When Toledo, Ohio-based ProMedica announced plans to acquire HCR ManorCare, industry analysts scoffed, suggesting that the combination didn’t make sense financially or operationally. About a year and a half after the deal’s closing, ProMedica is seeing some positive results, according to Steve Cavanaugh, the system’s chief financial officer. Cavanaugh, who was CEO of HCR before the acquisition, spoke with Modern Healthcare finance reporter Tara Bannow about some of those returns, as well as recent news about dialing back its Medicaid managed-care business in Ohio.
MH: Can you talk about your plans surrounding Medicaid in Ohio?
Cavanaugh: Because of a number of issues—we took some material losses in our health plan in 2019—we have been working with the state of Ohio to try and address that over the course of the last six months. After we got through that process, when we looked at the rates for 2020, in coordination with the state, we decided to exit the southeast region of Ohio—Columbus and down to the Ohio River.
It was a strategic move and a risk-management move. It’s really not contiguous to our service area for our hospitals and our physicians.
We’re going to stay in the northeast part of the state and our core geographic footprint, which starts at Toledo and runs the western part of the state. We have about 30,000 members who are currently enrolled in Paramount Insurance in (the southern) part of the state. We’re going to transition them to the other four health plans that offer managed Medicaid over the next six months.
MH: There were a lot of questions about ProMedica’s decision to take on HCR. It seems like you have made it work. How have you done that?
Cavanaugh: I’m a little biased. I was the CEO of HCR when we put the two companies together. What you had with HCR ManorCare was a really well-run company that had a broken capital structure. When we were private equity owned, we had taken on a significant amount of leverage and reimbursement changed pretty dramatically. The capital structure and the operating model were mismatched. But underlying (that) we had really good quality and really good financial results.
If you look at the margins in the post-acute business, they’re actually more attractive than your typical hospital. A lot of people don’t think of it that way, but when you blend together HCR’s businesses—Memory Care, assisted living, home health and hospice, and then our skilled-nursing facilities—our margins are generally higher than most hospitals.
The other area where it was attractive was the ability to really make ProMedica a national company. And I think now that HCR is not-for-profit and health system-owned, it opens the door to a lot of potential partnerships.
Most health systems really struggle with their post-acute strategy. Sometimes they’re in the business not because they want to be but because they feel like they have to be, or accidentally through acquisitions. Or if they’re not in it, they struggle to figure out how to manage it.
We have three health systems … I can’t tell you any of the names but … that we’ve signed letters of intent with. The idea would be that HCR would come in and help manage their post-acute operations.
MH: When do you think you’ll be able to sign definitive agreements and announce those deals?
Cavanaugh: I’d hope in the first half of this year. Deals move at their own pace.
MH: Are they in the Midwest?
Cavanaugh: They’re all subject to confidentiality agreements.
The real idea (behind the HCR acquisition was) to build capabilities and partner; people didn’t appreciate some of the soft things. For example, bringing some of the capabilities of the acute system into post-acute operations. Doing things like telehealth, telewound care, things that improve the clinical quality of your post-acute operations.
And then when you think about HCR ManorCare as a historically for-profit company, we’ve got a pretty good business discipline. We were really good at managing the nuts and bolts of running a business. (ProMedica CEO) Randy Oostra asks me, “Can we graft a little bit of that for-profit DNA on the legacy ProMedica system and Paramount?” There’s a lot of those kind of opportunities. People always go to where the cross-referral opportunities are and what are the synergies. Those are important, but if that’s all you focus on, you’re missing the point. There are other opportunities that could be just as big.
MH: As of September, 44% of revenue was post-acute, right?
Cavanaugh: It’s the biggest division in the company. We’re about $6.8 billion annualized in revenue and about $3 billion of that comes from post-acute. Within that $3 billion, there’s … skilled nursing, assisted living, home health and hospice.
MH: Can you talk about the challenge straddling the fee-for-service and value-based environments?
Cavanaugh: It’s like having one foot on the boat and one foot on the dock and your goal is to balance and not fall in the water. Because we own a health plan, it’s a little more natural for us to think about the world that way.
We’re big believers that you’ve got to do these things and sometimes do it to yourselves. In our rating agencies coverage, one of the agencies made a big deal about, “Your inpatient discharges actually are down year over year.” And we said, “Yeah, they’re down for everybody, but what matters is across the entire system our volumes are up.” So if you look at it on adjusted discharges, or however you want to look at it, our volume across the entire system is up. And that’s because we’re pushing people into the lowest-cost (and) right setting of care. Five, six years ago, we didn’t have a single urgent-care (visit). We’ll probably do 100,000 urgent-care visits this year.
The other thing we’re trying to wrap into this … is thinking about care and wellness holistically as opposed to just on a transactional fee-for-service, episodic basis. We know, for example, if a patient or a member screens for food insecurity, if we get them food assistance, whether through our food pantry or another community resource, per-member, per-month costs, at least in our health plan, will go down about 10% or more.
That’s not just the right thing to do from a community standpoint, it’s good business. We’ve seen this with pregnant mothers. If you’re dislocated from your home during pregnancy—you’re evicted, you lose your home for some other reason—you’re about 33% more likely to deliver prematurely or deliver a low birth weight baby.
If you own a health plan, it’s a lot more natural to think about how to care for this person; we need to deal with the holistic situation.