Non-Traditional Strategies for Scaling Hospitals and Providers in the Covid Era and Beyond

Sally Engelman
Director, Business Development, Lumeris

As Covid-19 continues to cast a shadow on the US healthcare ecosystem, many regional hospitals are fighting to cauterize revenue hemorrhage. Meanwhile, the federal government has moved to implement additional barriers for the one of the most common strategies for hospitals to secure incremental revenues and drive cost synergies: mergers and acquisitions (M&A). While the jury is still out on whether these M&A activities improve our country’s care delivery system, leadership teams and consultants alike continue to tout the benefits of consolidation. This strategy, however, will increasingly face federal scrutiny. In July, President Biden signed an executive order directing the Federal Trade Commission and Department of Justice to further probe hospital mergers in attempts to protect clinical quality and prevent rising healthcare costs. The Biden administration posits that poor access to care in rural communities is a result of M&A activity in recent years.

According to Rick Pollack, CEO of the American Hospital Association (AHA), hospital M&A deals already undergo sufficient scrutiny, and additional enquiry will create superfluous bureaucratic red tape. Furthermore, the AHA doubles down on its support for the current flurry of M&A activity, emphasizing that these mergers give rural communities additional resources to improve clinical quality and decrease costs. The AHA cites a study conducted by Charles River Associates in which the findings show that hospitals acquired through M&A realized a 3.3% reduction in annual operating expenses, as well as a statistically significant drop in readmissions, and a non-statistically significant reduction in mortality rates. Interestingly, the study also found that revenue per admission at acquired hospitals declined by 3.7%, suggesting that the savings realized by acquired hospitals are passed onto health plans at the hospital’s expense. Another study published in JAMA found that patients treated in rural hospitals after merging with larger institutions had lower mortality rates after the M&A event than before. Though the effects of hospital M&A on quality and cost require further research, increased scrutiny of mergers creates an opportunity for a new strategy to increase scale: network-to-network alignment.

 

As CMS sunsets the Next Gen ACO model and transitions to new models including direct contracting and potentially expanded and mandatory bundles, provider groups are being incented and, in some cases, forced to take on more risk.

In parallel, CMS is shifting the paradigm of how providers get paid. As CMS sunsets the Next Gen ACO model and transitions to new models including direct contracting and potentially expanded and mandatory bundles, provider groups are being incented and, in some cases, forced to take on more risk. Becoming a ‘pay-vider’, a provider that bears similar characteristics to a traditional payer (or even becomes a payer itself), empowers smaller provider groups to plan from a position of power through strategic partnerships with larger health systems to align providers and risk in specific markets. Network-to-network alignment creates new opportunities with current market payers, can mitigate competitive threats from regional competition and national aggregators, and can lead to true operational and care delivery synergies. Couple this with the potential for increased value-based care revenue (and margin) and network-to-network alignment models can create an attractive business case for providers.

While these partnerships may seem complex to negotiate and may require different phases as the relationship matures, the capital outlay (which is often significantly less than traditional M&A) often leads to expanded access to the aggregate healthcare dollars in a given market and can provide an avenue to scale community providers’ services and geographic footprint. These types of arrangements can enable community providers to diversify revenue streams while significantly expanding the lives under management (which is increasingly becoming a common measure of organizational scale). Notably, network-to-network alignment creates an opportunity to benefit from safe harbor provisions provided to value-based organizations for coordinating care and referrals within the high-value network.

Change is here; how quickly providers can transition from traditional measures of scale (e.g., NPSR, discharges, visits) to future measures of influence (e.g., lives under management, capitated revenue, MLR performance) is fundamental to long-term success. Time is of the essence. Providers must explore growth strategies that optimize existing investments, footprint, and an enhanced provider network to ensure they the best position for long-term growth, competition, and sustainability.

mgordon@lumeris.com

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