It’s been less than a year since ProMedica closed a $1.4 billion deal to buy post-acute provider HCR ManorCare. The acquisition resulted in the 15th-largest not-for-profit health system by revenue. Part of the transaction involves real estate investment trust Welltower’s agreement to buy HCR’s landlord, fellow REIT Quality Care Properties, in a cash deal priced at $20.75 per share, or roughly $2 billion. Welltower and ProMedica also formed a joint venture for QCP’s real estate in which Welltower will own 80% and ProMedica will own 20%. For HCR, the deal brought much needed capital. For Toledo, Ohio-based ProMedica, the deal allows the system to expand population health-driven senior healthcare. ProMedica CEO Randy Oostra recently talked with Modern Healthcare’s editorial board about the system’s future. The following is an edited transcript.
MH: Have there been any hiccups since the acquisition of HCR?
Oostra: I can think of a couple of surprises. We knew it would be tough, especially the skilled-nursing business. We’re actually doing well from a volume perspective. It’s payer-mix changes that we’re seeing in acute-care hospitals as well. It’s a bit more Medicaid than we expected, and that hits us from a reimbursement standpoint. But the integration has gone well. We just got our IRS conversion to not-for-profit. HCR was a for-profit, publicly traded company with a culture that’s a little different from ours, so we’ve had to put the two together and it took us a while to figure it out. We’ve learned from them and they’ve learned from us. So it’s been a nice blend.
We worked on this deal for years and discussed a variety of relationships. As they began to have more troubles, and the more we thought about our future, the more we thought it would make some sense.
Still, it’s going to be a challenge. It gave them some relief. But there will be challenges. We also need to think about home care, hospice and assisted living. Those are all high-growth areas. I think that’s why you see private investment flocking to those areas. There’s good economics there.
MH: The ratings agencies were skeptical of the deal when you first announced it.
Oostra: That’s probably an understatement. I think it’s going to take a couple of years to convince them it was the right move. A couple of things motivated us. You look at our system and what we were trying to do. Hospitals, doctors and a health plan in northwest Ohio, southeast Michigan, it’s an area that’s not growing.
For a company like us, either you go to markets that you’ve not been in before or you look to grow in nontraditional ways. We just bought a company the same size we were and we doubled the size of our revenue. From a base cash standpoint, they don’t like that. We even have investors that say, “I would like the old ProMedica back with the amount of cash we have.” Well, that’s OK, but again, you think about the future. We’re motivated by the communities we serve.
The number of 85-year-olds filing bankruptcy is at an all-time high. We start looking at those statistics. People are living longer. They didn’t save enough for retirement, and healthcare is literally killing them economically. So we’re looking to provide care at the lowest-cost setting.
If you can find somebody with scale, which we were able to do because they’re literally across the street from us, all of a sudden you have some scale to be able to think about not only what you do traditionally clinically, but then you look at it from a health plan standpoint. You look at it from a social determinants standpoint, an aging standpoint, and it all comes together.
MH: How are you competing with private investment in healthcare?
Oostra: We’re happy to compete in that sector. We bought a dental company in Indiana for example. I’m positive they had better offers. But when the owners looked at the deal and they thought about their employees and who they were, they sold to us.
Why did we buy them? It’s complementary to what we do. It can create job growth. It can create scale in the system. It’s those kind of things that you begin to look at.
So you ask yourself, “Why hasn’t healthcare done some of these things?” You see, especially in the VC area where they’re very active in certain components, like, “Well, why aren’t we looking at some of those components to make investments in those things?” Which would ultimately take some pressure off our hospitals and begin to diversify a little bit. I think the thing we have to be careful of is how we diversify. We’ve been through some cycles of this in healthcare.
You can only cut so much out of healthcare and still keep on going. In our case that was break out $300 million to $400 million every two or three years. You do that time after time, finally you start looking around and say, “Now what do we do?” That’s where I think a lot of health systems find themselves.
MH: Do you ever worry about competition from private equity and venture capital increasingly moving into healthcare?
Oostra: Yes. I think the biggest concern is there are areas that would be logical for not-for-profit healthcare to move into. But traditionally, we haven’t looked at it, and we see the VC funds going at it hard and aggressively, and having access to money.
What’s interesting about that, going back to the rating agencies, they tell us they want us to have 200 to 300 days cash on hand. Yet you look at some of these other funds, at how leveraged they are, and they continue to do that. So it’s almost like we’re trying to compete with an arm tied behind our back. We have people telling us, “Don’t do it.” And the next breath they’re saying, “Well, what are you gonna do?” It’s a bit frustrating.
We have to be good stewards from a fiduciary standpoint. But do we really need to be sitting on 300 days cash on hand, when you have other folks thinking about new ways to grow? Growing in some nontraditional areas, where really, when you think about it from a consumer standpoint, that’s where the market is going.
So yeah, I think it is a concern for us. It should be a concern to everybody that some of these opportunities that we should be pursuing are being taken by others.
MH: Assuming this deal will help lower your overall cost of doing business, how does that translate back to the patients?
Oostra: That’s where the dilemma is, because we’re making massive changes. We have done three or four cycles. In our case, probably somewhere around $300 million in reductions for the size of our system. All those significant reductions have allowed us to keep pace with inflation. Revenue is flat. You’ve got a 1% to 2% margin hopefully. Over a couple of years it translates into a couple hundred million. In fact, we always tell our board, “This $300 million maybe doesn’t worry us as much as the next $300 million.”
I think where that gets translated is we just have to start to think of things very differently, including delivering care remotely using telehealth, using alternative care sites like urgent care. We have six to eight urgent-care centers. Forty percent of the people who go to those sites don’t have primary-care doctors. So you begin to look at those kind of services that really, hopefully, help a person have better options for lower-cost care rather than showing up in our emergency room. I think that really is probably one of the better ways to translate.
MH: You’ve been a leader in addressing social determinants of health. Tell us what you see on the horizon.
Oostra: We believe this next era not only involves social determinants with patients, but also employees. That could be a significant way to reduce healthcare costs.
If you think about it just individually, I mean, those are all the things that you got up thinking about this morning. Hopefully you’re not thinking about yourself as a patient. But those are the sort of things that impact your lives. And yet, everything you read about social determinants, we underspend. We spend what, 4% of our economy on those things. Denmark spends 15%. The Organisation for Economic Co-operation and Development countries spend about 9%. We’ve underinvested in those social areas, so how do we begin to start to invest in some of them?
We have dozens and dozens of projects. We had a donor give us $35 million to establish a Harlem Kid Zone project in the north side of Toledo. We have an inner-city grocery store with job training. We’re building housing, providing literacy training. I mean the whole gambit.
We’ve also tried to do it in the city more globally. We have partnerships in housing and job development, and of course, the food pieces, financial counseling, which is huge for people. We’re trying to build that out. A lot of it’s been philanthropy based.
MH: Is there a business case that you’ve discovered?
Oostra: Right now, we are talking to a large employer about screening their employees for the 10 social determinants. It’s a little bit more complicated when you screen employees, and how they opt in and opt out. But our thought is, there’s a business case there. We can lower healthcare costs and reduce absenteeism and increase productivity. On the health plan side, clearly it reduces costs, so we’re starting to adopt it there.
Again, hopefully, we keep people out of the hospital. That doesn’t always help us economically, of course. But those are all the sort of things that when you begin to look at it, I think the issue is, why didn’t we do this before?