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Daughters of Charity Robert Issai

Reform Update: Daughters of Charity's weak market presence cited as reason for failed acquisition deal

By Melanie Evans
Posted: January 15, 2014 - 4:30 pm ET

Amid a surge of consolidation in healthcare as the industry responds to healthcare reform, a hospital deal that broke down this week underscores the premium on size, market leverage and geographic reach.

Ascension Health, the nation's largest private not-for-profit health system, and the Daughters of Charity, a struggling six-hospital system in Los Altos Hills, Calif., announced they had ended acquisition talks. Instead, the Daughters of Charity, which first opened a California hospital in 1856, would seek buyers interested in one or more of the system's hospitals.

The deal failed because the Daughters of Charity lacks market heft.

The Daughters of Charity's half-dozen hospitals are scattered across three markets. As Robert Issai, the system's CEO, put it in an interview with Modern Healthcare, they lack the “essentiality,” or market presence, that would make them a viable target for Ascension.

Hospitals, systems and physician groups have said that provisions of the Patient Protection and Affordable Care Act that encourage coordinated care and managing population health, as well as parallel imperatives from private payers, are making it crucial for providers to increase their scale through mergers and alliances.

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But the trend is also troubling to antitrust regulators and economists on the lookout for consolidation that could raise prices. “Since the primary driver of growth in private spending in recent years has been price increases for healthcare services, a compelling argument could be made for putting the breaks on consolidation,” Leemore Dafny, a professor of management and strategy at Northwestern University, wrote in the New England Journal of Medicine in December.

Hospital market concentration has increased and half of U.S. hospital markets are highly concentrated and none are highly competitive, according to one snapshot of competition by David Cutler of Harvard University and Finoa Scott Morton of Yale University published last year in the Journal of the American Medical Association.

That threat, however, is potentially offset by more cost-effective, higher-quality care delivered by more coordinated and integrated health systems, all of which could lower prices. (Research on this point is mixed, Cutler and Morton note.)

Ascension sought additional deals to increase the Daughters of Charity's market position and expand its delivery network, but did not succeed. After it was announced that Daughters of Charity would seek other buyers, Ascension CEO Robert Henkel said it is necessary to guarantee access to care and to manage the financial risks that health systems assume as they seek to manage population health.

Daughters of Charity officials, too, appear convinced that scale and market leverage will matter. Issai said the system will seek buyers able to increase its hospitals' market presence.

Research group examines how healthcare proposals impact country

Three noted healthcare economists will head the new Center for Health and Economy, a nonpartisan research organization that will provide data and analysis on the outlook of the U.S. healthcare system.

Uwe Reinhardt, a professor of economics and public affairs at Princeton who also serves on the Institute of Medicine; Douglas Holtz-Eakin, a former director of the Congressional Budget Office and president of the right-of-center American Action Forum; and Stephen Parente, a professor in the University of Minnesota's finance department are the top leaders of the 11-member board, which includes academic experts in health economics across the country. Together, the group holds a wide range of views and has conducted comprehensive research on the economics of U.S. healthcare.

The new group is expected to issue projections and analyses on how different healthcare proposals will affect the country, and those figures will be based on two microsimulation models: a “Medicare model” that analyzes the effects on those who are older than 65 and an “Under 65” model for the rest of the population.

On Wednesday, the center—which referred to itself as H&E in an announcement—released three reports. The first is an annual baseline report that offers the group's estimation of the U.S. healthcare system over the next 10 years. Another examines the differences between how current healthcare law affects those under the age of 35 and those between 35 and 65; and the third analyzes legislation from Rep. Allyson Schwartz (D-Pa.) that would repeal Medicare's sustainable growth rate formula to pay physicians, which H&E estimates would add to the federal budget deficit by at least $153 billion over 10 years.

—Jessica Zigmond

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