Consolidation creating giant hospital systems

Large regional and national healthcare systems are getting bigger and markets are increasingly consolidating, Modern Healthcare's annual survey of hospital systems shows.

Among the nation's biggest for-profit and not-for-profit systems, dealmaking in 2013 created giants with multibillion-dollar annual revenues that rival some Fortune 500 companies. Regional systems acquired nearby hospitals to strengthen their position as local players. And nearly all systems added more physicians to their payrolls: Among survey respondents, doctors employed by systems increased 39% to roughly 67,600 physicians.

The largest U.S. health system by revenue is HCA. The Nashville-based for-profit system ended 2013 with net patient revenue of $38 billion and the No. 1 spot in Modern Healthcare's ranking.

Ascension Health, the second-largest system by revenue, acquired regional health systems in Kansas, Oklahoma and Wisconsin, adding nearly $4 billion in revenue and 32 hospitals to the St. Louis-based system's portfolio. Not-for-profit Ascension ended 2013 with patient revenue of $15.3 billion.

For-profit Community Health Systems, which ended 2013 with 133 hospitals and revenue of close to $13 billion, ranked No. 3. Trinity Health, Novi, Mich., and Catholic Health East, Newtown Square, Pa., merged to create not-for-profit behemoth CHE Trinity Health with more than $12 billion in operating revenue, making it the fourth-largest system.

The consolidation activity—likely to continue this year with a flurry of recently proposed unions—underscores the jockeying among health systems as public policy and market forces expand insurance coverage for millions of Americans, push providers to manage the health of enrolled populations and shift payment to new models that introduce greater financial risks for hospitals and doctors.

Systems are striking deals that deliver larger scale, more leverage and more diverse business lines that executives contend are needed to manage increased insurance risk and reduce wasteful fragmentation. Dealmakers say they hope to improve quality and reduce costs through greater standardization of care, more negotiating leverage with suppliers, and bigger investments to bolster providers' ability to communicate and coordinate care.

But consolidation also carries the risk of reducing competition and raising prices. “The problem is, coordination and competition are kind of antithetical,” said Mark Pauly, a professor of healthcare management at the University of Pennsylvania.

The wave of dealmaking has attracted regulators' scrutiny. In January, a federal judge agreed with the Federal Trade Commission's argument that Boise-based St. Luke's Health System gained too much market clout when it acquired a large local medical group; he ordered the system to unwind the deal. “Our job is to protect American consumers,” said Martin Gaynor, director of the FTC's bureau of economics. Mergers in highly concentrated healthcare markets can raise prices, which hits consumers with higher premiums, higher cost-sharing and slower wage growth, he said.

Experts say the trend among health systems to acquire physician practices also has the potential to raise prices. Health systems that employed doctors and made market-share gains raised prices 2% to 3%, according to an analysis of market-share shifts and price changes between 2001 and 2007. The study was published in May in Health Affairs. Laurence Baker, a professor of health research and policy at Stanford University and author of the study, said the results suggest savings from employing physicians won't be “easy or automatic.”

Insurers lose bargaining power when hospitals and doctors jointly negotiate prices, said Dr. Ann O'Malley, a senior fellow with Mathematica Policy Research. The risk of increased costs because of consolidation is greatest under fee-for-service reimbursement tied to volume of services. “Hospitals … would like to garner more referrals to their specialists” by employing more doctors, she said. “In the short term, there's a real risk that costs could really go up.”

Modern Healthcare's rankings capture a sizable number of major health systems. But because the survey is voluntary, it does not fully reflect the U.S. hospital market. For some non-respondents, Modern Healthcare used publicly available financial data, such as for Tenet Healthcare Corp., which last year acquired Vanguard Health System. Tenet reported operating revenue of $11.1 billion in its regulatory filings, including Vanguard revenue for the final three months of 2013. Vanguard reported annual revenue of $6 billion before the deal. Tenet did not respond to the survey.

For systems that did not respond, details on physician employment and ambulatory growth were not available. Among the non-respondents that ranked among the nation's larger systems were Allina Health, Minneapolis; BJC HealthCare, St. Louis; Bon Secours Health System, Marriottsville, Md.; Partners HealthCare System, Boston; Texas Health Resources, Arlington, Texas; and UPMC, Pittsburgh.

The survey did not capture deals closed after the end of systems' fiscal 2013. Baylor Health Care System merged last October with Scott & White Healthcare after the close of Baylor's fiscal year. The newly created $8.3 billion Texas system is not included in this year's ranking. Also not included is the $3.9 billion deal by Community Health Systems, Franklin, Tenn., for Health Management Associates, Naples, Fla. The deal closed in January.

Dealmakers cite early success in cutting costs as evidence that bigger is better. Leaders of CHE Trinity Health said the combined system's larger size has yielded savings and new business opportunities. Greater efficiencies because of scale have shaved operating expenses by $128 million in the first year of the merger, while combined quality, clinical and information technology staff have allowed more rapid adoption of strategies to reduce waste and harm. “We just multiplied the ability to get good ideas and to replicate those good ideas across the system,” said Daniel Hale, executive vice president of the system's Institute of Health and Community Benefit.

Hale downplayed the risk that consolidation will reduce competition and raise prices. “Size creates a lot of possible, really positive opportunities for us,” he said. Operating in 20 states allows CHE Trinity to better compete for contracts from national insurers serving multistate employers, he said.

Catholic Health Initiatives, which ranked No. 7 on this year's list, grew larger as the system entered a new state. Last year's deal made by the Englewood, Colo.-based system for St. Luke's Episcopal Health System, Houston, added $1.2 billion in revenue to CHI's operations, to increase its revenue to nearly $9.9 billion.

Mergers between giant health systems are not the only deals taking place. Smaller health systems have merged to create formidable regional players, and more deals are on the way to reshape local markets. In May, University of Wisconsin Health System announced plans to merge with SwedishAmerican Health System in Rockford, Ill. In March, St. Anthony's Health System, Alton, Ill., announced a potential merger with OSF HealthCare System, Peoria. Beaumont Health System in Royal Oak, Mich., announced a possible merger with Botsford Health Care in Farmington Hills and Oakwood Healthcare in Dearborn to create a $3.8 billion system.

In addition, health systems continued to acquire physician groups as part of their strategy to diversify into ambulatory care. That trend also was reflected in the growth of freestanding outpatient-care centers owned by health systems, which increased 27% to 6,045 centers.

SSM Health Care, St. Louis, gained 500 physicians and 60 clinics last year with its acquisition of Wisconsin-based Dean Health System. That increased the 15-hospital system's roster of employed physicians by 46% to 1,300 doctors.

“From our perspective, we were purposely trying to move beyond a hospital system to truly being a system that's trying to keep people healthier, and hospitals are not the best place to do that,” said William Thompson, SSM's president and CEO. “To truly improve the experience and lower the total cost, we needed physicians to take the lead in the delivery of care and assume positions of leadership in all levels of the organization.”

SSM will seek to employ more doctors across its markets to prepare for contracts to manage the health and healthcare costs for enrolled patient populations, Thompson said. SSM's deal for Dean Health System gives it access to a profitable medical group's management expertise, which SSM leaders will tap as they expand physician hiring. “We recognized that hospital systems do not manage physician groups well,” Thompson said.

Ascension Health, St. Louis, reported a 93% increase in physician employment in 2013 to 5,252 doctors. But the tally for 2013 included hospital-based and academic doctors not counted in the 2012 total. The system's acquisition of three regional health systems boosted its total of employed doctors by 1,000 physicians.

Dr. David Pryor, president and CEO of Ascension Clinical Holdings, said his system tailors its physician employment strategy to each market, and will continue to work with independent doctors as it pursues a strategy of building regional networks. “There are very strong physician groups in many markets who are key to delivering high-quality care, but they may choose to stay independent,” he said.

Follow Melanie Evans on Twitter: @MHmevans