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Health Care Current: November 12, 2013

The dilemma of M&A in health care

This weekly series explores breaking news and developments in the U.S. health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory and legislative changes.

The art of becoming big: the dilemma of mergers & acquisitions in health care

My Take

By Mitch Morris, MD, Vice Chairman and National Health care Provider Lead, Deloitte LLP

 

Consolidation has transformed nearly every U.S. industry—manufacturing, retail, life sciences and hospitality—you name it. One hundred years ago, there were hundreds of American auto companies and now there is essentially the big three. The “mom and pop” pharmacy is becoming a nostalgic memory.

The U.S. health care industry is well into another round of consolidation. Already, according to the American Hospital Association, 3,007 hospitals (roughly 53 percent) are part of a health system.1 The industry went through a round of consolidation in the 1990’s but many would say that, other than better access to the debt market, the resulting health systems were, for the most part, holding companies and not operators that had a focus on economies of scale or reduced costs. This was especially true for the not-for-profit sector.

According to Irving Levin Associates, in 2012 there was twice the number of hospital mergers as compared to 2009 and this shows no sign of slowing down.2 The Affordable Care Act (ACA) has served as a catalyst to accelerate the consolidation movement, which seems to have taken on a life of its own. Several trends are beginning to emerge across the industry:

  • As reimbursement rates continue their downward trend and the costs of maintaining infrastructure and regulatory compliance march ever higher, the acute care industry seeks scale to better manage costs. Many acute care players are beginning to reduce costs through economies of scale, including the implementation of shared services, programmatic integration and consolidation, selective sourcing and addressing clinical effectiveness. The hope is that costs can be shaved by as much as 30percent, which is certainly not a goal that can be achieved simply by headcount reduction.
  • The stand-alone hospital may be an endangered species—many smaller organizations simply cannot afford to invest in keeping up with facilities, upgrading IT capabilities, attracting the best clinicians, or playing an active role in the emerging payment model innovation game. Nor do they all have the market clout to be considered essential players in narrow health plan networks. As margins shrink and access to capital becomes more difficult, even hospitals in affluent communities are feeling the pinch.
  • Health plans, which also continue to consolidate, are dipping their toes into the provider business through the acquisition of medical groups. Many are also developing capabilities to manage population health.

So is bigger better? How big is big enough? And can a system be too big?

It’s not uncommon for mergers to fail to produce expected benefits for the new organization or the communities they serve. But there is some data to suggest that, by some measures of performance, hospital acquisitions do produce a benefit. A Deloitte Center for Health Solutions report, Hospital Consolidation: Analysis of Acute Sector M&A Activity, recently studied hospitals that were acquired in 2007 and 2008 and found that, over several years, the acquired hospitals had increased volumes and improved margins compared to a cohort of similar size (case mix adjusted) that was not acquired. The benefit was most pronounced when the acquirer was a national chain as compared to a regional system.

Will the U.S. have only three health systems in the next few years? It’s unlikely, but we are quickly moving toward needing a larger scale to successfully compete. In the 90’s we did not have the same economic or legislative imperative to achieve higher value in a lower cost structure. Now we do. And those organizations that don’t get both the art and science of this transition are likely to find themselves in a difficult position.

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Sources:
1 American Hospital Association. "AHA Hospital Statistics, 2013 Edition."
2 Irving Levin Associates The Hospital M&A Market Report http://www.nytimes.com/interactive/2013/08/13/business/A-Wave-of-Hospital-Mergers.html?_r=0

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Implementation & Adoption

HHS: HIX plans will not be considered federal health programs

Secretary of the U.S. Department of Health and Human Services (HHS), Kathleen Sebelius, clarified in a letter directed to Representative Jim McDermott (D-WA) that organizations will not be in violation of the law if they choose to assist uninsured patients in paying for health insurance coverage through health insurance exchanges (HIX). After careful review, in consultation with the Department of Justice, the letter explains that qualified health plans (QHPs) sold through HIXs do not meet the legal definition of a federal health program, therefore anti-kickback laws are not applicable. The anti-kickback statutes prohibit providers from exchanging anything of value in return for business paid by Medicare or Medicaid and other federal health programs. There was initial concern that because the federal government was providing funds to individuals through subsidies for insurance coverage, QHPs on HIXs would be considered as federal health care programs. The letter also notes that state and other federal laws may restrict this activity depending on the specific situation.

“This clarification statement will pose some interesting and potentially challenging compliance situations for hospitals and physicians. Hospitals and physicians have been conditioned over time to believe that they can only provide minimal financial assistance for their patients to comply with the Medicare/Medicaid Patient Inducement Statute, which prohibits any person/institution from offering or transferring compensation or rewards to a Medicare or Medicaid patient that is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier or any item or service for which the federal government makes a payment through Medicare or Medicaid. This change will require hospitals and physicians to “think outside of the box” on how aiding uninsured patients with their private insurance premiums will be perceived by patients, families and physicians—and could create some longer term compliance hurdles for health care providers as they face future audits and scrutiny by the government.”—Todd Kerr, Managing Director, Life Sciences & Health Care, Deloitte & Touche LLP

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MA plan performance outcomes differ for dual-eligibles, study questions star ratings

Last week, a study released by Inovalon, Inc. showed a performance gap between the outcomes of dual-eligibles and non-dual-eligibles across the nation, calling into question the rating system used to evaluate Medicare Advantage (MA) health plans. The study used data from MA registries from 2002 to September 2013. Key findings:

  • Dual-eligible members in the study underperformed on eight out of the 10 measures that were recorded, even after the researchers controlled for socioeconomic status, demographics and severity of illness.
  • The current Five-Star rating system used to calculate incentive payments for MA plans may be unfairly penalizing MA plans that serve a higher proportion of dual-eligibles, as the two populations (dual-eligibles and non-dual-eligibles) cannot be compared apples to apples.
  • MA plans treating higher proportions of dual-eligibles may receive lower incentive payments and, in turn, be unable to provide the same amount of services to their dual-eligible population as MA plans with a smaller portion of dual-eligibles.

MA plan stakeholders have lobbied in the past to update the Five-Star Quality Rating system and this study bolsters their argument.

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Kaiser: 17 million people will qualify for tax credits on HIX

Last Tuesday, the Kaiser Family Foundation released a report estimating the number of people who will be eligible for premium tax credits when purchasing coverage on a HIX. Using data from the Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC) for 2012 and 2013, it estimated that 17 million people will qualify for tax credits in 2014. This differs significantly from the estimates released by the Congressional Budget Office (CBO) that 6 million people will qualify for tax credits in 2014. According to the Kaiser report, the states with the highest number of people qualifying for tax credits are residents of Texas, California, Florida, New York and Pennsylvania. Highlights: 

  • The five states with the most eligible residents will make up 40 percent of all individuals qualifying for tax credits:
    • Texas: 2 million 
    • California: 1.9 million 
    • Florida: 1.5 million 
    • New York and Pennsylvania: more than 700,000 each 
  • District of Columbia is estimated to have the lowest number of residents eligible for tax credits at 9,500

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Gallup poll: most uninsured adults aware of individual mandate, but not HIXs

A new Gallup poll shows that many uninsured consumers in the U.S. are still unaware of HIXs, but they are increasingly more knowledgeable about the ACA individual mandate. Highlights:

  • 80 percent of uninsured individuals know about the health insurance requirement of the ACA and the penalty attached to opting out from obtaining coverage; up from 56 percent in July
  • 67 percent of uninsured consumers are planning to buy health insurance while 25 percent are opting to pay the fine
  • 70 percent of uninsured consumers are not familiar with HIXs; while 27 percent are aware
  • 59 percent of consumers saw ads and advertisements regarding the ACA; an increase from 49 percent during the month of September.

The poll shows clear progress in raising awareness in the uninsured population regarding the need to purchase health insurance, but more progress needs to be made regarding educating those individuals about the logistics of obtaining coverage through HIXs.

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On the Hill & In the Courts

OMB confirms FDA user fees cannot be used due to the sequester

Last week, the Office of Management and Budget (OMB) responded to an inquiry made by several bi-partisan policy makers in August expressing concerns about sequestered U.S. Food and Drug Administration (FDA) drug and device user fees. OMB’s response confirmed that roughly $85 million of FDA fiscal year (FY) 2013 funds were locked in the agency’s salaries and expense accounts as a result of sequestration and would remain there, unavailable for usage, unless legislation is established to free the funds. The FDA Safety over Sequestration Act, backed by Representative Anna Eshoo (D-CA) along with 64 co-sponsors, would release any future drug and device fees collected from private funds from sequestration. Eshoo noted that the point of sequestration was to reduce public spending and that sequestering these funds does not accomplish that goal as the FY2013 sequestered FDA money came from the private funds of companies that wanted to expedite the FDA’s approval process for drugs and medical devices.

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Supreme Court will review ACA contraceptive cases 

Last week, the U.S. Supreme Court indicated that they will examine four pending birth control mandate cases on November 26 to consider if any should be taken up by the Court. The four cases challenge the legality of the ACA’s requirement for employers who provide group health insurance plans to provide coverage for contraceptives. All four cases are pursuing a religion-based challenge.

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Around the Country

HHS adds $150 million funding for new community health centers

Last week, HHS Secretary, Kathleen Sebelius announced that $150 million of ACA funds will be invested in supporting 236 new community health center sites. Currently, more than 21 million patients receive care at the roughly 9,000 sites around the country which are operated by 1,200 active community health centers (CHCs). The funding is intended to assist an additional 1.25 million patients accessing care in historically underserved areas. The additional funding will provide resources for CHCs to add new full-time sites to continue patient outreach, insurance enrollment efforts and services to those still locked out of health insurance.

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GME payments unequal throughout the nation

According to a study published in the November issue of Health Affairs, Medicare graduate medical education (GME) payments vary among states, creating a geographic imbalance in the way the federal government distributes its $10 billion in annual GME funding to teaching hospitals. GME plays a leading role in financing the physician workforce, as it provides teaching hospitals with funding for residency and training programs. Data gathered from the Healthcare Cost Report Information System of the U.S. Centers for Medicare and Medicaid Services (CMS) from FY2008-FY2010 showed that several GME components were disproportionally distributed. Key findings:

  • The resident cap per 100,000 population ranged from 1.63 for Medicare-sponsored medical residents in Montana and 202.87 in District of Columbia; New York had the second highest cap at 77.13
  • Wyoming received the least amount of GME payments at $1.64 million, while New York received the most at $2 billion
  • Wyoming also received the smallest GME payment per medical resident at $43,908, while Connecticut received the highest at $155,135
  • The northeast generally received higher GME payments and higher medical resident caps per 100,000 population than southern states

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AAMC: GME funding can mitigate national physician shortage

According to an analysis conducted by the Association of American Medical Colleges (AAMC), by 2020 there will be a shortage of more than 91,500 physicians in the U.S. and that number is expected to grow to 130,600 by 2025. The analysis result takes into account expansion of health care insurance, physician retirement (one-third retiring in the next decade) and physician specialty choice. The shortage is equally distributed, which means that primary and specialty care face the same challenges. American medical schools are trying to address this shortage by increasing enrollment slots, but are limited by the federal cap in GME funding for residency training positions. In order to address the impending physician shortage, the AAMC recommends that Congress lift their Medicare funding freeze for physician training, which has been in place since 1997. Without expanding residency training positions available to medical students, there will be no substantial change. AAMC states that Medicare will need to support a 15percent increase in GME positions to prepare an additional 4,000 physicians each year moving forward to match the demand.

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CMS approves South Carolina dual-eligible program

South Carolina has received approval from CMS to launch the Healthy Connections Prime program to align Medicare and Medicaid financing and integrate care for patients enrolled in both programs, known as dual-eligibles. The program will contract with health plans and providers to offer integrated care services to the 53,000 dual-eligibles expected to be enrolled beginning July 2014. Dual-eligibles are usually comprised of the sickest beneficiaries and cost the federal government $260 billion a year. South Carolina is the latest state approved to carry on a program designed to lower cost. According to the Journal of the American Medical Association, as much as $532 a year can be saved per dual-eligible patient under a coordinated care model. Specifically, South Carolina will be using a three-way capitated payment model in which plans will receive prospective blended payments for providing coordinated care. Details of how the program will work have not been disclosed. It is unclear if the program will include a bidding process or if there are any health plans interested in taking on a contract to care for the dual-eligibles.

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Breaking Boundaries

Study: NPs practicing independently in retail clinics could save millions in health care costs

According to a study released in this month’s issue of Health Affairs, retail health clinics found in pharmacies, big-box retailers and grocery stores can reduce costs by allowing nurse practitioners (NPs) to practice and prescribe independently, as opposed to being supervised by or having to work directly with physicians. Highlights:

  • The average 14-day cost associated with a retail clinic visit with no NP independence was $543
  • The cost with NPs practicing independently was $484
  • With NPs practicing and prescribing independently, the cost was $509
  • The cost of a non-retail clinical visit was $704
  • The number of retail clinics across the nation is projected to climb to roughly 5,000 by 2015—double the number of NPs currently practicing in that clinical setting
  • By 2015, roughly 10 percent of outpatient primary care visits will come from retail clinics—resulting in $2.2 billion in health care cost savings.
  • If NPs are permitted to practice independently, an additional $810 million is projected be saved in health care costs and an additional $472 million if NPs are allowed to both practice and prescribe independently.

According to researchers, retail clinics can provide patients with access to health care where there is a shortage of primary care providers. In addition, they have been shown to provide the same quality of care as non-retail clinics. The study examined 9,503 individuals who visited a retail clinic within 50 miles of their home zip code between 2004 and 2007, specifically focusing on the cost of 10 clinical conditions routinely seen at retail clinics

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Study: 12 percent of health care projected to be delivered using telemedicine tools

A group of researchers recently analyzed health informatics and health services research literature to estimate the impact of health information technology (IT) physician demand. Highlights:

  • If health IT and electronic health (e-health) applications were fully implemented in 30 percent of community-based physicians’ offices, the demand for physicians would be reduced by about 4-9 percent
  • If doctors use “e-referral” technology more frequently, there would be between 2 and 5 percent reduction in the need for physician specialists
  • Doctor-patient communication portals and telehealth technology could help address regional physician shortages by enabling 12 percent of care to be delivered remotely
  • The study also noted that these estimates could more double if comprehensive health IT systems were adopted by 70 percent of ambulatory care delivery settings.

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Meet Mitch Morris

Mitchell Morris, MD

Mitchell Morris, MD

US/Global Health Care Providers Sector Leader

Dr. Morris is the Vice Chair and Global Leader for...More

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