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Reform Update: Ascension deals signal new economic reality in healthcare

Ascension Health, one of the nation's largest hospital owners, is expanding rapidly with a string of announced deals that its CEO says will grow its reach beyond hospitals to keep pace with rapid Obamacare-induced changes in the marketplace.

But notably, Ascension is not on an acquisition spree. Its latest deals—in Illinois, Michigan, Arizona and Wisconsin—are not outright purchases, but rather agreements with regional rivals and other national players to jointly own, operate or contract for hospitals and insurance companies.

The deals pair Ascension with well-established players in each market and allow the system to avoid costly competition or wasteful duplication by capitalizing on partners' resources that Ascension lacks, said Robert Henkel, Ascension Health's chief executive. The strategy also will allow Ascension to jointly develop broader services to care for patients at home, in nursing homes and other locations outside of hospitals. “There are times we don't have all the pieces,” he said.

The shift by healthcare systems away from providing care in hospitals has accelerated since the 2010 health reform law, as Medicare and Medicaid introduced new financial incentives for lower-cost care under reform and commercial health plans followed. An explosion of dealmaking across healthcare has followed as hospitals, medical groups, insurance companies and drug and devicemakers consolidated or diversified, depending on strategy.

While those deals include a flurry of mergers and acquisitions, they also include a rush of joint agreements such as Ascension's that in some cases deliver the same strategic advantages, often at a lower cost or initial investment, consultants and analysts say.

Joint contracting or joint operating agreements also can yield leverage needed to boost rates paid by insurers, lower prices paid to suppliers and prevent exclusion from increasingly prevalent narrow network health plans, or plans that limit access to a select group of providers, they said.

“Having an entity that is distinctly in control is not a requirement for success,” said Lisa Martin, a hospital analyst for Moody's Investors Service.

And as health systems increasingly enter contracts, such as accountable care, that tie financial performance to patients' overall health and medical expenses, big organizations that care for large numbers of patients—with relatively healthy people to offset the cost of sicker ones—may be at an advantage, experts said.

Ascension's joint agreements will expand its size and geographic reach in one of its newest markets, Chicago, and one of its largest, Michigan, without the drain on capital and antitrust scrutiny that accompany mergers and acquisitions. Deals in Tucson, Ariz., and Milwaukee will bring in new owners to boost investment in accountable care and health insurance activities.

Ascension's deal in Michigan created a behemoth network with hospitals owned by CHE Trinity Health. Combined, the partners' newly created Together Health Network includes 27 hospitals and 5,000 doctors that officials say will place 3 out of 4 state residents within 20 minutes of a network hospital or doctor.

In Illinois, Ascension also would gain the clout of an additional half-dozen hospitals in Chicago under a joint agreement with Adventist Health, another large U.S. health system based in Orlando, Fla.

Ascension's three Chicago-area hospitals, acquired in a 2011 deal for the Alexian Brothers Health System, Arlington Heights, Ill., needed more scale in a market where the Blues insurers and powerful competitors have aggressively adopted accountable care contracts, said Jordan Shields, a vice president for Juniper Capital. Blue Cross of Illinois and Advocate Health Care, Downers Grove, Ill., entered an accountable care contract early in the decade.

Ascension Health would divest some ownership under announced deals in Arizona and Wisconsin.

Tenet Healthcare Corp. would hold the majority of a proposed joint venture with Dignity Health and Ascension in Tucson, where Ascension's operations have increasingly struggled in recent years. The partners have released limited details about the deals, but Tenet Healthcare's spokesman said Ascension would enter a joint venture that would fund and expand a physician-led accountable care organization and clinically integrated network. Ascension declined to comment on the deal. Tenet Healthcare referred additional questions to Ascension.

In Wisconsin, Froedtert Health, Milwaukee, would jointly own a health plan owned by Ascension's Ministry Health Care under another proposed deal. Ministry includes Milwaukee's Columbia St. Mary's hospitals.

For Ascension, the deals present challenges as well as opportunities. Joint agreements require joint decisions without a single owner, or a single CEO, as final arbiter in disputes, consultants said.

That can be problematic when joint operating agreements are confronted with potentially unpopular choices, such as consolidating lucrative or high-profile services in a single hospital, said Mitchell Morris, global healthcare leader for consulting firm Deloitte. But failure to make tough decisions can undermine the goals of the affiliation. “If decisions are easy and obvious, then everyone agrees to them,” he said.

Sharp exits Pioneer ACO program

Sharp Healthcare broke even on the first two years of its Medicare accountable care program, but executives feared financial losses under formulas used to assess bonuses or penalties for the Medicare ACOs. Sharp joined nine other ACOs that have left the Pioneer ACO program, which was launched as Medicare's first and most ambitious test of accountable care.

Risk-based contracts rise slightly

Health system revenue from risk-based contracts, such as Medicare and commercial accountable care, increased slightly last year, though it remained a sliver of total revenue, Moody's Investors Service reported in its latest snapshot of not-for-profit hospital median performance.

The median health system reported 2.4% of revenue from risk-based contracts, up from 2.1% the prior year. The median number of covered lives, or the number of people in contracts that put health systems at some financial risk, increased to 108,956 in 2013 from 84,382. The median number of employed physicians increased as well, to 94 in 2013 from 83 the prior year and 74 the year before that. Meanwhile, revenue woes and rising expenses eroded hospital margins last year. Moody's reported the median operating margin dropped to 2% from 2.5%.

Follow Melanie Evans on Twitter: @MHmevans



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