Hospital execs reveal potential recipe for ‘high-value’ mergers and acquisitions
Health Care Current | October 17, 2017
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Hospital execs reveal potential recipe for ‘high-value’ mergers and acquisitions
By Steve Burrill, Vice Chairman, US Health Care Providers Leader, Deloitte LLP
Before joining Deloitte, and several years before I graduated from college, I was chopping onions, whisking sauces, and deglazing (and initially scouring) saucepans in professional kitchens. I cooked professionally for three years, working my way through college after a culinary education. I learned that even a tried and true recipe doesn’t guarantee a four-star dining experience if steps aren’t followed precisely, if the line cooks aren’t paying attention, or if the staff working the front of the house is discontent.
Much time has passed since I traded in my sous chef whites for a starched white shirt and tie, but I see plenty of parallels between restaurant kitchens and hospital board rooms. Whether preparing an entrée or acquiring or merging with a hospital, success is typically dependent upon a clear understanding of expectations, close attention to detail, and constant communication.
On paper, mergers and acquisitions (M&A) can make a great deal of sense for health systems and hospitals. For a health system, acquiring a hospital can help it gain a foothold in a new market, diversify risk, and build scale. The facility being acquired might benefit from better access to capital, improved quality of care, and better patient outcomes. While M&A can help the acquirers and acquirees achieve these goals, there are no guarantees.
Deloitte’s Center for Health Solutions recently collaborated with the Healthcare Financial Management Association (HFMA) to determine how M&A impacts the performance of acquired hospitals, and to learn why some transactions have more favorable results than others. The report, Hospital M&A: When done well, M&A can achieve valuable outcomes, is based on an analysis of the nearly 400 hospital M&A transactions (which includes 750 hospitals) that took place between 2008 and 2014, a survey of 90 executives involved in M&A transactions, and interviews with another 13 executives.
What causes the urge to merge?
According to survey respondents, a desire to increase market share is the top driver for transactions among acquiring organizations. Other goals respondents cited include a desire to improve efficiencies, boost care quality and patient satisfaction, and build capabilities for population health.
About one-third of executives from acquired hospitals looked to M&A as a way to boost access to capital. Many acquired organizations were in financial distress, or required investments in staff, health information technology (HIT), physician recruitment, facilities, medical equipment, or pension funding to improve operations and quality of care. Close to 80 percent of respondents said significant capital investments were made in the acquired facility after the transaction concluded, and nearly 40 percent of hospital executives told us they used the capital to upgrade or implement clinical information systems. This was the most common use of capital, according to our survey.
M&A was also often seen as a way to increase cost efficiencies. Almost 30 percent of acquiring hospital executives, and 24 percent of executives from acquired hospitals, sought M&A to improve efficiencies. That strategy was successful for most deals – 70 percent of survey respondents said they achieved at least some of their transaction’s projected cost structure efficiencies.
Yes, there is a potential secret sauce
Financial, market, competitive, and regulatory forces are likely to fuel continued consolidation among hospitals and health systems going forward. As hospital board members and executives consider taking part in this trend, either as buyers or sellers, they could benefit from understanding why some M&A deals achieve their goals. We found that it can take more than two years for improvement efforts and investments to pay off. Our analysis determined that higher operating margins did not immediately follow M&A for acquired hospitals. Once we took into account market and hospital characteristics, acquired hospitals experienced a post-transaction decline in operating margins, revenue, and expenses, which typically lasted two years.
But M&A experience varied a great deal among acquired hospitals. According to our research, acquired hospitals were more likely to be successful if leadership developed a strong strategic vision for pursing the transaction, and had explicit financial and non-financial goals. Many executives also stressed that investing time, particularly early in the pre-merger conversations, is essential to a successful transaction.
We found that underestimating important cultural, competitive, and market differences of acquired organizations can make it more difficult for a transaction to reach post-deal expectations. However, when acquirers take on a proactive and purposeful approach to M&A, they can increase the potential for creating a transaction that meets both cost and quality goals.
Potential ingredients for M&A success
According to our research, executives indicated that M&A was more likely to succeed when leaders:
- Developed a strong strategic vision for pursuing the transaction
- Had explicit financial and non-financial goals
- Held leadership accountable, often at the vice-president level, for integration efforts
- Identified cultural differences between the organizations
- Aligned clinical and functional leadership early in the process
- Implemented project management leading practices, with tracked targets and milestones from day one
Hospitals and health systems that are embarking on a potential M&A transaction likely shouldn’t expect immediate results, and should anticipate unexpected challenges and costs. We found that immediate investments and additional staffing were sometimes required to improve quality at an acquired hospital, which can impact financial performance. Many executives who were involved in transactions with better outcomes said they spent more time on integration planning and execution when compared to their counterparts who were less successful in meeting cost and quality goals.
In restaurants, attention to detail can be critical. Looking away, even briefly, can mean a scorched filet, a fallen soufflé, or a broken sauce. “The proof of the pudding is in the eating,” as the cliché’ goes. From my perspective, that might be as apt for hospital mergers and acquisitions, as it is for the culinary world.
In the news
Executive Order exempts association plans from ACA regulations; extends short-term plans
On October 12, 2017, the president signed an executive order (EO) directing federal agencies to look for ways to exempt association health plans from many Affordable Care Act regulations and extend the duration of short-term non-ACA compliant plans (see the October 12, 2017 Reg Pulse blog for a full summary of the EO and a legislative and regulatory outlook).
Prior to the ACA, association health plans (AHPs) allowed certain people to group together to buy health insurance in the large-group market and across state lines. By doing this, insurers could sell plans with more limited benefits and coverage at lower premiums than would be otherwise possible in states with many mandates. The ACA required such plans to follow the small-group market’s rules – which include consumer protections like essential health benefits and out-of-pocket limits. The EO specifically directs federal agencies to rewrite the rules around AHPs to permit their sale across state lines, and to ease ACA rules such as prohibiting associations from forming solely to provide health coverage.
The EO also considers the expansion of short-term health plans. Under the Obama administration, people could buy and use non-compliant ACA plans for no more than three months. Such plans are exempt from ACA regulations. They typically have higher out-of-pocket costs and limited coverage. The EO directs the federal government to expand the definition of short-term coverage, potentially back to 364 days, such as before, with no medical loss ratio rules or limits on charging sicker people higher rates.
Combined, these measures will allow small-group employers and individuals to buy plans with less coverage at a lower premium. Younger and healthier populations might be the most interested in purchasing this type of coverage.
Finally, the EO also directs federal agencies to consider changes to Health Reimbursement Arrangements, which would allow employers to contribute tax-free funds to employees to pay for health insurance premiums.
The president has asked the agencies involved, the Departments of Labor, Treasury, and Health, to provide their recommendations for new regulations or reinterpretations of existing rules within 60 days.
White House announces it will cease CSR payments
On October 12, the White House announced that the administration will no longer make cost sharing reduction (CSR) payments to insurance companies for low-income individuals who purchase health coverage through public insurance exchanges. While the payments are called for by the ACA, Congress never appropriated funding for the program, although it does have the authority to do so.
Citing guidance from the US Departments of Justice and Health and Human Services, the administration said it would immediately end the payments.
In 2014, the House of Representatives challenged the legality of the CSR payments and a district court judge accepted the argument that the payments were illegal. However, the judge stayed her decision pending the Obama administration’s appeal.
Some insurers factored in the potential for no CSR payments when they calculated their 2018 premiums. Those that did not might try to raise rates or pull out of some markets.
Democratic state attorneys general are challenging the legality of the change.
Related: The Congressional Budget Office (CBO) projected that insurance premiums for silver-tiered health plans sold on the exchanges would rise 20 percent next year and people in some areas would have no exchange offerings if CSR payments expired after December 2017 (see the August 22, Health Care Current). The CBO also projected that eliminating CSR payments would increase the deficit by $194 billion over 10 years because of increased spending on premium subsidies.
Congress and the White House take a close look at the 340B Program
In a hearing last week, the House Energy and Commerce Oversight Subcommittee asked hospitals what they do with savings from the 340B program. The 340B Drug Pricing program requires drug manufacturers to provide steeply discounted outpatient drugs to eligible provider entities.
Entities eligible for the program include Medicare/Medicaid Disproportionate Share Hospitals, children’s hospitals, Federally Qualified Health Centers, and others safety net providers. During the hearing, hospital leaders spoke about using the savings from the lower prices for community efforts, HIV/AIDS programs, and uncompensated care. Some lawmakers criticized hospitals for not being transparent under the program.
The program is facing scrutiny days before the next 340B Program open registration period closes. Fifty-seven senators and 228 house members encouraged the US Centers for Medicare and Medicaid Service (CMS) to maintain its current rules for 340B. The agency is considering a proposal that would create exceptions for certain classes of drugs in the 340B payment structure as part of the annual Outpatient Prospective Payment System (OPPS) rule. If finalized as proposed, hospitals would see lower payments for drugs purchased under the program.
The White House Office of Management and Budget also is reviewing an Obama-era rule change that would limit ceiling prices under the 340B program. The administration has delayed implementing this rule multiple times for additional time to consider the regulation. Hospitals support the delayed rule, while drug manufacturers have raised concerns about it.
Related: A report funded by The Alliance for Integrity and Reform Coalition, a coalition of patient advocacy groups and biopharmaceutical groups, found that hospitals are using the 340B drug discount program to boost revenue and lower their charity care costs.
CMS releases 2018 Medicare Advantage star ratings; no plans are low-performing
CMS released its annual star ratings for Medicare Advantage (MA) and Part D plans on October 11. Although the number of total plans with four or more stars has not changed much, some insurers notably improved. Additionally, for the first time since the program’s inception in 2007, CMS did not list any insurers or plans as low-performing.
Six of 10 Kaiser Permanente plans earned five stars overall (i.e., for both MA and Part D). Anthem, Inc. received a five-star rating for the first time, and noted on its website that 60 percent of its MA enrollees are enrolled in a four-star plan this year.
Under the program, CMS rates insurers and their plans on a scale of one to five stars based on a variety of measures, including chronic-condition management, quality of care, customer satisfaction, and drug costs. The agency awards 5 percent bonus payments to insurers that receive at least four stars.
Some studies have found that MA beneficiaries consider star ratings when they choose their plans. About 70 percent of MA beneficiaries are enrolled in plans with four stars or more – this percentage has increased since CMS began the program.
The new ratings were released shortly after CMS announced that it expects MA enrollment to reach an all-time high in 2018. The agency expects MA premiums to decrease as well (see the October 10, 2017 Health Care Current).
CMS provides information on Meaningful Use adjustments for 2018
CMS recently released additional information on its Meaningful Use payment adjustments for 2018. In a listserv notice, the agency said it will be reducing payments for eligible hospitals that do not demonstrate Meaningful Use. To qualify for CMS quality programs under Meaningful Use, providers must use health IT in a way that improves quality, engages patients, and keeps their information safe.
Eligible hospitals that did not demonstrate Meaningful Use during the 2017 reporting period will be charged penalties in the 2018 adjustment period. The adjustments will be part of the update to the inpatient prospective payment system (IPPS) payment rate, reducing the update amount.
CMS listed several qualifying Meaningful Use exemptions hospitals can apply for, including:
- Infrastructure — (e.g., for facilities in an area with poor broadband connectivity)
- Newly eligible hospitals
- Unforeseen circumstances — (e.g., natural disaster)
- Problems related to electronic health record (EHR) vendors
The agency also clarified that these payment adjustments do not apply to hospitals that participate in the Medicaid EHR Incentive Program only, and are not billing Medicare.
Administration names Hargan Acting Secretary of HHS
On October 10, Deputy Secretary Eric Hargan replaced Don Wright as Acting Secretary of the Department of Health and Human Services (HHS). The Senate confirmed Hargan as Deputy Secretary on October 4 by a vote of 57-38, largely along party lines.
Prior to being named Acting Secretary, Hargan served on the administration’s transition team and as Deputy Secretary during the George W. Bush presidency. He is a lawyer based out of Chicago.
California governor signs drug-pricing legislation into law
On October 9, California Governor Jerry Brown signed two bills that aim to lower drug prices into law.
One increases transparency. Beginning January 1, 2018, pharmaceutical companies will be required to alert health insurers and the state when they plan to raise the prices of certain drugs more than 16 percent. This requirement applies to all brand-name, specialty, and generic drugs that cost more than $40 for one course of treatment. Companies must give 60 days’ advance notice of qualifying price increases. They also must report why they decided to increase the drug’s price, including any new benefits of the drug.
The other measure will prohibit drug makers from offering discounts on brand-name drugs if a less expensive alternative is available.
The pharmaceutical industry opposed the transparency law, stating that the measure targeted a small part of the drug supply chain – wholesale prices – which would not necessarily save consumers money. Some industry members also expressed concerns that the disclosure of information would reveal trade secrets.
Related: Other states have also passed measures in an effort to curb drug price growth. Maryland, for example, passed a law that forbids “price gouging.” However, a challenge to the language of the law is currently working its way through the courts (see the October 10, 2017 Health Care Current).
State exchanges adopt new decision-support tools
Next month, Connecticut and Washington will join California, Idaho, New Mexico, and Mississippi in using GetInsured software to help consumers enroll in their state-based exchanges, Access Health CT and Washington Healthplanfinder.
GetInsured helps people choose a plan that best suits their needs. Consumers can input their current doctor to find plans where that doctor is in-network. They can also list the prescription drugs they take to find plans where those drugs will be covered. The software also allows for customers to search for plans within their budgets. Three million people who enrolled during the second enrollment period in 2015 did so using GetInsured technology.
Open enrollment for 2018 will begin on November 1.
Unlocking the mysteries of our biological rhythms may lead to breakthroughs in preventing and treating disease
If you have ever experienced “jet lag” or felt thrown off by “springing forward” or “falling back” for daylight savings time, you know that humans have an internal, biological clock that helps us anticipate and adapt to the regular rhythm of the day. While scientists have long known about the existence of the circadian rhythm, little is known about how our internal clock operates.
Recently, a group of scientists, Jeffrey C. Hall, Michael Rosbash, and Michael W. Young, made discoveries that help explain how plants, animals, and humans adapt their biological rhythm so that it is synchronized with Earth's revolutions. Their work earned them this year’s Nobel Prize in Physiology or Medicine.
Fruit flies served as the model organism for their groundbreaking research. The team isolated a gene that controls the normal daily biological rhythm in the fruit fly. They showed that this gene encodes a protein that accumulates in the cell during the night, and is then degraded during the day. They also identified additional protein components of this process, exposing the mechanism governing the self-sustaining clockwork inside the cell.
Their work shows us that our inner clock adapts our physiology to the different phases of the day, and regulates critical functions such as behavior, hormone levels, sleep, body temperature, and metabolism. That is why we may experience “jet lag” when we travel; and why certain behaviors that we have adapted to keep up with the 24 hour, seven-day-a-week business cycle and the relentless availability of information coming to us through our smartphones and other devices can lead to misalignment in our internal cycles, and put us at risk for many diseases.
Heart disease, diabetes, and obesity are all affected by our metabolism, hormone levels, and blood pressure – all mechanisms that impact the circadian rhythm. A growing body of research shows that working the night shift is linked with coronary heart disease. The International Agency for Research on Cancer has listed night shifts as a possible carcinogen. Among people who have worked a decade of shift work, their brains show cognitive decline years in advance.
The Nobel Laureates were able to pick up where other researchers left off in the 1970s. Previous research identified the genes in fruit flies that control the circadian rhythm, but it was not until the prize-winning team discovered the protein encoded by the gene and accumulated during the night and was degraded during the day. These protein levels oscillate over a 24-hour cycle, in synchrony with the circadian rhythm. The next key goal was to understand how such circadian oscillations could be generated and sustained. The team hypothesized that the protein they identified must block the activity of the gene responsible for the circadian rhythm. They reasoned that by an inhibitory feedback loop, the protein could prevent its own synthesis and regulate its own level in a continuous, cyclic rhythm.
Analysis: This work is an example of how research in basic science contributes to the study of fundamental biological processes to prevent and treat disease. Diseases that are linked to changes in the physiological levels influenced by the circadian rhythm include diabetes, heart disease, cancer, and obesity. Other scientists are studying fruit flies to learn more about human sleep, since the sleep cycles and brain patterns of fruit flies during sleep are very similar to humans. The goal is to help us better understand the genetic mechanisms of sleep and develop better molecular targets for drugs that treat neurodegenerative disorders such as Alzheimer’s disease and Parkinson’s disease.