Beyond the Byline: Inefficiency dooms hospital mergers, Modern Healthcare analysis shows

Modern Healthcare Politics and Policy Fellow Matti Gellman and Hospital Operations Reporter Alex Kacik discuss Modern Healthcare's analysis that showed that certain hospitals didn't become more efficient after merging.

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Music Credit: Coffee by Cambo

Matti Gellman: Hello, and welcome to Modern Healthcare's Beyond the Byline, where we offer a behind the scenes look into our reporting. I'm Maddi Gellman, a reporting fellow who writes about politics and policy. Today, I'm talking with Hospital Operations Reporter, Alex Kacik to talk about why some mergers are unwinding. Thanks for joining me, Alex.

Alex Kacik: Thanks for having me on Matti.

Matti Gellman: There's always a lot of hype around hospital mergers and acquisitions. Executives tend to pump up these transactions claiming they will lead to lower costs, better care and improved access. Alex, you looked into what happens when these deals fall apart. What did you find?

Alex Kacik: Well, Matti, like you said, hospitals and health system executives spend a lot of time crafting the message and promoting the transaction, once the letter of intent is signed. But typically they spend less time on what happens if the deal sours. So Hogan in Newport Beach, California, it's actually close to where I grew up, and its parent company Providence, which is based in Renton, Washington is the latest example. Hogan sued Providence last year to formerly unwind its 2013 merger.

Its main complaint was that Providence didn't hold up its end of the population health initiative, that was the main driver behind the transaction. Broken promises are one of the many reasons that the folks I talked with, MNA experts and former hospital executives, said why these deals are unwound and dismantled. But you have executive turnover, power struggles, cultural differences, and performance issues. We decided to focus on the performance of four hospitals that have sought to break away from their merger agreements over the past year and a half.

Matti Gellman: How did you decide which hospitals and metrics to focus on?

Alex Kacik: So we looked at Hogan Providence, as I mentioned, and then St. Mary's and Ascension, Yakima Memorial and Virginia Mason and Geisinger and Atlanta Care. And I worked with our data journalist, Tim Broderick to analyze Medicare cost reports. And the tricky part there is that there are different reporting structures for each hospital's cost report data, but that being said, they offer a more granular picture in terms of the individual hospital metrics when it comes to things like labor costs and supply chain costs compared to the annual and quarterly earnings statements.

So we looked at one of those metrics were full-time equivalents per average operating bed and salary per net patient revenue, to try to get an idea of how the hospitals' largest expenses, labor costs and supply chain were impacted after mergers. And the biggest thing we found was that these hospitals generated a lot more revenue, but they saw their expenses increase as well. Integration costs when these systems get together are bound to drag finances for a year or two years, but we saw expense inflation, either mirror or outpace revenue growth in most of the hospitals we looked at. So that suggests as much of the other research shows that these hospitals get bigger, but not more efficient, which certainly could be the breaking point for some of these deals.

Matti Gellman: What's the impact of these deals that are formally unwound?

Alex Kacik: So from the folks I talked with, they said that nearly every aspect of the organization can be impacted from IT to governance. In the case of Hogan Providence their expected trial date isn't until next April. So in the meantime, they're in this strange limbo where they likely won't commit to any new long-term projects since they may be separate entities this time next year. But they said it's not going to impact day-to-day operations. But, in the meantime, all this is diverting attention away from patient care, whether you're looking at the legal costs or the ramifications of this. It gets really complicated when companies pay a lot of times. The bigger health systems will invest in the smaller ones for infrastructure improvements, that was the case in Geisinger and Atlanta Care. And what, if those funds aren't there, a lot of this specifically isn't spelled out in these merger agreements it's purposely vague or non-existent.

So sometimes they leave it up to the courts in terms of how this dismantling is handled. Another sticking point from an example that the Hogan executives told me was that they had this system where like most hospitals, you have these vital signs monitors that beep at the patient's bedside. They requested those alerts move to the nursing station. But because that wasn't part of the guiding protocol at Providence that wasn't allowed. So, they described that as one of a thousand cuts that undermined their authority and the decision-making process. So they also said that they're paying more into this system, the broader system than they're getting in return, mentioning that they essentially pay a tax to support a system central office, but sometimes that investment isn't realized.

Matti Gellman: What does this mean in the context of the broader merger and acquisition landscape? There are dozens of major deals completed every year. Is this expected to slow activity?

Alex Kacik: So it may be giving executive some pause, but generally execs are going to pursue these transactions. Look, we have bonuses that are often tied to these deals going through for the top brass at these organizations, which is one of the many incentives that will continue even as some of these fall apart. A lot of times, there's other implications outside of access and patient care that drive these deals, which is in stark contrast to the reasons that they explain why and then promote why these deals are going through. We have seen more deals stall after the letter of intent at this point. I had some MNA folks telling me that it used to be a pretty formal proceeding to get to a letter of intent stage, but now it's just informal handshake, it means less.

And I think there's less hesitancy to break up a deal in the due diligence process before they get to a definitive agreement. So you also have combined oversight when it comes to not only on a state level, but a federal level. You have the Biden administration and you have newly appointed folks, both of which our Vice-President and the HHS Secretary who have served as California Attorneys General through different stints. And they've both been pretty tough on hospital mergers during their tenure. So you have that factoring into the decision-making, you have Biden and his cabinet is an administration saying that they want to boost the budgets of the regulatory agencies to provide more stringent oversight and thorough oversight of some of these hospital deals that are going through, as well as hospital acquisitions of physician practices.

Some are saying that's leading to more joint ventures and informal collaborations that don't require the same type of oversight. And on the state side, you have certain bills going through California, for instance, and they're typically going to be an outlier because their regulatory processes are usually higher than others. But, that would lower the threshold for what would trigger an investigation from the state AG office. So smaller deals would fall under their purview than previously reported. So, you have a lot of different factors here, but overall, it sounds like the drive, especially with the pent up demand, when deals stalled during the pandemic, that there's still going to be those incentives and that motivation to get these deals done going forward.

Matti Gellman: What's the difference between the state and the federal approaches to anti-trust regulation?

Alex Kacik: So state AGs, like in Massachusetts and California have been more aggressive. They put price caps on certain deals or required major divestitures for deals to go through. And the feds have generally been more lax in part because they don't have the workforce to challenge all of them. But, as I mentioned before, the Biden administration and some related bill from Senator Klobuchar is looking to add to the DOJ and FTCs budget. They think that some of these factors may cause a little hesitancy when it comes to the potential to pursue these hospital tie-ups.

I think it's a wait and see approach at this point. They're not sure how that will materialize and if there'll be the congressional support on a federal level to support some of these changes. In the meantime we're seeing more evidence come out in relation to hospital mergers and hospital acquisition of physician practices, pointing to the fact that these deals usually end up in price increases and they don't have material impacts on quality.

There's one study that we cited. It was from a U Penn's Wharton School. It was a working paper that looked at how supply chain expenditures changed before and after some of these hospital tie-ups. And they found that the expectations, particularly when it comes to physician preference items, that they didn't garner as much savings as expected. So it's just one instance where, as one healthcare management professor at Wharton Law and Robert Burns told me that people are beginning to understand that mergers don't bring about cost reduction. So as that sentiment grows, I think there will naturally be a little bit more consternation on whether these deals should go through.

Matti Gellman: Thank you all for listening. If you'd like to subscribe and support our work, there's a link in the show notes. You can subscribe to Beyond the Byline on Spotify or wherever you listen to your podcasts. You can stay connected with our work by following Alex and I at Modern Healthcare on Twitter and LinkedIn. We appreciate your support.