Dead, de­layed, done

Failed merger ef­forts re­flect in­creased ac­tiv­ity

Modern Healthcare - - THE WEEK IN HEALTHCARE - Me­lanie Evans

Abold plan to merge two large Michi­gan health sys­tems col­lapsed last week. It was just the lat­est one to fiz­zle among big hos­pi­tal op­er­a­tors look­ing to get big­ger in trans­ac­tions that might have been far-fetched just a few years ago.

It was Henry Ford Health Sys­tem’s board that ended the Detroit-based sys­tem’s talks with sub­ur­ban com­peti­tor Beau­mont Health Sys­tem, based in Royal Oak. Ne­go­tia­tors had al­ready missed one dead­line, Crain’s Detroit Busi­ness re­ported. Talks fell apart af­ter Beau­mont’s lead­ers balked at the orig­i­nal terms, Henry Ford’s chief ex­ec­u­tive said in a state­ment an­nounc­ing the deal was dead.

The news fol­lows the dis­in­te­gra­tion of pos­si­ble deals in the Mid­west and Pa­cific North­west in re­cent weeks and more suc­cess­ful ef­forts this year that joined mul­ti­hos­pi­tal sys­tems, in­clud­ing the mega-merger of Catholic Health East and Trin­ity Health.

The deal mak­ing be­tween re­gional and national heavy­weights un­der­scores the ma­neu­ver­ing across the in­dus­try as in­sur­ers, hos­pi­tals and med­i­cal groups ad­just to his­toric changes to reg­u­la­tion and mar­kets amid in­tense pres­sure to cut costs.

Failed deals are a symp­tom of the de­gree of ac­tiv­ity and, in some cases, the will­ing­ness to en­ter­tain un­likely com­bi­na­tions.

PeaceHealth, a sys­tem with eight hos­pi­tals in Ore­gon, Wash­ing­ton and Alaska, sought to merge with Catholic Health Ini­tia­tives’ sev­en­hos­pi­tal Pa­cific North­west di­vi­sion un­der a new com­pany. “We knew it was bold,” said Peter Adler, chief strat­egy of­fi­cer for PeaceHealth.

The pro­posal—an­nounced in Au­gust and sus­pended in April—arose as an op­por­tu­nity that fit within PeaceHealth’s strate­gic plan to try to bet­ter in­te­grate care and lower costs, he said. Last week, PeaceHealth un­veiled an agree­ment with Univer­sity of Wash­ing­ton Medicine that will di­rect re­fer­rals be­tween the or­ga­ni­za­tions.

“A lot of th­ese are not go­ing to work out,” said Toby Singer, a health­care at­tor­ney who spe­cial­izes in health­care merg­ers and an­titrust with Jones Day in Wash­ing­ton. That’s not be­cause the rate at which deals fall apart has in­creased. In­stead, more in­ter­est and more ne­go­ti­a­tions will lead to more suc­cess­ful— and un­suc­cess­ful—deals, she said.

Prospec­tive part­ners be­gin the work ham­mer­ing out crit­i­cal merger de­tails with lit­tle in­for­ma­tion about each other. Only dur­ing ne­go­ti­a­tions do gov­ern­ing boards and ex­ec­u­tives dis­cover enough about the oth­ers’ cul­ture and op­er­a­tions to make an in­formed de­ci­sion. Pub­lic reaction once the deal is an­nounced may also in­flu­ence progress.

“It’s a won­der that any­thing ever gets done,” Singer said. None­the­less, the pace of deals be­tween mul­ti­hos­pi­tal sys­tems ap­pears to have ac­cel­er­ated, she said.

Health re­form cre­ates a greater need for cap­i­tal, and larger, more ge­o­graph­i­cally di­verse sys­tems may be able to bor­row more cheaply to fund cap­i­tal in­vest­ments, Singer said.

Of­fi­cials with Catholic Health Ini­tia­tives are con­sid­er­ing deals that they might have pre­vi­ously over­looked. The com­pany is po­si­tion­ing it­self to bet­ter man­age pop­u­la­tion health and pre­pare for more fi­nan­cial risk un­der new pay­ment con-

tracts with in­sur­ers and em­ploy­ers, said John DiCola, the En­gle­wood, Colo.-based sys­tem’s se­nior vice pres­i­dent of strat­egy and busi­ness de­vel­op­ment. One-quar­ter of the sys­tem’s cap­i­tal bud­get this year is al­lo­cated to strate­gic growth and joint op­er­at­ing agree­ments.

The in­vest­ment needed to vet pos­si­ble deals varies by com­plex­ity of the trans­ac­tion. “If you’re se­ri­ous about it, you make the in­vest­ment,” DiCola said. “Hope­fully, it works out.”

It did not in Detroit, where cul­tural dif­fer­ences scut­tled a deal even af­ter gov­ern­ing boards agreed to con­tinue past an orig­i­nal dead­line, Crain’s Detroit Busi­ness re­ported, not­ing that clin­i­cal lead­ers at Beau­mont asked the sys­tem’s board to re­con­sider merg­ing with Henry Ford. The sys­tems’ ex­ec­u­tives de­clined to be in­ter­viewed.

The Detroit dealmak­ers are not the only prospec­tive part­ners to meet with delays.

Talks con­tinue be­tween Scott & White Health­care, Tem­ple, Texas, and Bay­lor Health Care Sys­tem, Dal­las, af­ter their ini­tial ex­ploratory agree­ment signed in De­cem­ber ex­pired at the end of April. The po­ten­tial part­ners’ chief ex­ec­u­tives, Joel Al­li­son of Bay­lor and Dr. Robert Pryor of Scott & White, said in a joint state­ment the large re­gional sys­tems “con­tinue to con­fi­dently move for­ward with the in­tent of merg­ing our two or­ga­ni­za­tions.” The state­ment called the orig­i­nal timeline “ag­gres­sive.”

Larger might not mean less costly if grow­ing health sys­tems gain mar­ket lever­age. Dr. Robert Beren­son, an Ur­ban In­sti­tute se­nior fel­low, said that can be true of merg­ers that do not con­sol­i­date ri­val hos­pi­tals with over­lap­ping mar­kets. The merged sys­tem can gain lever­age with in­sur­ers that have cus­tomers scat­tered across the new or­ga­ni­za­tion’s com­bined foot­print. “I think the proof is on them to demon­strate there’s some ef­fi­ciency to be­ing a mega-sys­tem in­stead of just a large sys­tem,” Beren­son said.

Heav­ily con­sol­i­dated hos­pi­tal mar­kets, such as those in Min­nesota, may next see a run of deals be­tween in­sur­ers and health sys­tems, said Roger Feld­man, pro­fes­sor of health pol­icy and man­age­ment at the Univer­sity of Min­nesota. That’s be­cause merg­ers be­tween al­ready domi- nant hos­pi­tal op­er­a­tors could draw an­titrust scru­tiny, he said. Hos­pi­tals in deals with in­sur­ers will gain valu­able ex­per­tise as new ap­proaches to pay­ment re­quire hos­pi­tals to be­have more like health plans, he said.

A Jan­uary deal that com­bined Park Ni­col­let Health Ser­vices, St. Louis Park, Minn., and HealthPart­ners, Bloom­ing­ton, Minn., did ex­actly that for Park Ni­col­let. HealthPart­ners, which owns three hos­pi­tals, also op­er­ates an in­surer. “I think that’s where we’re headed,” Feld­man said.

AP PHOTO

Beau­mont CEO Gene Michal­ski and Henry Ford CEO Nancy Sch­licht­ing an­nounced the sys­tems’ merger talks last Oc­to­ber.

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