Pulse
Big and Getting Bigger
What’s behind the latest round of health care mergers?
By Kim Kiser
Orthopedic surgeon Brian Nelson’s practice was by all measures a success. Since it opened in August of 1990, Physicians Neck and Back Clinics had grown to 16 physicians with six clinics in the Twin Cities metro area. “We were doing well, we weren’t under financial pressure,” he explains. “We were not looking to sell. It wasn’t on our agenda.”
So why, then, did the practice sell its assets to HealthPartners in December of 2009? In a word, uncertainty. “We knew health care reform was coming one way or another,” Nelson says. “What’s going to happen in health care reform, virtually by necessity, is that a few people will make some very important decisions. We didn’t feel Physicians Neck and Back was big enough to even have a seat at that table. We don’t have size or political clout. We felt HealthPartners did.”
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Second Time Around
Although the consolidation that took place among hospitals, clinics, and health plans during the mid-1990s led to the creation of some of Minnesota’s largest health systems, the mergers weren’t always tenable arrangements. In some cases, health systems closed clinics just a few years after acquiring them; in others, physicians cut themselves loose after a brief period.
“The major difference between what’s happening now and what happened in the ’90s was that hospitals for the most part demonstrated that they didn’t have a clue how to run physician practices,” says Allan Baumgarten, a Minneapolis health care consultant. “There was a lot of unhappiness about the results of all those acquisitions.”
Peter Person, M.D., president and CEO of Essentia Health in Duluth, was involved in the merger of Duluth Clinic and St. Mary’s Medical Center in 1997. He says the employment model that was used at the time guaranteed physicians income for a certain number of years with no expectations about productivity. In addition, some practices were bought at inflated prices. “The economics were bad,” he explains. The relationship between the physicians and administrators wasn’t good either. “Physicians make great partners,” he says, “but kind of lousy employees.”
So why should the situation be different this time around? “It seems hospitals have learned a lesson about how to do a better job of working with physicians,” Baumgarten says. “That or the physicians think the situation has become so difficult that they have to suck it up and take the best deal they can get.”
Person believes administrators have learned how to better communicate with physicians. When he talks to physicians who work for Essentia, he starts with clinical issues and then moves to administrative and business issues. Another reason he believes the mergers will work better this time around is because they have to. “There’s no getting around it. Health care reform has passed,” he says. “There’s a lot of background noise about whether it will be unfunded or changed legislatively. But most of us who are following it closely don’t think that will happen. There are no other good solutions. … If you’re an administrator and you’re looking to the future, the writing is on the wall.”—K.K.
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Nelson’s clinic isn’t the only one to have reached such a conclusion. A number of smaller physician groups and hospitals have joined recently with larger organizations, touching off a merger trend the likes of which hasn’t been seen since the mid-1990s, when the Clinton administration attempted to overhaul health care. St. Paul Heart Clinic, Camden Physicians, North Country Health Services in Bemidji, and Lakeview Hospital in Stillwater are among others that have merged or signed letters of intent to merge with larger health systems within the last 18 months. “I would say there’s definitely a trend,” says Allan Baumgarten, a Minneapolis health care consultant who publishes annual reviews of the health care markets in 12 states. “I see it here and in markets across the country.”
Unlike in the 1990s, when much of the consolidation involved hospitals and health plans in urban areas purchasing primary care clinics in order to expand their referral base, many of the mergers happening today involve specialty practices and rural providers seeking to join larger groups. Not only that, but entire health systems also are being absorbed. “It’s creating some interesting situations,” Baumgarten says. “The traditional geographic boundaries in health care are eroding.”
Sanford Health, which is based in Sioux Falls, South Dakota, and Fargo, North Dakota, for example, expanded into northwestern Minnesota with its purchase of MeritCare in 2009. It now has 30 hospitals and 111 clinics in six states. Integrity Health Network was formed in 2010 when Northstar Physicians Network and Northland Medical Associates merged. Based in Duluth, the network has 160 primary care and specialty physicians in 40 clinics throughout northern Minnesota and northwestern Wisconsin. Essentia Health, also in Duluth, expanded its reach when it affiliated with Innovis Health in Fargo in 2008.
It now has 17 hospitals and 64 clinics in four states and is expected to grow even larger in the coming year. “Our phone continues to ring,” says Peter Person, M.D., CEO, of Essentia Health. He says Essentia is currently in discussions with one physician group and several small hospitals. “Hospitals and clinics are trying to plot out their future,” he says, and they’re finding that going it alone is no longer an option.
Letter of the Law
Person, who in 1997 was involved in the merger between St. Mary’s Medical Center and Duluth Clinic that created SMDC—one of the components of Essentia Health, says what’s different this time is that health care reform has become law. “The Clinton plan failed, but this is a done deal, and it’s hard to ignore.”
He notes that several provisions in the 2010 Patient Protection and Affordable Care Act are prompting hospitals and clinics to think hard about how they will deliver care in the future. One is the fact that many more people are likely to have health insurance, which could drive up demand for services. Another is a requirement that different payment and delivery models be tested under Medicare—specifically, accountable care organizations (ACOs). Under the ACO model, the details of which have yet to become clear, hospitals and clinics will be asked to work together to provide more integrated, coordinated care and accept risk in exchange for receiving a share of the resulting cost savings.
Person says the reform legislation, increasing competition, and growing financial pressures prompted Essentia, which was created in 2004 as the financial oversight organization for SMDC, to change its purpose and structure. As of September 2010, all of the entities under the Essentia umbrella—SMDC, Innovis Health, and Brainerd Lakes Health in Brainerd—began operating as a single entity. “From a clinical perspective, the reality was we were much better off … using our resources together than trying to replicate them in Brainerd, Detroit Lakes, and Fargo,” he says. “No one wants the oversight model any more. They want Epic [the electronic medical record system], they want telemedicine, they want clinical support, they want technology, they want all the things that will make their ability to provide outstanding care continue.”
Some of the communities served by facilities within the Essentia system are already starting to see changes. For example, Brainerd is now served by three oncologists rather than one. Person adds that they will soon bring more cardiology services to Brainerd and expand electrophysiology in Fargo. “Over time, people will see more services, more comprehensive services, and more opportunity to get care locally,” he says.
Wanting to be able to offer their community more services was one reason why the leaders of North Country Health Services, which consists of a 108-bed hospital, a nursing home, an assisted living facility, a home health agency, and a durable medical equipment company in Bemidji, decided to become part of Sanford Health. “Certainly health care reform was part of the discussion,” says Paul Hanson, president and CEO, “but it really came down to us as an organization asking ourselves, Do we want to grow and develop into a regional player or are we OK with surviving but being a treat-and-transfer center?” In order to become a regional player, North Country needed a network of physicians to provide services and referrals, and money to invest in information systems and other offerings. “We examined the cost of developing an integrated system on our own. But the cost of the physician component alone was prohibitive,” Hanson says.
Because Sanford employed 98 percent of the physicians in the community, North Country approached them and in November 2010 signed a letter of intent to merge. The acquisition of North Country will make Bemidji Sanford’s third hub in Minnesota. In exchange, Sanford will invest $75 million in facilities, services, and technology over the next 10 years. As a result, North Country will gain access to Sanford’s electronic medical record system and be able to expand or add hospital-based services such as interventional cardiology, oncology, orthopedics, and obstetrics/gynecology. “If you don’t have the support of your local physicians for recruiting and retaining specialists, you’re wasting your resources,” Hanson says. “There has to be a relationship with the physicians to make that possible.”
Person agrees. “Hospitals and clinics fighting for patients or services in rural areas doesn’t work,” he says. “The economics of rural health care are such that collaboration is really important.” And, he says, working together is the right thing to do for patients. “I grew up in Morris, Minnesota, and it was hard in the late 50s and early 60s to get comprehensive medical care,” he explains. “Today, our biggest challenges are winter driving and being 50 miles from the nearest physician. Having technology such as telemedicine will make physicians available in smaller communities.”
Is Bigger Better?
Although being part of a larger system can benefit hospitals—and patients—especially in greater Minnesota, Baumgarten also sees a downside. “There’s potential for good and bad,” he says. “Being part of a larger organization can really raise the bar in terms of quality of care, coordination of care, and efficiency,” he says. “On the other hand, large organizations, especially ones that control 40 percent or more of the local market can use that market position to raise their prices almost at will.”
As an example, he cites a study by Paul Ginsburg, director of the Center for Studying Health System Change, a Washington, D.C., policy research organization, that examined how certain provider systems in California used their muscle to drive up prices. Another study by Ginsburg’s group found some hospital organizations in Milwaukee were demanding 200 to 300 percent of Medicare rates in their contracts with health insurers because they had such a large share of the market. That same study found some physician groups in rural Wisconsin were being paid rates that on average were 176 percent higher than Medicare rates because of limited competition.
Baumgarten also questions whether the ACO or shared savings models that are fueling some of the consolidation will actually deliver on their promises. “The idea is that if you are more efficient in providing and coordinating care, and there are savings compared with some benchmark, then the providers will share in the savings. But if you’re already an efficient group, it’s not likely that there will be a lot of savings to share in,” he says, adding that he wonders whether Minnesota health systems, which are already known for their efficiency, will participate in ACO pilot projects because the cost of developing them might outstrip the potential for savings.
No Hidden Downside
Although Brian Nelson admits he and others at Physicians Neck and Back Clinics had trepidation about joining HealthPartners, he doesn’t think small independent clinics and hospitals need to fear consolidation. “We were a small business joining a big corporation. We were worried about whether we would lose our independence, whether they would treat us with respect, whether we would feel crushed like an ant under somebody’s foot,” he says. “It hasn’t been that way at all.”
Nelson says being a part of HealthPartners has brought him and his colleagues more patients. It also has provided them with access to services they didn’t have before such as IT and marketing. In addition, they have been able to offer HealthPartners something it didn’t have before—a fitness approach to treating back pain. “It’s a good example of the whole being greater than the sum of the parts,” he says. ■