Dead, delayed, done

A bold plan to merge two large Michigan health systems collapsed last week. It was just the latest one to fizzle among big hospital operators looking to get bigger in transactions that might have been far-fetched just a few years ago.

It was Henry Ford Health System's board that ended the Detroit-based system's talks with suburban competitor Beaumont Health System, based in Royal Oak. Negotiators had already missed one deadline, Crain's Detroit Business reported. Talks fell apart after Beaumont's leaders balked at the original terms, Henry Ford's chief executive said in a statement announcing the deal was dead.

The news follows the disintegration of possible deals in the Midwest and Pacific Northwest in recent weeks and more successful efforts this year that joined multihospital systems, including the mega-merger of Catholic Health East and Trinity Health.

The dealmaking between regional and national heavyweights underscores the maneuvering across the industry as insurers, hospitals and medical groups adjust to historic changes to regulation and markets amid intense pressure to cut costs.

Failed deals are a symptom of the degree of activity and, in some cases, the willingness to entertain unlikely combinations.

PeaceHealth, a system with eight hospitals in Oregon, Washington and Alaska, sought to merge with Catholic Health Initiatives' seven-hospital Pacific Northwest division under a new company. “We knew it was bold,” said Peter Adler, chief strategy officer for PeaceHealth.

The proposal—announced in August and suspended in April—arose as an opportunity that fit within PeaceHealth's strategic plan to try to better integrate care and lower costs, he said. Last week, PeaceHealth unveiled an agreement with University of Washington Medicine that will direct referrals between the organizations.

“A lot of these are not going to work out,” said Toby Singer, a healthcare attorney who specializes in healthcare mergers and antitrust with Jones Day in Washington. That's not because the rate at which deals fall apart has increased. Instead, more interest and more negotiations will lead to more successful—and unsuccessful—deals, she said.

Prospective partners begin the work hammering out critical merger details with little information about each other. Only during negotiations do governing boards and executives discover enough about the others' culture and operations to make an informed decision. Public reaction once the deal is announced may also influence progress.

“It's a wonder that anything ever gets done,” Singer said. Nonetheless, the pace of deals between multihospital systems appears to have accelerated, she said.

Health reform creates a greater need for capital, and larger, more geographically diverse systems may be able to borrow more cheaply to fund capital investments, Singer said.

Officials with Catholic Health Initiatives are considering deals that they might have previously overlooked. The company is positioning itself to better manage population health and prepare for more financial risk under new payment contracts with insurers and employers, said John DiCola, the Englewood, Colo.-based system's senior vice president of strategy and business development. One-quarter of the system's capital budget this year is allocated to strategic growth and joint operating agreements.

The investment needed to vet possible deals varies by complexity of the transaction. “If you're serious about it, you make the investment,” DiCola said. “Hopefully, it works out.”

It did not in Detroit, where cultural differences scuttled a deal even after governing boards agreed to continue past an original deadline, Crain's Detroit Business reported, noting that clinical leaders at Beaumont asked the system's board to reconsider merging with Henry Ford. The systems' executives declined to be interviewed.

The Detroit dealmakers are not the only prospective partners to meet with delays.

Talks continue between Scott & White Healthcare, Temple, Texas, and Baylor Health Care System, Dallas, after their initial exploratory agreement signed in December expired at the end of April. The potential partners' chief executives, Joel Allison of Baylor and Dr. Robert Pryor of Scott & White, said in a joint statement the large regional systems “continue to confidently move forward with the intent of merging our two organizations.” The statement called the original timeline “aggressive.”

Larger might not mean less costly if growing health systems gain market leverage. Dr. Robert Berenson, an Urban Institute senior fellow, said that can be true of mergers that do not consolidate rival hospitals with overlapping markets. The merged system can gain leverage with insurers that have customers scattered across the new organization's combined footprint. “I think the proof is on them to demonstrate there's some efficiency to being a mega-system instead of just a large system,” Berenson said.

Heavily consolidated hospital markets, such as those in Minnesota, may next see a run of deals between insurers and health systems, said Roger Feldman, professor of health policy and management at the University of Minnesota. That's because mergers between already dominant hospital operators could draw antitrust scrutiny, he said.

Hospitals in deals with insurers will gain valuable expertise as new approaches to payment require hospitals to behave more like health plans, he said. A January deal that combined Park Nicollet Health Services, St. Louis Park, Minn., and HealthPartners, Bloomington, Minn., did exactly that for Park Nicollet. HealthPartners, which owns three hospitals, also operates an insurer. “I think that's where we're headed,” Feldman said.

Follow Melanie Evans on Twitter: @MHmevans