Bet­ting on change

Tenet deal with Van­guard shows it’s primed to try ACO ef­fort, new pay­ment model

Modern Healthcare - - COVER STORY - Beth Kutscher

Tenet Health­care Corp.’s $4.3 bil­lion bet on Van­guard Health Sys­tems is about three things: build­ing size and scale, par­tic­u­larly in fast-grow­ing Texas; squeez­ing ad­di­tional rev­enue from Van­guard’s hos­pi­tal and am­bu­la­tory-care port­fo­lio; and be­com­ing a big­ger and bet­ter player in man­aged care and pop­u­la­tion health man­age­ment.

While the first two moves come straight out of any chain’s play­book, the third is a riskier wa­ger. Dal­las-based Tenet wants to be ready for the likely shift from fee-for-ser­vice to pay­ment for out­comes and value un­der health­care re­form. Nashville-based Van­guard, the small­est pub­licly traded hos­pi­tal op­er­a­tor, has been a leader in the ac­count­able care or­ga­ni­za­tion move­ment among in­vestor-owned sys­tems. Van­guard’s Detroit Med­i­cal Cen­ter is one of the CMS’ Pi­o­neer ACOs and was an early par­tic­i­pant in the Acute-Care Episode Demon­stra­tion Pro­ject, a bun­dled pay­ment ini­tia­tive for car­dio­vas­cu­lar and ortho­pe­dic pro­ce­dures. Van­guard also op­er­ates five health plans around the coun­try, cov­er­ing 237,000 lives.

The deal for Van­guard is not only one of the largest deals among in­vestor-owned chains in re­cent years, it also comes af­ter sev­eral years when Tenet had been rel­a­tively quiet on the ac­qui­si­tion front. The chain last year spent just $211 mil­lion on ac­qui­si­tions, ac­cord­ing to its an­nual re­port, all of it on out­pa­tient-care cen­ters, physi­cian prac­tices and boost­ing its rev­enue-cy­cle man­age­ment ca­pa­bil­i­ties. It spent $84 mil­lion the year be­fore.

“In Tenet, you have a com­pany that has fo­cused on or­ganic growth,” said Joe Lupica, the Phoenix-based chair­man of con­sult­ing firm New­point Health­care Ad­vi­sors. “They took them­selves out of the ac­qui­si­tion mar­ket and then ap­proached it very gin­gerly.”

While for-profit sys­tems gen­er­ally have ap­proached the ACO ex­per­i­ment with cau­tion, Tenet’s pro­posed deal for Van­guard is a sign that at least one in­vestor-owned chain is will­ing to bet on al­ter­na­tive pay­ment mod­els, even though there’s no cer­tainty yet that they will de­liver cost sav­ings and qual­ity im­prove­ments. The other ma­jor in­vestor-owned chains, par­tic­u­larly HCA and Com­mu­nity Health Sys­tems, have mostly kept their dis­tance from ACO ef­forts.

“Hos­pi­tals have to be­come ex­perts at risk man­age­ment … build­ing net­works with­out holes,” Lupica said. “We can’t just fo­cus on dots on a map. I think it’s more than ge­og­ra­phy here—it’s about ex­per­tise.”

In an an­a­lyst call to in­tro­duce the deal, Tenet Pres­i­dent and CEO Trevor Fet­ter hailed Van­guard’s ex­per­tise in health plan op­er­a­tions and pop­u­la­tion health as key driv­ers be­hind the ac­qui­si­tion. The deal not only adds hos­pi­tals and new ge­o­graphic mar­kets, but “we will also have a broader ser­vice of­fer­ing be­cause of Van­guard’s health plan op­er­a­tions,” Fet­ter said. It’s ex­pected to close at the end of 2013.

In an in­ter­view, Fet­ter said his com­pany isn’t nec­es­sar­ily look­ing to launch new health plans. But he added that the deal will give Tenet the added ex­per­tise to in­tro­duce more risk-based con­tract­ing, in­clud­ing ACOs.

A num­ber of health sys­tems have an­nounced plans in re­cent months to re-en­ter the health in­sur­ance mar­ket, tak­ing an­other stab at an ex­per­i­ment they had pre­vi­ously tried but aban­doned in the 1980s and ’90s. Sys­tems plan­ning to launch their own health plans in­clude Sut­ter Health, Pied­mont Health­care and Well­Star Health Sys­tem.

Tenet be­gan ex­plor­ing com­mer­cial ACOs early last year, forg­ing re­la­tion­ships with in­sur­ers in­clud­ing Blue Shield of Cal­i­for­nia and Cigna Corp. Those moves put it ahead of its for-profit peers, many of whom—in­clud­ing Com­mu­nity Health Sys­tems, Capella Health­care and Health Man­age­ment As­so­ciates—told Mod­ern Health­care at the time that they were skep­ti­cal that the ACO model would pro­duce the promised ben­e­fits.

Ob­servers say the Van­guard deal, on top of those ear­lier steps, shows Tenet’s in­ter­est in pur­su­ing the ACO model. “That in­di­cated some in­ter­est—this just screams it,” said Bill Melville, an an­a­lyst at HealthLead­ers-In­terS­tudy.

“Van­guard has re­ally been the only one ag­gres­sively par­tic­i­pat­ing in the (Cen­ter for Medi­care and Med­i­caid In­no­va­tion) pro­grams,” said Jeff Gold­smith, pres­i­dent of

Health Fu­tures, which forecasts trends on health ser­vices and tech­nol­ogy.

Gold­smith de­scribed Van­guard’s early par­tic­i­pa­tion in the CMS’ Acute-Care Episode Demon­stra­tion Pro­ject—which it un­der­took at Bap­tist Health Sys­tem in San An­to­nio—as “tremen­dously suc­cess­ful,” par­tic­u­larly in build­ing sup­port within the med­i­cal com­mu­nity. That pro­ject is a bun­dled-pay­ment ini­tia­tive for se­lected car­dio­vas­cu­lar and ortho­pe­dic pro­ce­dures. “It’s chang­ing Van­guard’s im­age in San An­to­nio,” he said.

Tenet, of course, is buy­ing more than good will. It is also buy­ing cov­ered lives in Van­guard’s health plan op­er­a­tions as well as more than three years of ex­per­i­men­ta­tion with new pay­ment mod­els.

As of March 31, Van­guard cov­ered 237,000 lives un­der five man­aged-care plans, ac­cord­ing to the Nashville-based chain’s quar­terly earn­ings re­port. Its health plans for Medi­care, Med­i­caid and dual-el­i­gi­ble ben­e­fi­cia­ries op­er­ate in Arizona, Illi­nois and Michi­gan. It also of­fers plans for com­mer­cial groups in Texas.

Gold­smith, an early critic of ACOs, noted that the move to form them is less about the eco­nomic op­por­tu­ni­ties and more about lay­ing the ground­work for as­sum­ing full cap­i­tated risk if the mar­ket moves in that di­rec­tion. “I think a lot of peo­ple got into ACOs out of de­fense,” he said.

Yet even among the hold­outs, there are signs that in­vestor-owned sys­tems are start­ing to wade into ACO wa­ters, at least on the com­mer­cial side. Last month, HMA said it was form­ing an ACO with Florida Blue, the state’s Blue Cross and Blue Shield com­pany, which would serve pa­tients in Bre­vard County. And in March, Capella said its hos­pi­tals would join the Mis­sion­Point Health Part­ners ACO, part­ner­ing with St. Thomas Health, Nashville, with which it has a sep­a­rate joint ven­ture.

Still, there are some ma­jor ex­cep­tions. April Wortham, an an­a­lyst at HealthLead­ers-In­terS­tudy based in Nashville, said she doesn’t ex­pect the same moves from HCA, the largest in­vestorowned hos­pi­tal chain, which has been rapidly ex­pand­ing its num­ber of emer­gency rooms. “The whole tenet of ac­count­able care is to re­duce emer­gency room use,” she said.

She also didn’t fore­see a change in strat­egy at Com­mu­nity Health Sys­tems. In an in­ter­view last year, Com­mu­nity Pres­i­dent and CEO Wayne Smith, a vet­eran of in­sur­ance gi­ant Hu­mana, said “there’s no em­pir­i­cal ev­i­dence that (ACOs) are sav­ing money.”

Wortham said, “It may be that it works in some mar­kets and it doesn’t nec­es­sar­ily work in oth­ers.”

Melville said Van­guard’s par­tic­i­pa­tion in the CMS pro­gram in San An­to­nio helps it com­pete against HCA, the largest player in that mar­ket. In Arizona, Van­guard’s Phoenix Health Plan had been one of the dom­i­nant Med­i­caid man­aged­care con­trac­tors un­til it lost its con­tract in March; a new capped con­tract will al­low it to con­tinue op­er­at­ing in Mari­copa County but with­out be­ing able to add new mem­bers.

Tenet’s play for Van­guard comes be­fore em­pir­i­cal ev­i­dence is avail­able on the per­for­mance of the Detroit Med­i­cal Cen­ter’s Pi­o­neer ACO and the other 31 Pi­o­neers around the coun­try, which be­gan their per­for­mance pe­riod in Jan­uary 2012. The CMS is ex­pected to re­lease the Pi­o­neer data this year.

Dr. An­drew Ziskind, man­ag­ing di­rec­tor at Huron Con­sult­ing Group, noted that some of the early re­ports of sav­ings un­der ACOs have been “much more mod­est than peo­ple an­tic­i­pated.”

Re­spond­ing to a ques­tion on the an­a­lyst call, Keith Pitts, Van­guard’s vice chair­man, did not dis­close num­bers for the Pi­o­neer ACO in Detroit, but said, “It looked like we did ef­fect some sav­ings.”

Pitts, who will be­come Tenet’s vice chair­man, also said the larger chain’s ex­per­tise in rev­enue-cy­cle man­age­ment, through its Conifer Health So­lu­tions sub­sidiary, “can help ac­cel­er­ate some of our ac­tiv­i­ties there.”

Ziskind con­tended that hos­pi­tal sys­tems en­gaged in ACO pro­grams may ben­e­fit more from in­creas­ing their pa­tient vol­ume through the ACO than from the ACO’s shared-sav­ings fea­ture. In ad­di­tion, the ACO work helps sys­tems build their ca­pac­ity to man­age pop­u­la­tion health and suc­ceed un­der new pay­ment-for- value mod­els. “In the long-run, hos­pi­tals are try­ing to po­si­tion them­selves to cover a larger num­ber of cov­ered lives. That’s one clear busi­ness ad­van­tage (of form­ing an ACO).”

Tenet also has moved ag­gres­sively into an­other key health­care re­form arena. It has en­tered into con­tracts with health plans that will be sold through state in­sur­ance ex­changes. Dur­ing the com­pany’s fourth-quar­ter earn­ings call, Fet­ter said the sys­tem had con­tracts with “three large Blues plan” that will cover 30% of its hos­pi­tals. In an in­ter­view, Fet­ter said Tenet cur­rently has more ex­change con­tracts than Van­guard and more than “vir­tu­ally any­one.”

While Tenet has only re­cently restarted an ac­qui­si­tion strat­egy, Van­guard has been on a sig­nif­i­cant buy­ing spree in re­cent years. At the end of 2010, the com­pany bought the mul­ti­hos­pi­tal Detroit Med­i­cal Cen­ter and made a sig­nif­i­cant fi­nan­cial com­mit­ment to turn around the fi­nan­cially flag­ging provider. The fol­low­ing year, it pur­chased Val­ley Bap­tist Health Sys­tem in Har­lin­gen, Texas. Van­guard has fo­cused pri­mar­ily on acute-care ac­qui­si­tions, which al­lows Tenet to add more am­bu­la­to­rycare cen­ters in its ex­ist­ing mar­kets, Fet­ter said.

In­creas­ing rev­enue from Van­guard’s hos­pi­tals will be a key part of the “syn­er­gies” Tenet hopes to gain from the ac­qui­si­tion. On the an­a­lyst call, Fet­ter said “a large part of Van­guard’s rev­enue comes from hos­pi­tals that are rel­a­tively new to its sys­tem.” He praised Van­guard’s turn­around abil­i­ties while ar­gu­ing that Tenet will be able to ac­cel­er­ate those ef­forts. Van­guard’s hos­pi­tals will be­come clients for Conifer af­ter the deal’s clos­ing.

Since Van­guard’s man­age­ment and pri­va­tee­quity firm Black­stone Group hold the ma­jor­ity of Van­guard’s shares and there are few over­laps among the two com­pa­nies’ mar­kets, an­a­lysts are fore­cast­ing few ob­sta­cles for the deal. As of March 31, Black­stone held al­most 38% of Van­guard shares, or roughly 29.4 mil­lion.

Tenet plans to pay $1.8 bil­lion, or $21 per share, and will as­sume $2.5 bil­lion of debt when it buys Van­guard, which launched its ini­tial pub­lic of­fer­ing two years be­fore this deal’s an­nounce­ment.

Van­guard, founded in 1997, op­er­ates in Arizona, Illi­nois, Michi­gan, Mas­sachusetts and Texas. Tenet, founded in 1967 as National Med­i­cal En­ter­prises be­fore re­brand­ing in 1995, op­er­ates in Cal­i­for­nia, Florida, Ge­or­gia and Texas.

Fet­ter boasted that the Van­guard deal will make Tenet “No. 1 or No. 2 in 19 key mar­kets.”

AP PHOTO

Van­guard’s IPO priced at $18 in June 2011, and its shares closed at $12.37 on the last trad­ing day be­fore the deal an­nounce­ment. Tenet’s op­er­a­tional ef­fi­ciency is ex­pected to im­prove cash flow at the smaller chain’s hos­pi­tals.

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