Tenet affiliation with Yale New Haven eases entry into Northeast

Tenet Healthcare Corp.'s partnership with Yale New Haven Health System, New Haven, Conn., signals growing opportunities for investor-owned chains in the Northeast region, which has been reluctant to welcome for-profit healthcare. But the new affiliation also highlights state regulators' unease with for-profit operators and other market-driven changes as providers buy more physician practices and assume more financial risk for patient outcomes.

“The reality of the marketplace is that we are moving to a point of mergers and consolidation,” said Angela Mattie, an associate professor of management at Quinnipiac University in Hamden, Conn. “It's less about who's delivering care and more about what the care is and are we delivering the best value possible.”

Like many states in New England and the mid-Atlantic region, Connecticut has tried to limit corporate influence in healthcare. Its broad corporate-practice-of-medicine restrictions on who can employ doctors have been a barrier for companies like Dallas-based Tenet that are moving toward integrated delivery networks and risk-based payment.

Discussions around a partnership with Yale New Haven began when Nashville-based Vanguard Health Systems, which Tenet acquired last October, began looking at hospital acquisitions in Connecticut. Letters of intent currently are in place with Waterbury Hospital, Bristol Hospital, and the Eastern Connecticut Health Network, a two-hospital group with facilities in Manchester and Rockville.

As the industry moves toward narrow provider networks and risk-based payments, joint ventures and other partnerships will be one way for providers to position themselves in the new operating environment, said Keith Pitts, Tenet's vice chairman.

Tenet's partnership with Yale New Haven will help create a healthcare delivery network facilitating care coordination and participation in value-based payment contracts. Yale New Haven will bring the clinical expertise and strong service lines that it is already known for, said Marna Borgstrom, president and CEO of the three-hospital system. In addition, Yale New Haven will hold a minority stake in other hospitals Tenet acquires, including future deals in the greater Northeast region.

For Tenet, the deal provides a way around Connecticut's broad corporate-practice-of-medicine law. While many states restrict corporations from directly employing physicians, most states allow doctors to be employed through a not-for-profit foundation created and governed by doctors. But in Connecticut, the organizing entity has to be not-for-profit as well, said Trip Pilgrim, senior vice president at Tenet. That's where Yale New Haven comes in.

The growing trend of physician employment has been controversial in Connecticut. In a November opinion piece in the Hartford Courant, state Attorney General George Jepsen cautioned against a repeal of the state's corporate-practice-of-medicine law.

Even allowing not-for-profit providers to form medical foundations has “resulted in the aggressive acquisition of physician practices by nonprofit hospitals,” he wrote. “Hospital-affiliated practices can negotiate higher rates than independent physician practices, charge separate 'facility fees,' drive out competition in particular markets and provide care in areas where more patients are covered by higher-paying commercial health insurance policies.”

There also are concerns about physician consolidation and providers taking on greater financial risk, said Ellen Andrews, executive director of the Connecticut Health Policy Project. “It's a real shift in the players and the doctor incentives,” she said. “There's a lot of anxiety about it and the Legislature is definitely looking at it.”

Tenet still must receive approval for its three Connecticut hospital acquisitions. Given there has only been one other for-profit conversion in Connecticut, “we'd expect the completion of this deal to be drawn out into the second half of 2014,” Deutsche Bank analyst Darren Lehrich wrote in a research note. But if approved, Tenet would be a consolidator in an otherwise fragmented southern New England market, he added. Tenet, through Vanguard, already owns three Massachusetts hospitals.

Tenet isn't the first publicly traded chain to ally with an academic medical center to capitalize on an academic organization's brand and clinical expertise. Last year, Community Health Systems formed such a partnership with the Cleveland Clinic—combining its operations strength with Cleveland Clinic's expertise in clinical programs like cardiovascular care. Joint acquisitions also will be part of that deal.

But Borgstrom said Yale New Haven doesn't necessarily have the same aspirations as its peer Duke University Health System. The Durham, N.C.-based system formed a joint venture with publicly traded LifePoint Hospitals in 2011 and has been rapidly buying medical centers not only in North Carolina, but as far away as Michigan.

“I wouldn't be that audacious,” Borgstrom said. “Sometimes a strategy can get out ahead of what really needs to be in place.”

Follow Beth Kutscher on Twitter: @MHbkutscher