Many factors are causing small hospitals to join big health-care systems
It has happened in everything from banking to beer, restaurants to retail chains, media conglomerates to medical device manufacturers. Why would health care be immune from the kind of industry consolidation that is rocking practically every other major industry?
When the accounting and consulting firm of PricewaterhouseCoopers a year ago studied the top health-care industry issues that it felt would dominate 2016, industry consolidation was at the top of the list. For 2017, the uncertainty facing the Affordable Care Act under the new presidential administration tops the chart of issues to watch, but industry consolidation is still in the top 10. “The health industry will continue to consolidate through mergers and acquisitions in 2017,” the latest PwC report states. “The new year also likely will bring an uptick in alternative transactions, such as joint ventures, partnerships, strategic alliances and clinical affiliations.”
“In Indiana, we have about 130 acute-care hospitals,” says Doug Leonard, president of the Indiana Hospital Association, referring to hospitals that offer a broad range of services including an emergency room. There are additional hospitals that have a more specific focus, such as behavioral health, rehabilitation or long-term care.
Of the acute-care hospitals, he says, “A little over half are in systems now, and every year that changes,” as smaller hospitals affiliate with bigger systems. “The last few years there have been four to six every year.”
Why are those hospitals opting to join larger organizations?
“It’s becoming increasingly difficult for a smaller hospital to stay independent,” Leonard explains. It’s harder to recruit talent, including physicians and nurses. Getting access to the capital needed for expansions and upgrades may be more difficult for a small hospital. And they can have a harder time maintaining services in certain clinical areas.
“It’s also difficult to have negotiating clout with insurance companies and managed care companies if you’re a small, single hospital.”
Indeed, he points out, access to the right medical care is a real problem in parts of Indiana, away from the bigger cities where there’s lots of competition and clusters of specialty services. A dozen and a half counties in Indiana have no hospital at all. And in almost a dozen more counties, there’s a single small hospital that no longer provides maternity care, he adds. “They’re no longer delivering babies on an elective basis.”
By joining a larger system, a small hospital just might be able to bring in specialists that were not feasible before. It might gain access to more management and human resources expertise and cutting-edge information technology services. And it might get a better reception in the capital markets as it tries to finance a newer or bigger facility. “One hospital needed a new building but had difficulty getting access to capital,” Leonard points out. “By joining with a system, they’re getting a new building built.”
Consolidation is certainly not a new trend in Northwest Indiana. Back in 2009, for example, Starke Memorial Hospital in Knox merged into the La Porte Regional Health System, which itself had a dozen years earlier become part of what was then called Clarian Health Partners, a growing statewide system now known as Indiana University Health. The next year, La Porte Regional Health System acquired Lakeshore Surgicare, a provider of outpatient orthopedic surgical services.
Then in early 2016, IU Health announced plans to divest an 80 percent share of the La Porte hospital and its smaller sibling in Knox, along with their clinics and physician networks. The acquiring entity was a subsidiary of Community Health Systems, a large for-profit hospital chain based in Tennessee.
The reasons for the 2016 plan mirrored the motivations that brought the Knox and La Porte hospitals into the IU Health fold in the first place. The local hospital leaders said at the time that they sought the Clarian/IU Health connection in order to benefit from shared resources, networking, buying power and physician relationships. And in announcing plans for the Community Health Systems acquisition, they hailed the potential to bring in new technology, improve physician recruitment and construct replacement hospitals in La Porte and Starke counties.
Meanwhile, the Mishawaka-based system known as Franciscan Alliance is very active across Indiana. Among its 14 hospitals are locations in Hammond, Dyer, Crown Point, Munster, Rensselaer and Michigan City. The Catholic system last fall announced a plan to rebrand most of its hospitals to carry some variation of the name Franciscan Health. What were known as Franciscan St. Anthony Health in Crown Point and Michigan City, for example, became Franciscan Health Crown Point and Franciscan Health Michigan City. The two Franciscan St. Margaret Health locations changed to Franciscan Health Hammond and Franciscan Health Dyer.
It is a rebranding, for sure, but more than that, according to its leaders. The more unified brand really underscores the benefits of an integrated, aligned system approach. “It further underscores the combined strength of our system, offering patients and their families a full continuum of high-quality, compassionate care,” Sister Jane Marie Klein, chairwoman of the Franciscan Alliance board of trustees, explained in making the announcement.
According to Kevin Leahy, president and CEO of Franciscan Alliance, “Unified names for each hospital will create broader awareness of our standing as a large, multistate Catholic health-care system with nationally recognized centers of excellence, numerous joint ventures, partnerships and physician relationships.”
All of those attributes, of course, are among the selling points for a hospital system approach. That said, the way the hospitals are now named also reflects the importance of paying attention to the very specific characteristics of each local community, according to Leahy–“assuring that the services we offer and our access point matches ever more closely the needs of the people and communities we serve.”
And that local focus is a vital consideration in the consolidation movement. “There’s always some fear in the local community,” when its independent hospital decides to join a bigger team, Leonard says. With that in mind, the hospitals and their larger affiliation partners put a lot of effort into maintaining a local voice.
“Most of the systems still have local people on their boards or have a local advisory board at least,” Leonard says. “And the systems want to maintain a good relationship with the community, so they try very hard to keep getting local input. Often, the management team stays in place.”
That desire for local control led two Northern Indiana hospitals to take a different consolidation approach. Memorial Hospital of South Bend and Elkhart General Hospital affiliated with one another in late 2011. A few months later they announced that, while they would keep their hospital names, they would operate under a parent structure known as Beacon Health System.
“One of the things that the boards were interested in was maintaining local governance, explains Kreg Gruber, chief operating officer of Beacon. “They’ve been able to achieve that by having local boards populated by local residents and business owners.”
The system itself has a 14-member board, and its initial composition carefully included seven members from each community. In addition, there are still entity-specific boards for the hospitals and the large medical group. Those boards pay attention to local quality considerations and community health issues, while the system board focuses on larger strategic matters and overall system quality.
The system was created from a position of strength and an eye toward the future, Gruber says. “Each organization was strong when we came in,” he says. Bond ratings are one measure of strength–they were solid before and remain that way.
So why combine the two independent hospitals? “We believe we’re seeing good, tangible results from that decision,” Gruber says. “We’ve seen economies of scale in the supply area, purchasing leverage and use of resources, recruiting of physicians.”
For example, before the combination, Gruber says, “Each of the two hospitals was struggling to find neurologists. We were able to put together a neurology group that covers the two hospitals. And we were able to add neurosurgeons to both campuses.”
Another type of situation provided part of the motivation when Bloomington Hospital joined the IU Health system, according to Leonard. Bloomington is home to Indiana University’s biggest campus, and IU Health is strongly affiliated with IU’s medical school in Indianapolis. Bringing Bloomington Hospital into the IU Health system helped pave the way for a plan announced in 2015 to create a regional academic health campus that includes a brand-new IU Health Bloomington hospital. In that way, the affiliation helped bring about not just new facilities, but also new academic opportunities for IU students in Bloomington.
Clearly, there are lots of different reasons why independent hospitals are making the leap toward affiliating with big systems. That said, Leonard notes, “There are a lot of independent Indiana hospitals that are doing very well and will do well for a long time. They have enough critical mass.”
Still, the hospital association president has no reason to believe that the consolidation trend will cease, as the challenges for smaller hospitals remain, along with the potential benefits of affiliation. “I think it’ll continue. There’s nothing I see on the horizon that is going to make it easier for small hospitals.”