Reform Update: Geisinger, AtlantiCare merger continues wave of consolidations

Danville, Pa.-based Geisinger Health System's move to merge with AtlantiCare in neighboring New Jersey is yet another example of consolidation underway by systems seeking to fortify and extend their market reach. The deals underscore what executives describe as a need for bigger scale to absorb financial risks under new payment models and offset pressure to reduce costs.

AtlantiCare, Atlantic City, would be Geisinger's largest and most far-flung deal after a string of smaller acquisitions of nearby hospitals in Geisinger's home state. In 2012, the system with $1.7 billion in net assets added three Pennsylvania hospitals: Community Medical Center Healthcare System, Scranton; Shamokin Area Community Hospital, Coal Township; and Bloomsburg (Pa.) Health System, with $54 million, $31 million and $6.1 million in net assets, respectively. The next year Geisinger acquired Lewistown (Pa.) Hospital and its 18-physician medical group with net assets of $31.7 million. It has a deal pending to acquire Holy Spirit Health System in Camp Hill, Pa.

All are within Geisinger's existing market, said Kevin Brennan, the growing system's finance chief. “They're close and we're already there,” he said.

AtlantiCare would expand Geisinger's foothold in New Jersey, where its health plan entered into a joint venture with Meridian Health System, Wall Township, in 2013. Expansion of its clinical operations and its health plan are central to Geisinger's strategic plan, Brennan said. “We believe there is market opportunity for growth,” he said, created by marketplace changes as private and public insurers test new payment models. That includes Medicare's test of bundled payments and accountable care under the Patient Protection and Affordable Care Act.

AtlantiCare operates one of more than 300 Medicare accountable care organizations created under the law. The merger could also position Geisinger to capitalize on new insurance markets created under the ACA. Brennan said the system would explore entering New Jersey's health insurance exchange with its own provider network.

Larger systems, too, are seeking to bolster their presence in regional markets. The four Texas hospitals owned by Toledo, Ohio-based system Sylvania Franciscan Health were “clearly a factor” in Catholic Health Initiatives' offer to acquire Sylvania, said Kevin Lofton, CEO for the Englewood, Colo.-based system who was in New York for an investor conference this month. The hospital giant entered Texas in 2013 and has aggressively moved to solidify and expand its presence. Texas would account for more than $2 billion in operating revenue once CHI closes its pending deals for four-hospital Memorial Health System of East Texas, based in Lufkin, and Sylvania Franciscan's hospitals in the state.

That would make Texas one of CHI's largest markets, Lofton said. CHI's Texas operations include CHI St. Luke's Health and a joint venture for a hospital with the Baylor College of Medicine, both in Houston. Lofton said the system is seeking to build strong regional systems and is seeking to double the market share of its Texas operations to 16%.

Too little market clout has even scuttled deals, as was the case in January when Ascension Health ended talks to acquire a six-hospital California system. “It's tremendously difficult to be a small system across three markets,” the seller's chief executive said as the deal collapsed.

But with greater consolidation comes the risk of increased leverage to raise prices, which some antitrust experts warn is perhaps more likely as a growing number of medical groups join health systems.

For the hospitals acquired, deals provide access to capital and help buffer the risks amid rapid changes in healthcare markets and policy. Geisinger would bring scale to AtlantiCare's operations that could reduce operating costs and boost capital for investment in technology, services and physicians, said Dominic Moffa, executive vice president for AtlantiCare. Geisinger also offers expertise with managing risks associated with new payment models. Payment models may shift some of insurers' financial risk to providers, as is the case with capitation.

“They bring a 500,000-member heath plan to the table,” Moffa said. “Having that experience of accepting risk and managing risk is very valuable.”

More expansion

Sutter Health, Sacramento, began to sell health insurance last year after securing a license from California regulators, but its market entry was limited. That is expected to change this year, said Patrick Fry, the system's chief executive, who was in New York this month for an investor conference. The system started with a “phased rollout” of its health plan in two of Sutter's five markets, and will expand this year.

Price check

In a new blog post, two White House economists join others arguing that price increases are not to blame for the recent acceleration in U.S. health spending that began late last year after historically low growth in the wake of the Great Recession. “As measured using data from the Bureau of Economic Analysis through March 2014, prices of healthcare goods and services were up just 0.9% relative to a year ago, the slowest rate of increase in the last 50 years,” write Jason Furman, chairman of the Council of Economic Advisers, and Matt Fiedler, a senior economist for the council.

Follow Melanie Evans on Twitter: @MHmevans



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