There has been a significant wave of health care provider consolidation driven by the desire to achieve scale in response to declining patient volumes and reimbursement, increasing costs, health care reform and the need for capital to implement improvements in the delivery of care, development/expansion of their physician networks and to make needed upgrades in IT, especially electronic medical records. The steady growth in hospital M&A activity since 2009 with nearly 100 transactions completed during 2013[1] is expected to continue.[2] Experts agree that hospitals that merge “gain valuable leverage in negotiating for insurance contracts, product pricing and talent recruiting as well as assuming more control over emerging accountable care organizations.”[3]
Troubled health care providers have been taking advantage of this trend of horizontal consolidation by affiliating with other stronger providers (see for example the successful bankruptcy sales of Casa Grande Regional Medical Center, Forum Health, Saint Francis Hospital, etc.) and this wave of consolidation has led many boards to the conclusion that their best chance to save their mission is by affiliating with a stronger provider.
At the same time there is another wave of consolidation led by health plans that are pursuing vertical integration both to control their costs and manage population health. Health plans are also reacting to the increasing strength of physician networks. In fact, many health plans are actively acquiring physician practices. This trend may lead to a natural extension into the integrated health system as the next wave of integration.
When assessing potential exit strategies, a distressed health care provider should consider merging with (or being acquired by) an insurance company that provides health coverage in their service territory.
One notable example of the successful use of this strategy is the recent creation of the Allegheny Health Network, by Highmark Inc., a national diversified health and wellness company based in Pittsburgh. Highmark serves 35.2 million people across the United States through its businesses in health insurance, dental insurance, vision care, information technology and integrated health care delivery. The company, which has approximately 20,000 employees, is among the largest health insurers in the U.S. and the fourth-largest Blue Cross and Blue Shield-affiliated company. Most importantly, Highmark operates health plans in Pennsylvania, Delaware and West Virginia that serve 5.2 million members.[4]
One Notable Example
Before the creation of the Allegheny Health Network, West Penn Allegheny Health System (West Penn) was a large ($1.5 billion net patient revenue), independent, financially distressed five-hospital health care system that employed over 500 physicians and 10,000 people . West Penn was spun out of the troubled Allegheny Health, Education and Research Foundation (AHERF) in the late 1990s and has been viewed as under stress or in distress for a number of years.
West Penn had struggled financially for years as a result of overleverage, declining utilization and reimbursement coupled with increasing costs. Its management had undertaken numerous failed restructuring initiatives, cost cutting initiatives, reducing service offerings and deferring critical capital investments. They even went so far as to close the emergency department and cardiac care unit at Western Pennsylvania Hospital in Pittsburgh in a failed attempt to retain patient volumes (and revenue) while reducing costs. The system also needed significant capital investment in order to provide competitive, state-of-the-art care, fix its troubled physician provider organization and invest in its IT systems.
West Penn was one of two health systems dominating health care in western Pennsylvania. Its primary competitor, the University of Pittsburgh Medical Center (UPMC) had captured an increasing share of the market, while West Penn struggled. UPMC had also diversified into the health insurance market and offered its own health plan to compete with Highmark, the dominant insurer in the area. As West Penn’s struggles continued, it became clear that WPAHS would require a partner in order to survive.
A common solution for a distressed hospital system facing these challenges would have been to find an acquirer and utilize the bankruptcy process to maximize creditor recoveries and allow the acquirer to minimize its exposure to pre-bankruptcy liabilities. Oftentimes, the potential acquirer willing to pay the highest price and provide creditors the best recovery is a for profit system.
Highmark recognized that it had the opportunity to create an integrated delivery network thereby avoiding the risk that West Penn might fail allowing UPMC to exercise monopolistic power in the region.
On June 28, 2011, West Penn announced its intention to pursue an affiliation with Highmark. On October 31, 2011, an affiliation agreement was executed pursuant to which Highmark and WPAHS would work together to establish a new integrated health system to improve quality and access to health care and to reduce the cost of care in western Pennsylvania. After a lengthy review process by the Pennsylvania Insurance Department, this transaction was approved on April 29, 2013, and closed shortly thereafter.
Between March 2013 and July 2013, Highmark also acquired two community hospitals, Jefferson Regional Medical Center, and St. Vincent Health System, creating the Allegheny Health Network. Highmark has undertaken numerous other initiatives including creating alliances with hundreds of physicians, developing medical malls and developing insurance products designed to ensure that the right care is delivered at the right time in the right place. The centerpiece of the delivery network is the resuscitated West Penn.
Today, the Allegheny Health Network comprises eight hospitals and employs 17,500 professionals. It has 2,800 employed or aligned physicians, residents and fellows serving 29 counties in Pennsylvania, as well as portions of New York, Ohio and West Virginia. Annually, the health network generates approximately $2.4 billion in revenue through 87,000 discharges.[5]
Each of West Penn’s facilities remains open and has access to needed capital. The communities they serve continue to have access to high quality care at reasonable prices. The system continues to operate as a nonprofit, serving its mission. The risks and costs of bankruptcy have been avoided. West Penn’s role as the centerpiece of the network and the breadth and depth of the integrated delivery network provides a much more stable platform for its continued success in serving its charitable mission.
Conclusion
The Allegheny Health Network provides a model for saving distressed hospitals and systems different from the traditional sale to a competitor or new market entrant.
In seeking out a partner, distressed providers (and even successful providers) should consider broadening their search beyond traditional providers. They should consider expanding their scope to include the possibility of merging with a health plan who may be interested in expanding downstream into providing health care as part of its strategy. At the very least, expanding the pool of potential bidders may increase the level of interest among the other potential acquirers.
Those with a long history in health care may remember the wave of vertical integration in the 1990s that ultimately was not viewed as successful. Many of these earlier examples were driven by the providers and lacked the necessary scale and long term commitment to achieve success. Health plans were generally not viewed favorably by physicians or patients. The entities lacked the broad expertise needed to manage the providers and the insurer. Physicians in the 1990s were generally more independent and less interested in affiliation.
Given the lessons from failed integration attempts in the 1990s and the success of the Allegheny Health Network, when should a struggling hospital or health care system consider being acquired by a health plan?
- Size matters – In order to be an attractive integration candidate the system probably needs to offer the health plan enough scope and scale for the investment of dollars and management attention to make sense.
- Physician Organization – Controlling a physician organization that provides both primary care and specialty services should make a system more attractive to health plans.
- Competitive position – The more important the system is to the delivery of health care in a given service territory, the more attractive it will be to a potential acquirer.
- Local Health Insurance Market – if there is at least one health plan that insures a significant percentage of the potential patients in the system’s service territory this approach is more likely to lead to a successful outcome.
- Integration Risk – Ensuring successful post transaction integration will require attention in many new areas for both acquirer and acquire. Focusing on the need for new skill sets, employee retention, incentive alignment, clinical management and cultural fit will be critical to success.
[1] Herman, Bob, Hospital M&A Activity Grew Slightly in 2013, Becker’s Hospital Review , April 14, 2014
[2] Adamopoulos, Helen, Significant Hospital M&A Activity Likely to Continue This Year, Becker’s Hospital Review , March 27, 2014
[3] Andrews, John. Hospital Consolidation Rising. Healthcare Finance News; March 2013.
[4] Highmark Corporate Profile: https://www.highmark.com/hmk2/about/corpprofile/index.shtml; accessed 4/18/2014
[5] Allegheny Health Network Fast Facts: https://www.alleghenyhealthnetwork.com/pdf/AHN_Fast%20Facts_3-12_for_clients.pdf; accessed 4/18/2014