Sentara Healthcare and Cone Health represent the latest in a series of scuttled merger proposals, but it isn't expected to slow M&A activity, industry observers said.
Sentara and Cone abandoned their plans Wednesday to build a more than $11 billion system spanning North Carolina to Virginia amidst internal opposition as well as criticism from community members and state regulators. Around a dozen proposed mergers between relatively healthy not-for-profit systems haven't closed over the past three years as doctors have protested and regulators have become increasingly wary of consolidation.
"I do think it's reflective of this new attitude toward consolidation in healthcare where more than ever, enforcers are suspicious of systems that are growing and skeptical of the benefits they claim they'll bring," said Ken Field, an attorney with Jones Day who works on healthcare antitrust and competition issues. "It's almost as if we're starting from a position of disapproval as opposed to a position that unless we find something illegal, we should let it go through."
Merger and acquisition advisors point to a range of reasons why deals fall apart, including cultural differences, antitrust implications, geographical hurdles, half-baked integration plans, infighting and power struggles. But health system executives will continue to turn to mergers and acquisitions to try to boost revenues and insulate their organizations from competitors, national emergencies and reimbursement shifts, they said.
"The people who are against (hospital) deals to begin with will point to this as evidence, but there are certainly as many merger conversations happening right now than I had ever seen," said Nathan White, president of Newpoint Healthcare Advisors.
There were early signs of discord in the Cone-Sentara deal. Two of Cone's top executives—its CEO and CFO—announced plans to leave several months into the due diligence process. Cone's CEO, Terry Akin, previously planned to step down once the deal was completed. He announced Thursday he still plans to step down this month, citing personal reasons. More recently, physicians and patients aired concerns about creating a monopoly that would raise prices.
Cone and Sentara haven't offered specifics into what ultimately doomed the deal, so it's unclear whether it was a cultural problem or external regulatory interference.
Although there appears to be no market overlap, public commenters claimed that Sentara had a history of using its large insurance arm to favor Sentara-linked providers with higher payments, making it hard for other insurers to compete, said Beth Vessel, a partner at Waller Lansden Dortch & Davis who focuses on antitrust issues.
North Carolina's Attorney General, Josh Stein, issued a statement Wednesday that appeared to take some credit for the deal's fate. Stein said he had been thoroughly reviewing the proposed transaction when the systems announced they were scrapping it.
"Recently in North Carolina, there has been a wave of hospital consolidations — HCA and Mission, Novant and New Hanover, Wake Forest and Atrium — and I have real concerns about this trend," Stein said. "Bigger doesn't always mean better. In fact, it often means worse and more expensive."
The work of attorneys general is often more about politics than antitrust issues, Field said. The Cone-Sentara deal didn't have obvious antitrust issues, especially because the two systems didn't have overlapping coverage areas, he said.
The attorney general's statement said he is asking every hospital administrator in North Carolina about their compliance with the new federal price transparency regulation, noting that patients have little, if any, information about the prices of services they receive.
Stein has greenlit a number of hospital mergers in recent years, most recently Atrium Health and Wake Forest Baptist Health in March. He also did not object to Novant's purchase of New Hanover Regional Medical Center.
In 2019, he allowed investor-owned hospital giant HCA Healthcare to buy six-hospital Mission Health with conditions. Within a year, Stein's office was fielding patient complaints about higher bills and diminished access and quality.
"He wants to show he's at least a cop on the beat, that he's taking this very seriously," Field said of Stein's action in the case of Cone and Sentara.
Dr. Kurt Lauenstein, a family physician with Cone Health in Greensboro, said he thinks Stein's investigation prompted the systems to scrap their plans.
"When he said that, they knew the jig was up," he said. "It just doesn't pass the smell test."
Lauenstein had written to Stein opposing the merger, arguing that Sentara would have drained Cone's communities to prop up its own financial needs.
Cone's former CEO, Tim Rice, doesn't think the outcome is because of Stein's investigation. Instead, he thinks the two systems simply decided something about the deal didn't feel right.
"It's hard to walk away after you've invested so much time and energy," Rice said. "But at the end of the day, the leadership teams and the boards just didn't feel like this was the right option."
In a letter supporting the merger, Rice wrote that Sentara had committed to providing much-needed capital so Cone could meet community needs. Sentara's almost $9 billion in revenue is nearly quadruple that of Cone, which posted $2.3 billion in revenue in fiscal 2020.
"The geography of (the deal) had peoples' interest piqued about how it would work," White said.
Just over the past year and a half, Intermountain Health and Sanford Health called off their proposed deal, along with Beaumont Health and Summa Health, Beaumont and Advocate Aurora Health, Atrium Health Navicent and Houston Healthcare System, CommonSpirit and Essentia Health, LifePoint Health and Prisma Health, and Massachusetts General Hospital and Exeter Hospital.
Baylor Scott & White Health and Memorial Hermann, Cone and Randolph Health, then-Partners HealthCare and Care New England, and UNC Health Care and Atrium Health abandoned their merger plans in 2018 and 2019.
When large multi-hospital systems combine, the seller rarely goes through several rounds of proposals, refining terms and conditions, and a more thorough introduction, said James Burgdorfer, a principal at Juniper Advisory.
"Those market-clearing processes result in a low failure rate," he said. "But when you don't do them, it subjects the CEO, and to a certain extent the board, to criticism from physicians and external parties like the (Federal Trade Commission), attorneys general, payers and competitors."
The Beaumont-Advocate Aurora deal, for instance, was abandoned after the Michigan Attorney General's office said that it planned to investigate and a majority of doctors responded negatively to the transaction in a survey, although the parties also indicated that the pandemic had hindered face to face interactions among the parties, Waller's Vessel said.
"There are various reasons that mergers have been abandoned and we don't always know the full story, but potential antitrust scrutiny is likely a factor for many of these transactions," she said.
Those organizations were largely in positions of strength. The deals weren't driven by impending bankruptcy or other dire scenarios that fuel other transactions, industry observers said.
"The longer you go from the letter of intent to the definitive agreement, it opens up Pandora's box for the naysayers," White said. "It can get to a point where doing the deal is causing such chaos for the board, staff and the community that they walk away."
Organizations are announcing letters of intent before the business terms are fully baked, said Jordan Shields, a partner at Juniper.
"This is especially true when coupled with a failed roll out of the announcement where the principals lose control of the messaging and threatened constituencies weigh in and blow things up," he said.
Consolidation, particularly among hospitals, has been linked to price increases and lower quality. Prices typically increase and quality often suffers when competition wanes, research shows.
The Biden administration plans to increase the funding for federal regulators and track hospital consolidation more closely. Bills are moving through Congress as well as several states that would bolster regulatory oversight of hospital deals and hospital acquisitions of physician practices.
There has been speculation that more federal antitrust enforcement is likely with respect to hospital mergers, partly because HHS Secretary Xavier Becerra oversaw the landmark Sutter Health antitrust settlement in California, Vessel said.
"Although the FTC and DOJ are responsible for antitrust enforcement, HHS might take steps to reduce incentives for anticompetitive behavior that may result from consolidation," she said, adding that the Biden administration is likely to focus on antitrust enforcement because the agencies may take action without congressional approval. "It seems likely that increased enforcement activity under the Biden administration will attempt to slow consolidation by hospital systems."
Scuttled mergers can have lasting impacts, particularly for the smaller organizations.
Staff will assume there are other buyers or systemic financial or quality issues. Failed mergers often rile up doctors and employees, distract boards and tire out the management team, Shields said.
Physicians at NorthShore University HealthSystem are still talking about the failed Advocate Aurora takeover from 2017, Burgdorfer said.
"Doctors get flummoxed and worried, and it hurts," he said. "That is a tremendously important dynamic and relationship for hospitals."