Record Year for Health Care Mergers Puts Focus on Physician Leadership

Clinician engagement and alignment are key to ensuring these new partnerships add value to patient care.

The CVS-Aetna merger that shook the health care industry in December 2017 was merely an exclamation point on a transformative year for health care deal-making. A recent report by management consultancy Kaufman Hall counted 115 such transactions, a 13 percent increase from 2016, which the group called “staggering.”

The reasons for the increase are complex, but a few triggers rise to the top when speaking to industry leaders: the financial bottom line of providers, ongoing change in payment structures, an exponential growth of technological innovation and a desire to expedite the move to value-based care.

They also acknowledge the importance of physician leadership in the success of any joint venture, merger or acquisition.

“These realities are changing not only the anatomy, but also the physiology of health care delivery – what it looks like and how it functions,” says Jay Wolfson, DrPH, JD, senior associate dean for health policy and practice at the University of South Florida’s Morsani College of Medicine in Tampa, Florida. “And it will require big, collaborative, coordinated engines to make this all work.”

These catalysts have the industry on the precipice of a paradigm of fully integrated care, in which patients consume their health services – primary doctors, specialists, pharmaceuticals, lab work, imaging, counseling – through united partners or even under the umbrella of one system.

The thought: It’s good for business as well as the patient. And more merger-and-acquisition “mega-deals” and bigger interstate regional consolidation will come in 2018, Kaufman Hall predicts.

“This brings health care closer to the 21st century of business model management than it has ever been,” Wolfson says.

But the ride will be bumpy.

“I think mergers are going to be huge,” says Quint Studer, a longtime health care consultant and former hospital CEO in Pensacola, Florida. “I think you’re seeing consolidation like crazy. But it’s not two successful systems all merging so it can be one big successful system. It’s usually, you know, two organizations struggling, so let’s put us together and get better. But that means … it’s a great time when you do a merger to start changing some things you wish you could change before.”

Studer acknowledges it’s a “tough environment for health care right now, and I don’t think it’s going to get any easier.” That’s reflected in some of the mind-blowing numbers from the Kaufman Hall report:

• 11 transactions involve sellers with net revenues of $1 billion or greater, representing the largest number of mega-deals ever recorded.

• The largest regional health system transaction announced was the merger of Advocate Health Care and Aurora Health Care, which would have combined revenue of nearly $11 billion and create the 10th largest not-for-profit hospital system in the country.

• 32 percent of 2017 sale transactions involved for-profit divestitures, driven mostly by Community Health Systems (10 transactions including 23 hospitals), Quorum (six transactions including eight hospitals) and Tenet (three transactions including seven hospitals)

• Pennsylvania (14 deals), Georgia (nine deals) and Texas (eight deals) were the most active states in terms of mergers and acquisitions in 2017.

High-quality physician leadership is central to the success of any joint venture. Leaders will be required to bring about engagement and alignment among practitioners amid new technologies and changing reimbursement structures, primary drivers of the trend. At the same time, physician leaders must keep their organization’s focus on ensuring these new partnerships add value to patient care.

Karen Weiner

“As many hospitals and health systems have no doubt experienced first-hand, if you do not have the support and buy-in from front-line physicians, the project is likely to be, at best, very rocky, and at worst, unsuccessful,” says Karen Weiner, MD, MMM, CPE, chief executive officer of the Oregon Medical Group, based in Eugene. “Competent and thoughtful physician leadership is essential to helping front-line doctors see the value in a merger, assuming that the value-add for patient care actually exists.”

Physician leaders must be acutely aware of the forces unique to their markets, Weiner says.

They need to “be able to articulate their organization’s mission, vision and values authentically, be able to identify like-minded entities, build collaborative relationships and leverage those relationships to their organization’s and to their patients’ advantage.”

An important piece of the puzzle is the pace of innovation and technological expansion. Mergers and acquisitions are sparking an increase in EHR transitions that physician leaders must navigate.

“Information technology is a singularly vital factor facilitating mega-mergers” because until recently, it simply was not possible to obtain and analyze the quantities of patient and provider data needed to meaningfully manage population health – clinically and financially,” Wolfson says.

That’s where limited resources come in.

“The average hospital today is still really struggling with IT resources, says Joseph Kim, MD, MPH, MBA, the president of Q Synthesis LLC, a health IT consultancy. “You’ve got the leaders out there - the Geisingers, the Intermountains and the partners of the world that have very, very robust IT infrastructure, staffing support – they’re the exception,” Kim says.

“So with that in mind, I think that those that have limited resources are kind of waiting to get acquired, and they’re probably having active discussions about it. I think most of them, they may not admit it, but I think they are probably thinking that they are eventually going to get acquired or merge and that will then allow them to unify as well as to enhance their systems.

Adds Weiner: “A high-quality EHR, population-health management software, point-of-care tech support and interoperability are just a few examples of the technology needed to thrive in this new environment. These are expensive resources, likely helping to drive medical groups to begin the search for strategic partnerships.”

Jay Wolfson

Wolfson says there are two major categories of transactions occurring: those involving large, corporate health and health-related entities, such as the CVS-Aetna arrangement; and those involving various sized physician and institutional acquisition/management companies.

Practicing physicians take a hit in both areas, Wolfson says. And medical groups will feel the effects more than others, Studer adds.

“When you look at their P&Ls [profit and loss statements], what department might be losing the most money? … The medical group,” Studer says. “For a merger to work, one of the things that’s going to get a lot of attention is the medical group – and that can be real good, or that can be real painful.”

A 2017 study by AMGA Consulting on medical group operations showed a continuing increase in cost pressures and revenues that limit growth. The operating loss per physician increased from 10 percent of net revenue in 2016 to 17.5 percent in a 2017 survey. Total losses per physician during this two-year period went from $95,138 to $140,856 per physician at the median.

“I think the mergers are going to put a lot of pressure on the medical groups on things like productivity, things like delivery model, but it could be also good,” Studer says. “But they’ll probably look more at extenders, they’ll look more a telemedicine, and something that I wouldn’t do unless you’re financially forced to do.”

Rick Mayer is a senior editor for the American Association for Physician Leadership.