, at least one of the parties is looking for a capital infusion or other financial boost—which isn't the case for the four members of the BJC Collaborative.
“Today, they're all financially sound,” Lipstein said. “These partners don't need money from one another. There's no need for a full merger, so we haven't discussed it.”
Memorial Medical Center
Joseph Lupica, chairman of Newpoint Healthcare Advisors, described the collaboration as “the sunny side of affiliation without the darker side of scale,” noting that the systems do not have the challenge of merging four separate cultures under a single organization.
“From the outside, what they've done appears brilliant,” he said. “It's almost like having a cafeteria merger. It appears they've carefully selected the elements of system-ness they want while still preserving the agility they need.”
While such collaborations are increasingly common, their major limitation is their inability to raise capital from the bond markets as a single entity, also known as an obligated group.
Mergers, as a general rule, tend to be credit positive for the systems involved, creating operating efficiencies and generating cost savings. A report last week from Moody's Investors Service found that, despite the challenging operating environment, the ratings agency upgraded more hospital debt than it downgraded, owing in large part to consolidation.
But BJC HealthCare and St. Luke's are already investment-grade credits. Moody's last quarter affirmed the ratings of the two systems at Aa2 and A1, respectively, which reflect their low credit risk and the agency's high level of confidence in their ability to repay debt.
“There are different reasons for partnering,” said Janice Anderson, a healthcare attorney in the Chicago office of law firm Polsinelli Shughart. “In this day and age, we're starting to see stronger organizations partnering together.”
Instead of sharing capital, the systems, which are in adjacent regions but are not competitors, plan to take advantage of their joint purchasing power.
Cox Medical Center South
All four systems are already members of VHA, a network of community-owned systems, and have worked with its group purchasing organization, Novation, to help reduce costs. The systems are not planning to form their own GPO, but aim to extract savings by aligning their purchases, such as setting standards for products or coordinating the timing for buys.
“I would just look at it as a kind of subset of the group purchasing organization trend within healthcare,” said Craig Herron, a director with St. Louis-based investment bank Clayton Capital Partners. “Clearly there's been a demonstrable benefit associated with GPOs.”
BJC, with 13 hospitals, is the largest system in the group and was itself formed through the mergers of Barnes Hospital and Jewish Hospital in 1992 and then Christian Health Services in 1993.
Herron noted that BJC is now too big for any of the other players to swallow, and BJC itself likely wanted to avoid the risks associated with such a large acquisition.
“From BJC's perspective … there's probably some decent opportunity for them to pick up some referral business,” he said. “Clearly this is an opportunity to put a toe in the water without trying to merge these four hospital groups together.”
St. Luke's Hospital of Kansas City
While consolidation is accelerating in the healthcare industry, some systems are looking for more creative tie-ups than a traditional integration.
“There are two different types of deals going on,” said Tom Cassels, executive director, research and insights at the Advisory Board Co. “There are deals that are strategic—and I would call this a strategic deal—and then there are financial deals.”
Yet strategic deals are still less common because they require the fortuitous situation of multiple successful organizations, all with the support of their clinical and leadership teams, working together for their own benefit, he said.
Herron pointed to a similar collaboration this year between two of Iowa's largest healthcare providers: the University of Iowa, Iowa City, and Mercy Medical Center, Cedar Rapids.
On the other side of the country, Novant Health, Winston-Salem, N.C., has made a business out of nonownership deals through its shared savings division; the partnerships allow smaller systems to take advantage of Novant's clout to negotiate lower prices as well as tap into its supply chain, revenue-cycle management and information technology capabilities. Novant Health did not respond to a request for comment.
“It's all to try to figure out, how do we get access to broader patient populations?” said Bruce Johnson, vice chairman of the healthcare practice in the Denver office of Polsinelli Shughart. He likened the looser agreements to “dating before getting married.”
Yet unlike the deal in Iowa, the BJC Collaborative doesn't include any immediate plans to enter into accountable care organizations or negotiate joint contracts with payers.
“We're really focused on the expense side of the organization,” BJC's Lipstein said. “And to be more specific, we're focused on the non-labor expense side.”
BJC has already formed an ACO and is participating in the Medicare shared savings program. And CoxHealth operates its own health plan and has been experimenting with risk-sharing models.
While St. Luke's might explore an ACO in the future, “that's really not our focus,” Estes said.
Dave Atchison, president and CEO of financial services firm Ponder & Co., noted that it is “legally and practically safer” to have a collaboration that focuses on expenses rather than on revenue, with the latter requiring a change in legal structure while the former does not.
Johnson similarly noted that there are fewer antitrust concerns when a deal involves back-office integration rather than an arrangement that would allow the systems to negotiate salaries or pricing.
“(The systems) would either need to become financially integrated or clinically integrated to negotiate contracts with payers,” he said. “It makes sense that they're not pursuing that today.”
Still, he noted, “It wouldn't surprise me if over time they considered trying to share risk.”
Yet Cassels noted that the collaboration can still achieve some of the goals of population health management without having a formal risk-sharing agreement. For instance, he pointed to the ability to use clinical data to find cost savings, such as analyzing variations in care for specific conditions.
“That's the type of thing that actually drives the functional cost savings,” he said, adding that a deal's structure is less important than these types of functional integration activities.
Edwards of CoxHealth similarly emphasized that the collaboration is about more than just trying to find cost savings. “We think there's greater opportunity in talking about clinical innovation,” he said, adding that CoxHealth, for instance, could share best practices for how it achieves its low readmission rates. “Each partner has lessons to share.”TAKEAWAY:
Hospitals and systems not ready for the commitment of a merger may find benefits
in looser alliances.