CEO Power Panel: M&A no longer health systems' top growth strategy

Members of Modern Healthcare's CEO Power Panel say mergers and acquisitions may be losing their allure for health system leaders. Only three of the 24 health system CEOs who took the survey said M&A will be their primary growth strategy in 2019. Ben Isgur, the leader of PwC's Health Research Institute, said big mergers can be followed by years of integration and inward focus, which could explain why systems might keep a low profile this year. The survey results also show finances may slide in 2019, but CEOs insist it's happening for good reason.

Survey responses indicate less of an appetite for mergers and acquisitions this year than in 2018. In 2019, 12.5% of CEOs said M&A best describes their growth strategy, down from 25.8% in 2018.

“Success for the future of healthcare organizations is not so much getting big for big's sake,” said Howard Kern, CEO of Sentara Healthcare. “I think that's what a lot of us are realizing. We've always had that view, frankly.”

In many M&A deals, systems haven't focused enough on actually achieving the promised cost savings and efficiencies, said Intermountain Healthcare CEO Dr. Marc Harrison. “I think very few people have actually gotten any value out of it,” he said.

San Diego-based Scripps Health is among the 42% of respondents that said their priority will be updating current business lines, although CEO Chris Van Gorder said the system would also welcome joint partnerships that can bring both economic savings and greater expertise. Scripps is already involved in a number of such deals.

Norfolk, Va.-based Sentara also plans to update current business lines by firming up its acute-care operations and making sure it has the right digital consumer technology.

Ultimately, Kern envisions the system partnering to develop that platform further and partnering with Google or Apple. “If you look at banking, retail, they're way ahead of healthcare,” he said. “It's undeniable that healthcare is going to end up there.”

One-quarter of CEOs said innovation will define their 2019 growth strategy. Among them is New Orleans-based Ochsner Health System, whose CEO, Warner Thomas, said innovation means using digital tools to connect more deeply with its existing patients and attract new ones. That includes using its online patient portal to make appointments, send messages and use telemedicine. The not-for-profit system is rolling out a suite of new digital medicine capabilities, such as a hypertension program that lets providers monitor patients' blood pressure, exercise, diet and medication adherence remotely.

Among CEOs pursuing M&A this year, only about 4% said they're planning a vertical merger. PwC's Isgur said that's likely because there are only so many prospects out there for such deals. It's not the kind of deal systems do repeatedly, he said.

CEOs aren't quite as confident in the performance of their systems this year compared with last.

Froedtert Health & the Medical College of Wisconsin in Milwaukee expects to perform worse this year because it hit a peak in 2018. The system saw 5% growth in hospital discharges in a market where utilization has been flat overall, CEO Cathy Jacobson said. Some of its hospitals and ambulatory surgery centers are operating beyond their capacity. Froedtert is adding inpatient beds to keep up, but that will come at a cost.

“We anticipate in 2019 that we'll recover from that, but we won't be able to operate at the peak that we're operating at right now,” Jacobson said.

Intermountain also expects to perform worse in 2019, but Harrison said it's self-inflicted. The Salt Lake City-based system is working to put more money into the pockets of consumers through lowering premiums and procedure costs and rapidly shifting procedures to less-expensive outpatient settings. It's going to stress the system, but it's the right thing to do, Harrison said.

“Please don't take this as a sign of weakness on our part,” he said. “We're going to make it hard for ourselves because we think it's right.”

The Power Panel survey results showcased health systems' growing demand for front-line caregivers. Although half of respondents said their hiring won't change this year, three-quarters said front-line staff are most in need.

Froedtert is going to need roughly 250 registered nurses to staff 72 new inpatient beds it has coming on line this year. Jacobson said the system is on track to meet that goal.

“But are we seeing shortages? Yes. Like, amazing shortages,” she said.

Southeast Wisconsin's unemployment rate currently hovers around 3%, and among healthcare professionals, Jacobson said that rate is “effectively zero.” That means Froedtert is seeing a shortage of just about every healthcare professional you can name, she said, especially registered nurses, but also operating room technicians, surgical technicians, certified nursing assistants and medical assistants.

Increasingly, health systems must also focus on whether their clinical employees have the skills to harness emerging technologies like AI, virtual reality and 3-D printing, Isgur said.

“We think health systems especially will have to think about upskilling their current workforce,” he said.

Health system CEOs are excited at the prospect of the Trump administration loosening federal anti-kickback restrictions under the Stark law.

Nearly 63% of respondents said such a change would benefit their organization financially, including Froedtert. But CEO Jacobson said the administration hasn't been specific about what changes it's considering. “I think all of us from the other side of the street say, 'Well, anything would be better than what we have today,' ” she said.

Health system CEOs say the evolution toward value-based care requires having business relationships between hospitals and physicians that reward physicians for performing fewer surgeries or moving them to less-expensive care sites. That's possible today, but it requires very narrow legal arrangements, Jacobson said.

“Anti-kickback was written so people aren't basically buying referrals, paying physicians for referrals,” she said. “But that's not the thing we're trying to do. We're trying to ask physicians to change, and in some ways, that actually might hinder their fee-for-service income. The only way we can do that is by putting them into value-based arrangements and being able to share some of those gains with them.”

In California, health systems can't employ physicians directly, so Scripps has about 1,000 physicians in its medical foundation. Unless the system can work closely with them, it won't be able to lower supply chain costs or better manage patient flows, Van Gorder said.

“I get it,” he said. “I understand why the government has those laws in place. But since that law was put in place years ago, medicine has changed dramatically. Doctors and hospitals have to be economically aligned.”

Most CEOs—62.5%—said the sweeping Tax Cuts and Jobs Act of 2017 didn't affect their system's finances. Another 33% said their organization's finances took a hit under the new law.

One of them was Ochsner's Thomas, who said the law's corporate tax break benefited for-profit companies and allowed them to pass savings onto their employees. In a tight labor market, any competitive advantage will pose a setback for not-for-profits, he said.

“It has made the competition for talent more challenging and something that we just need to continue to stay focused on,” he said.