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January 23, 2012

Catholic Healthcare West Drops Church Affiliation

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In a move I wouldn’t be surprised to see imitated, big religious hospital chain Catholic Healthcare West has broken its official ties with the Roman Catholic Church, though it will continue to include both Catholic and non-Catholic facilities in its flock.   The chain, which is changing its name to Dignity Health, currently includes 15 non-Catholic hospitals and 25 Catholic hospitals.

The system’s leaders have concluded that they couldn’t meet their ambitious growth targets if forced to adhere to faith-based care guidelines in all of its facilities.

According to CEO and president Lloyd Dean, who spoke to USA Today, he’s had to step away from potential deals several times when partners questioned their role in a Catholic system. This way, it should be much easier for CHW to work with other systems and acquire medical practices, observers say.

I expect to see other faith-based chains consider similar moves over the next year or two. As we’ve noted in this forum before, having to adhere to religiously-based rules can be a bit of a hassle for secular organizations, especially those that hope to compete in tight markets.  Mergers between the two sides can become a Tylenol headache very quickly.

Consider the struggles the University of Louisville (KY) went through in an effort to merge with Catholic-owned St. Mary’s Healthcare, forcing it propose build a “hospital in a hospital” to provide forbidden services. It makes my eyes water just to think about it. With health reform afoot, mergers a fact of life and new partnership models emerging every day, CHW may have done the only thing it could do.

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December 19, 2011

Small-Hospital Mergers A Signal That Crisis Is Upon Us

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If you’re wondering how healthy an industry is, look at how many smaller players are selling out. And if the smaller players are bailing like rats from the proverbial ship, consider that industry to be in crisis. That’s my theory, anyway. Read on and see if you agree.

You know, when I watched Community Health Systems and HCA and Tenet doing their little dances on the catwalk a few years ago, tendering offers and buying up sinking ships, I thought hey, that’s what big chains do. Didn’t register much.

One year ago, when I watched VC firm Cerberus Capital Management pick up Boston’s Caritas Christi chain, I saw signs of hospital desperation. After all, VC firms don’t sink their money into companies that offer a small, predictable return;  in this case, they acquired financially distressed properties with a very substantial upside.

So, what of this year?  Merger mania continues $7.3 billion of total healthcare-related M&A this year. (For more background, check out this hospital M&A list from business information provider Hoover’s. It’s been a wild year, and next year is likely to keep up the pace.

I’m not really surprised by the merger mess, and I doubt you are either. After all, hospitals have been running at minimal or even negative margins for many years, and now that health reform is breathing down everyone’s necks the pressure is climbing. The question is what this means for the industry.

Consider that one John Reiboldt of investment bank Coker Capital Advisers called the single stand-alone hospital a “concept of the past” at this year’s HIMSS event. Even if he’s wrong — or ahead of himself — the folks in his industry  are clearly poised to strike. And they’ll be making offers beleaguered single- and small-chain hospitals can’t refuse, capice?

November 21, 2011

Hospital Strategic Partnerships Avoid Mergers, But Create Other Pain Points

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This is one of those periods in health biz history when M&A looks especially attractive.  What CEO wouldn’t give a second thought to getting acquired and picking up a bundle of cash when they’re struggling to survive?

In fact, one attorney with a national health care law firm argues that that as many as 50 to 60 percent of doctors and hospitals are looking for partnership opportunities of late, in part because health reform encourages consolidation.

The question is whether the institutions can put aside their differences long enough to talk business — particularly if they have dueling missions (such as religious charity vs. profit). Not only that, it’s not clear whether partnerships will meet their needs for long, as we’ll discuss below.

Given their druthers, many institutions would prefer to stick it out on their own and do things their own way. And despite the urge to merge, many hospitals are keeping their independence through strategic partnerships, notes Becker’s Hospital Review.

It’s hard to argue that partnerships can have their advantages, as the Becker’s piece notes. Hospitals can cut overhead costs by sharing services and staffing, while expanding on their local reach and adding services they might lack.

Partners can also come together to shore up specific service lines without having to invest heavily on their own. That was the purpose of a recent agreement between Saint Vincent Health Center in Erie, PA and the Cleveland Clinic, which are teaming to further boost the reputation of their already high-profile organizations in cardiac and neurological services, according to the Becker’s piece.

And hospital partners can save big bucks by rolling out the all-but-mandatory EMR system together, too.  Not only do the hospitals save bucks on staffing and technical expenses, they also end up sharing clinical data by default. Ideally, they’ll provide higher-quality care and save money by avoiding duplicate services.

Hospital partnerships may make it easier to build an effective Accountable Care Organization, too. After all, it’s easier to share data and coordinate treatment if you already have a trusting relationship in place, particularly if you’re already integrated clinically.

That being said, partnership building comes with its own set of frustrations. Take last year’s relationship struck by Reston, WA-based Providence Health & Services and Seattle-based Swedish Health Services.

To get along, the two parties had to set up a complicated structure letting Providence’s 27 hospitals keep their Catholic mission, while the five Swedish hospitals stayed non-religious. The two will work together using the Epic EMR to work together on shared best practices and population health.

And that’s far from their biggest headache. Ultimately, hospitals won’t save the kind of money they’d like to save, nor build new business the way they’d hope to, without completing a real merger. At that point, things can get expensive and even more complicated, as individual IDNs or facilities fight to keep key partners of their strategy in place.

Meanwhile, the hospitals in question may find that merging doesn’t meet regulatory approval. Hey, look at what happened when ProMedica Health System of Toledo and nearby St. Luke’s Hospital decided to get hitched. The $1.7B ProMedica chain, has 11 hospitals in Ohio and Michigan, came riding to the financially-ailing St. Luke’s rescue with a $35 million investment in August 2010.

Since then, though, the FTC has cracked down hard on ProMedica, arguing that the deal unfairly monopolizes the Toledo market,  in particularly by raising its share of the inpatient obstetrical services market to 80 percent. (Hey, ask your friendly editor and I have to admit that the FTC’s argument has some merit.)

So, where can hospitals turn if they want to thread their way through the current hospital business climate?

Well, at least one model — promoted by organizations like Paradigm Physician Partners and the LHP Hospital Group — have rolled out a model in which, as privately held companies, they form joint ventures with and sink capital into non-profit hospitals and health systems. LHP, which holds joint interest in some or all of the hospital’s operations through an LLC,  recently closed a deal with Pocatello, ID-based Portneuf Medical Center.

I predict that hospitals will find new ways to take in investment without giving up equity or their non-profit status. If new models pop up on my viewscreen I’ll let you know — I think this’ll be a hot new transaction strategy.

 

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November 14, 2011

Hospitals play unfair games with Medicare observation status

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Most hospital visitors don’t care a whole lot whether they’re classed as inpatients or outpatients  — unless it affects the size of their bill. But lately, many patients are getting hit with unexpected fees after spending days in a hospital, thanks to tricks hospitals are playing in an effort to lower their readmission rate numbers, a newly-filed lawsuit contends.

These days, hospitals are under intense pressure to lower readmission rates, as such rates figure into their ratings on various types of quality scales.  In some cases, of course, they have no direct control of this number, as readmissions often have far more to do with the care they receive from community physicians and their willingness to comply with discharge instructions.

But ever-resourceful administrators have found a loophole that allows them to rejigger the admissions numbers. Under Medicare rules, they’re allowed to keep patients on “observation status,” deliver care and let patients go without ever classing them as inpatients. All of which might be well and good, except that if patients are in a hospital for days, they rack up a big bill — one they’re expected to pay far more of if the visit is billed as outpatient care under Medicare Part B.

Even more delightful for these patients, the fact that they haven’t logged three or more “real” inpatient days means that Medicare won’t pay for follow-up in a skilled nursing facility after discharge. So seniors either do without, or end up having the state pay through Medicaid.

Nice way to look out for patients, guys. Being old and sick and scared isn’t bad enough; now seniors have to wonder if their hospital costs are paid for even with Medicare coverage in place.

With this kind of mumblety-peg becoming fairly common, a consumer group called Center for Medicare Advocacy has filed a lawsuit to call a halt to the fun. The group is asking CMS to simply end observation status as a billable category.

While I sympathize with hospitals to some degree, who are also hoping to dodge scrutiny from the RECs by avoiding inpatient claim reviews, setting up seniors for high costs by playing unfair games is bad for you, the industry and the patient. Cut it out.

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August 31, 2011

Adding mini-hospital resolves clash between religious, secular facilities

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As secular, for-profit hospital chains merge with rule-bound religious facilities, patients are facing restrictions on their care that they hadn’t faced before. While for-profit hospitals will perform virtually any legal medical procedure, hospitals owned by religious institutions often impose faith-based limits on the treatments they will offer, with some refusing to provide services like emergency contraception for rape victims, vasectomies or tubal ligations.

However, one Louisville, KY based hospital may have found a compromise that could sidestep the issues entirely. The University of Louisville, which is poised to merge with Catholic-owned St. Mary’s Healthcare, plans to build what it calls a “hospital within a hospital” within St. Mary’s. The mini-hospital, which should cost about $15 million, will provide services that St. Mary’s will not.

U of L officials admit that building the special unit won’t be easy. For one thing, the university will have to get a separate hospital operating license for the unit, and hire a new group of employees.  Not only that, the tension between what the mini-hospital is doing and what St. Mary’s will permit will inevitably be something of a distraction.

Some critics, including state Attorney General Jack Conway, argue that the merger may not be such a good idea if U of L has to spend $15 million just to make it happen. After all, they note, the same $15 million could be used to pay for the care of the poor and uninsured.

As I see it, though, these objections are mostly posturing. The reality is that conflicts like this will crop up across the U.S., as there’s no end in sight to the country’s massive wave of hospital mergers.

I’m glad to see that U of L might have found a way of resolving its differences with St. Mary’s without the two sides coming to blows. Sure, it may be a bit messy, but if it allows the hospitals to pool their resources effectively, I hope other hospital dealmakers will consider this approach.  Building the hospital-within-a-hospital is certainly better then letting the issue fester.

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August 29, 2011

FTC: This Merger Looks So Good, It Has To Be Illegal

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If you’re as cynical as I am, it’s not hard to take a certain amusement in the goings-on in Toledo over the merger between an aggressive for-profit hospital chain and a suburban not-for-profit.

Over the past few months, the Federal Trade Commission seems to have developed a passionate interest in the merger between a formerly Lutheran-owned non-profit, St. Luke’s Hospital of Maumee, OH and ProMedica Health System of Toledo. ProMedica, which owns 11 hospitals in Ohio and Michigan — including four in the Toledo metro — is a swaggering giant with $1.7 billion in annual revenue.

What a sweet deal it was for ProMedica. According to Moody’s, the facility had very little debt ($8.3 million) and 412 percent cash-to-debt coverage as of November 30, 2009 (recently enough to matter).

Sure, as of early 2010 St. Luke’s had an operating cash flow deficiency of -2.0 percent and -9.8 percent operating margin, and at least according to Moody’s, had cut some cut-rate contracts with payors accounting for 22 percent of its operating revenues.

On the other hand, its miserably weak competitive market position which, as Moody’s noted in its downgrade report, included clashes with ProMedica, went away with the stroke of a pen when the two consummated their agreement. ProMedica sweeps in with its Aa3-rated borrowing capacity, invests a relatively slim $35 million and picks up the 10 percent market share SLH held at the time. I don’t know what 10 percent of the market is worth, but that has to be a fire sale.

Dig this if you can, cats and kittens:  According to the FTC,  the deal increases ProMedica’s market share in Toledo to 58 percent of inpatient services and (get this) 80 percent of high-margin inpatient OB services. Wow… Small wonder the FTC smells a rat.

Of course, in the sort of excess of confidence you always see in these deals, ProMedica’s executives are pretending the deal was good for the public and stuff.  I don’t know about you, but I find the following comment (made by ProMedica CEO Randy Oostra to the New York Times) to be preposterous:

“We could coordinate care,” Mr. Oostra said. “We could improve quality at St. Luke’s by adopting electronic health records and using clinical protocols to standardize the delivery of care. But the F.T.C. has stopped us in our tracks.” 

OK, let me get this straight, Mr. Oostra. You could only connect with St. Luke’s by buying it and forcing your EHR down its throat (after all, we know you’re not going to put St. Luke’s on Cerner if you use Epic)? You’re buying a hospital with tremendous upside largely because you think you can standardize care — because that will, of course, increase effectiveness and lower prices?  Oh, and as far as sharing data and coordinating care: have you ever heard of a health information network? Or an Accountable Care Organization?

Really, sir, if you want to impress the FTC with the public benefits of your transaction, you’re going to have to try a little harder. If you’re already phoning it in, to the Times no less, you’re not just arrogant, you’re stupid.

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August 21, 2011

Illinois hospitals shocked, I tell you, shocked at losing non-profit status

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For years now, legislators have been threatening and posturing over the issue of just how much charity care a non-profit hospital needs to provide to maintain their tax-free status.

In prior years, Sen. Chuck Grassley (R-Iowa) struck fear in the hearts of hospital execs when he toyed with pushing through rules demanding that non-profits dedicate 5 percent of revenues to charity care. To my knowledge, the issue isn’t in play on the Hill right now, though it isn’t dead either.

Since angry comments by Grassley haven’t been making headlines for some time, charity hospitals must have that they were pretty much in in the clear for the moment.

Imagine the dismay a trio of Illinois non-profits must have felt with the state Department of Revenue yanked their property tax exemptions earlier this week.

The ruling, which affects Prentice Women’s at Northwestern Memorial Hospital in Chicago; Edward Hospital in Naperville and Decatur Memorial Hospital, found that the properties weren’t being used for charitable purposes. If upheld, the ruling could cost the hospitals millions in property taxes.

The decision follows another slam in March 2010, when the state Supreme Court upheld a decision by the Department of Revenue rescinding the non-profit status of a hospital which spent 0.7 percent on charity care.

According to hospital records,  Northwestern spent 1.85 percent, Edward 1.04 percent and Decature 0.96 percent on charity care.

You know, if you’d been paying attention, guys, the pattern is pretty clear. Spend much below 2 percent of revenues on charity care,  you have a target on your head. Maybe you won’t get targeted now, but have no doubt that next time a politician gets hot and bothered over charity care your name will pop up.

And if you think you can beat the rap, consider the Provena Covenant case. The revenue department killed hospital’s property tax exemption in 2004, after noting that it had provide charity care to less than one-half of 1 percent of patients served in 2002. Come on, now.  Even my eight year old could have seen that one coming.

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May 2, 2011

Takes from Twitter: Intriguing hospital tidbits

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Here’s some hospital updates from the ever-flowing well of Twitterchat.  I’m not endorsing the tweeters in question, but I was intrigued by these tidbits:

@EFS_Consultants Medical Wonder: Meet The CEO Who Rebuilt A Crumbling California Hospital http://ow.ly/1csdwz

@Stanford: HP pledges $25 million to help Lucile Packard Children’s Hospital carry out a major expansion and conduct new research: http://bit.ly/iWDh0K

@nicolebrown25  Lawmakers weigh report on New Orleans hospital: The state has committed $300 million in construction money http://bit.ly/ii0YCC

@anesthesiology2 10 Recent Stark, False Claims and Kickback Lawsuits Involving Hospitals http://bit.ly/kCyODY

@TheAuditGroup Four Hospital Action Items for 2011 http://t.co/qB1lRvs

@Voicemed: 12 Best Practices for Making Hospitals Great Places to Work http://t.co/qFoKPKu

@HospitalLayoffs #Hospital #Jobs Hospital Mass Layoffs Dropped Slightly in First Quarter http://ow.ly/1crPlh

 

Gotmore info to share?  Tweet me at @katherinerourke and I’ll take a look.

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April 30, 2011

Hospital merger mania on the rise across the U.S.

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As I reported a few days ago, hospital mergers and acquisitions hit a historic high last year.  This is shaping up to be a pretty frenzied year for hospital M&A as well.  In fact, this may be the year that hospitals see a historic change in how they’re managed and they define themselves.

How much merger activity will we see?  At the HIMSS11 event earlier this year, John Reiboldt of Coker Capital Advisers suggested that the single stand-alone hospital may be a “concept of the past.”

While the comment by Reiboldt may have been a bit tongue-in-cheek, it’s clear that many smaller hospitals and health systems are giving up long-held independence in an effort to survive.

What’s more, such deals seem to be getting a friendlier reception from the Department of Justice and the FTC, which revised its Horizontal Merger Guidelines in August of last year.

A few randomly chosen examples of regional mergers underway:

* The merger between Albany-based  St. Peter’s Health Care Services, Northeast Health and Seton Health/St. Mary’s Hospital is should close shortly.  After three years of talks, the three entities have gotten the FTC’s blessing to move ahead.

*Alongside of its massive effort to acquire Tenet, Community Health Systems has signed a definitive agreement to acquire Mercy Health Partners, a three-hospital system based in northern Pennsylvania.

* Peoria, IL-based OSF Healthcare may absorb Rockford (IL)  Healthcare System, despite some degree of public hostility to the proposal (and complaints from rival SwedishAmerican Health System.

I see no reason why this consolidation should slow down this year, particularly as reform deadlines grow closer. And I fully anticipate that hospital mergers will create a ripple effect that tips other industries into new formers of cooperation.  Fasten your seat belts — this year is proving to be a wild ride.

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April 18, 2011

Google takes over hospital industry, CMS in private leveraged buyout

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Read the headline?  Those are things that just aren’t going to happen, right?

Well, I’m pretty sure the things that we can expect for the next few years will end up looking just about that strange when we read about them a decade later.

My personal faves are a) Accountable care organizations dominate U.S. healthcare system, b) Most hospitals are connected to doctors via EMR and c)  Emergency departments no longer swamped with uninsured patients.

Anyone else want to volunteer “future headlines” — stuff that might come true but seems impossible at the moment? Or stuff that should happen but just can’t?  Sarcastic or serious, your choice.

So, you got your crystal ball out?  I’ll publish all of your predictions, crazy or not. :-)

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