Kaiser Permanente’s acquisition of Geisinger Health may spark or expedite expansion talks involving Pennsylvania health systems.
Oakland, California-based Kaiser plans to acquire Danville, Pennsylvania-based Geisinger and create a nonprofit organization that looks to add five or six systems nationally over the next five years. While Geisinger and the other health systems that may join the new organization, Risant Health, would operate independently, they are poised to benefit from the integrated system's heft and the $5 billion Kaiser would invest in Risant.
The size and power of Kaiser, a $95 billion system spanning eight states and Washington, D.C., would likely reduce Geisinger’s operating costs involving supply chain management, purchasing agreements and potentially other administrative expenses related to technology, revenue cycle and human resources, among others. Geisinger's insurance operation could also benefit from Kaiser's 12.6 million-member health plan and its data analytics capacity. The transaction must pass regulatory scrutiny.
A Kaiser spokesperson said the system doesn't anticipate any immediate changes to Geisinger’s current IT platforms, while support for other Geisinger services such as revenue cycle and human resources is to be determined.
Geisinger has maintained a strong market share in central and northeastern Pennsylvania, but it has been slow to gain traction outside of its core service areas. It reported $239 million in operating losses in 2022 as expense growth increased at nearly twice the rate of revenue gains. If Geisinger is able to reduce its overhead with the support of Kaiser, it could funnel more resources to service expansions and care improvements.
That potential threat may pressure other Pennsylvania health systems to expand through mergers, acquisitions or affiliations, said Nathan White, president of M&A advisory firm Newpoint Healthcare Advisors and former chief operating officer of Sioux Falls, South Dakota-based Sanford Health.
“There is a significant amount of conversations taking place around health system mergers and affiliations. I think this deal with Geisinger places a new sense of urgency around those conversations, impacting potential deals from New York to Pittsburgh,” he said.
University of Pittsburgh Medical Center, the biggest health system in Pennsylvania, is likely in the best position to compete with a bolstered Geisinger. The integrated academic UPMC system reported $162 million of operating income in 2022, while many large health systems reported operating losses amid higher labor and supply costs.
UPMC has been growing its 40-hospital network over the past decade predominantly through acquisitions as Geisinger has slowly expanded its presence in western Pennsylvania, largely by expanding its facilities. UPMC, though, may run into opposition from state and federal regulators if it continues to expand regionally, said Rex Burgdorfer, a partner at M&A advisory firm Juniper Advisory.
UPMC did not respond to a request for comment regarding the Kaiser-Geisinger transaction.
“I don’t think it is any secret that UPMC and companies like it are on a short list of systems that the Federal Trade Commission is going to look at closely in any future acquisition attempts,” he said.
UPMC grew its central Pennsylvania footprint in September 2017 when it acquired the seven-hospital system PinnacleHealth based in Harrisburg. The following month, UPMC announced plans to build three specialty hospitals in the Pittsburgh area featuring heart and transplant, cancer, vision and rehabilitation services. Construction hasn't started on the cancer center, the vision and rehabilitation facility opened May 1, and the heart and transplant hospital is slated to be completed in 2026.
UPMC has also expanded into Maryland. In 2020, it acquired Western Maryland Health System, including a hospital in Cumberland and a network of diagnostic centers, urgent-care clinics, physician practices, a skilled-nursing facility and home-care operations serving western Maryland and parts of West Virginia and Pennsylvania.
“UPMC has been on a growth binge for a long time, now it’s in their DNA,” said Robert Lawton Burns, professor of healthcare management at University of Pennsylvania’s Wharton School.
The system has been expanding, in part to compete with Highmark Health, the parent company of the 14-hospital Allegheny Health Network based in Pittsburgh.
In December 2017, Highmark announced a Penn State Health affiliation and a $1 billion plan to grow its Allegheny Health network by constructing a hospital in Pittsburgh's North Hills suburbs, four community hospitals and renovating its existing hospitals. It also committed $315 million to a new cancer institute at its flagship hospital in Pittsburgh. In 2019, Highmark and Geisinger formed a clinical joint venture to build primary, specialty and inpatient facilities in north central Pennsylvania. Highmark acquired Grove City Hospital just north of Pittsburgh in 2020.
Allegheny Health Network recorded a $181 million operating loss in 2022 as it faced high labor costs, supply chain issues and inflation, according to an unaudited financial statement. That compared with a $120 million operating loss in 2021.
Smaller Pennsylvania health systems aren't sitting idle. Butler (Pennsylvania) Health System and Greensburg, Pennsylvania-based Excela Health in January finalized their merger, creating a five-hospital system in western Pennsylvania.
Nationally, regional deals like Butler and Excela have been the minority. Health systems have been pursuing fewer mergers or acquisitions where their networks overlap in favor of sprawling cross-state deals. That, in part, may stem from the FTC's scrutiny of in-state hospital transactions, said Kenneth Racowski, an antitrust attorney and partner at the law firm Holland & Knight.
“A very chilly climate and posture from the FTC about hospital consolidation is causing M&A folks at health systems to be more careful,” he said. “Expanding outside of your core market puts you in a better situation from an antitrust perspective. But what is the business justification for that?”
Racowski was uncertain whether the proposed Kaiser-Geisinger deal would spur more consolidation in Pennsylvania.
At minimum, the announcement may get health systems to think more creatively about expansion, Burgdorfer said. In 2011, Durham, North Carolina-based Duke Health and Brentwood, Tennessee-based LifePoint Health marked the first academic medical center and investor-owned hospital company to form a joint venture to acquire hospitals. The joint venture operates more than a dozen hospitals across North Carolina, Virginia, Pennsylvania and Michigan under a structure in which each hospital retains day-to-day decision-making authority, executives said. That deal led to half a dozen transactions in that region, Burgdorfer said.
“It got health system boards thinking that there are more than two binary options for growth,” he said. “Kaiser and Geisinger represents a big leap geographically and structurally that five years ago was on no one’s radar.”