Massive Healthcare Consolidation in the PPACA Era
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The Patient Protection and Affordable Care Act of 2010 (PPACA) - regardless of the view one has of the legislation - has created enormous disruption. And with disruption comes enormous opportunity, as well as risk. Many provider organizations (e.g. hospitals and physician groups) have responded to the changing healthcare delivery environment by safety in size through merger and acquisition. Payers are also buying or creating partnerships with hospitals, and hospitals are acquiring other hospitals and physician practices to become gigantic systems. To further complicate matters, PPACA directly supports this mass consolidation with its federally financed mechanism for healthcare delivery: the accountable care organization (ACO). But any attempt to fix healthcare through consolidation - at the expense of fair competition and without ensuring accountability - is destined to fail.

The Patient Protection and Affordable Care Act of 2010 (PPACA) - regardless of the view one has of the legislation - has created enormous disruption. And with disruption comes enormous opportunity, as well as risk. Many provider organizations (e.g. hospitals and physician groups) have responded to the changing healthcare delivery environment by safety in size through merger and acquisition. Payers are also buying or creating partnerships with hospitals, and hospitals are acquiring other hospitals and physician practices to become gigantic systems. To further complicate matters, PPACA directly supports this mass consolidation with its federally financed mechanism for healthcare delivery: the accountable care organization (ACO). But any attempt to fix healthcare through consolidation - at the expense of fair competition and without ensuring accountability - is destined to fail.

Hospital consolidation isn't exactly new. Historically, industry consolidation and attempts to leverage size and scale have been used to stave off competitive threat. In the 1990s, hospitals embarked on massive "affiliations" and buying sprees, scooping up primary care practices as a defensive maneuver against the potential threat of losing the referral base for lucrative specialty services and in anticipation of Hillarycare. Not unlike other mergers or acquisitions across other industries, the failure rate was quite high... frequently due to cultural incompatibility. Hospitals, for the most part, aren't very nimble, and managing an entrepreneurial office practice is very different from managing an employed physician. And this is before we look at the price multiples for the actual purchase.

A recent report by Moody's Investor Services confirms what my company - Numerof & Associates, Inc. - predicted three years ago. Mass consolidation in healthcare delivery is well underway again, and is likely to continue to accelerate.

Some industry observers - including Moody's - erroneously assume that bigger will be more efficient and effective. These kinds of moves, they argue, can enable greater competitiveness as they look to create networks of hospitals and doctors responsible for delivering and coordinating care in large communities at reduced costs.

It sounds good in theory, but is this really the case?

The recent wave of consolidation is likely to see the same fate as the consolidation in the 90s unless better discipline is applied to the hard work of merger/acquisition integration. Getting the deal inked is typically the easy part! But without a clear strategy to fundamentally change the business model, organizations are merely continuing the tradition of defensive adjustments. Size does not conquer all and can make a bad situation worse.

Insurers are dipping their toes in the water, looking to acquire healthcare delivery organizations to gain more control over practice patterns and costs. Toward the end of 2011, United Health Group purchased Monarch, the largest physician group in Orange County California with 2300 members. As another example, Pennsylvania-based insurer Highmark is planning to team up with West Penn Allegheny Health System to compete with UPMC, the large, well-known medical center in Pittsburgh.

Private equity firms have also entered the game. Oak Hill Capital Partners established a partnership with St. Louis based Ascension Health to buy Catholic hospitals around the country. Others are looking to get into the market - sitting on the sidelines, evaluating how the arrangements perform financially.

These are just a few examples of what has become standard throughout the industry. Eventually, these consolidated companies are in danger of becoming "too large to fail", undermining critical competition and the entrepreneurial spirit that drives real innovation in this country. I discuss this in great detail in an April 2011 Heritage Foundation policy paper on ACOs, "Why Accountable Care Organizations won't deliver better health care -- and market innovation will."

In a recent article entitled "ACOs Multiply as Medicare Announces 27 New Ones," Kaiser Health News discusses how consolidation of healthcare through ACOs will create opportunities for lower costs and better outcomes. The Obama administration has passed legislation creating Medicare's Shared Savings Program to further develop and expand the ACO program. The authors suggest that even if PPACA is overturned (or altered) by the Supreme Court, the industry (and Congress) will continue along the path to create more ACOs. They claim that physician groups and hospitals - through "shared information and best practices" - will be financially rewarded based on quality and results, rather than on a straight fee-for-service basis, and that this new organizational model under one umbrella will revolutionize the industry.

Sounds good on paper... but the evidence flies in the face of the claim. Under pressure from the industry, CMS has so watered down its quality outcomes measures that there are few meaningful disincentives for 'never events' (i.e. falls, medication errors, re-admissions, operating on the wrong body part, hospital acquired infections). As an example, there are financial rewards for merely reporting on 33 measures in the first year. In year two, pay-for-performance is introduced for 25 of the 33 measures with benchmarks yet to be defined. In year 3, pay-for-performance kicks in on 32 of the 33 measures.

I still haven't figured out why hospitals expect to get paid to learn how to make their environments safe in the first place... but this is how it's been set up. The more egregious issue is that to be eligible for any savings, participating ACOs need to achieve minimum performance levels (30%) on at least 70% of the items in each of the four domains that these 33 measures sort into. In essence, this represents teaching to the slowest students in the class!

Even if the incentives for ACOs were structured to really make a difference in driving quality outcomes, ACOs themselves represent real issues. Most hospitals apparently recognize the problem and inherent bureaucratic risk. Jonathan Blum, a CMS deputy administrator noted that the majority of the 27 ACOs recently announced are physician-led organizations ... many are physician groups. While CMS sees the ACO train "moving full-speed ahead," the fact that so few healthcare delivery organizations jumped on board (we have thousands of hospitals across the country) suggests that they know something CMS doesn't!

In theory, larger groups could mean greater efficiencies. But large healthcare delivery organizations have generally not been more efficient, integrated or consumer-centered. By encouraging consolidation, the current environment reinforces the negative aspects of the current model - lack of transparency, accountability, and cost effectiveness. ACOs and other consolidation efforts offer no new business model, and simply reduce provider options for the consumer and create behemoth organizations with added layers of complexity... not better outcomes at lower cost. The net result is likely to exacerbate current problems.

In the face of industry change, players must challenge fundamental assumptions about their business models, how they go to market, the types of products and services they offer, the nature of their customer base and the competencies that will be critical to continued success. The consolidation strategy seems like a knee-jerk reaction to the loaded barrel of the PPACA gun, which has payers and providers set directly in its sights. What most healthcare systems, payers and manufacturers don't realize, however, is that the real threat comes from not-in-kind competition. Scale and competitive consolidation that rely on the current business model will only offer temporary respite from the truly disruptive innovation lurking around the corner.

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