Rising costs, declining payments prompt nonprofit hospitals to seek partners
- October 30, 2014
When the economy started sinking six years ago, it almost took South Hill’s Community Memorial Healthcenter down with it.
For a long time, jobs have been scarce in this region along the North Carolina line, and few people served by the hospital had private insurance. When recession pressures started closing local factories, the money flow dried up. The hospital, which opened in 1954, felt it. “That’s when it really started to change,” says W. Scott Burnette, the hospital’s CEO. “We could see that we had more needs than we could meet.”
Burnette says the hospital’s board started looking for a partner, which it found after a two-year search. In July, it joined the Richmond-based Virginia Commonwealth University Health System, which pledged to contribute at least $75 million toward improving health-care services and technology, including plans for construction of a new hospital. “It’s just getting harder for individual, especially rural, hospitals to survive on their own,” says Burnette, whose facility is now called VCU Community Memorial Hospital.
There has been a string of similar moves in Virginia in recent years, and there’s good reason to think the consolidation will continue. Faced with rising costs and lower reimbursements, health-care groups are jockeying for a financial advantage by spreading their costs and expanding their footprint.
In 2010 Norfolk-based Sentara Healthcare took over hospitals in Charlottesville, Harrisonburg and Prince William County. Last year it acquired Halifax Regional Health System in South Boston. So far this year hospitals in Culpeper, Bedford and on the Northern Neck have become affiliated with larger hospital groups, along with the merger of Community Memorial with VCU Health System.
Mergers and acquisitions are what hospitals must do, says Sheila Gray, vice president of communications and public relations for the Richmond-based Virginia Hospital and Healthcare Association. “Consolidation offers hospitals the ability to reduce overhead and increase purchase power while at the same time providing additional resources to address operating, capital and staff needs,” she says. “Consolidations should not be judged as either good or bad, they are simply necessary given the current climate in health care.”
The General Assembly’s decision not to expand Medicaid under the Affordable Care Act is a factor. But the trend toward consolidation didn’t start with the ACA, says Ken Krakaur, a senior vice president with Sentara. “This was going on in 2008 and 2009, long before we knew what the ACA was going to look like,” he says.
Krakaur was involved in all of Sentara’s recent acquisitions. He says they weren’t hostile takeovers; they were led by the boards of smaller community hospitals asking larger health-care systems what they could offer. The recession was a big reason for these moves, he says. “One thing that most hospitals witnessed was the great increase in bad debt. There were a lot of jobs that were lost, so people didn’t have insurance.”
Independent hospitals won’t go out of business, Krakaur says, “but most that have not sought an affiliation yet will probably be doing so … We won’t find too many single, tax-exempt hospitals in the future. There are very few now.” In fact, he anticipates the next phase will involve smaller health systems joining larger ones. For Virginia, that would ultimately mean four or five major nonprofit players, as well as the for-profit entities such as Tennessee-based HCA.
Not for sale
By the metrics that others in the industry are describing, Mary Washington Healthcare in the Fredericksburg region is a good candidate for consolidation. In September this two-hospital nonprofit system laid off 66 people as part of a $30 million spending cut.
In a letter to employees, MWHC CEO and President Fred Rankin blamed the layoffs on “significant cuts to what we are paid to care for patients.” MWH lost $20 million in 2012 and $8 million last year.
While facing these financial issues, the health-care group is in the midst of a significant leadership change. Rankin is retiring and Dr. Michael McDermott, a local radiologist, will take over in January.
Eric Fletcher, senior vice president of strategy, marketing and business development for MWHC, acknowledges that the financial pressures that forced staffing cuts still exist, but there are still ways to improve the system’s financial health. Federal programs, primarily Medicare, have been reducing their payments to health-care providers nationwide, but there are ways to increase those payments “if you can maintain top-level quality of care,” Fletcher says. “Especially on the clinical quality indicators, we are performing extremely well, among the best in the country.”
The MWHC board’s determination to stay independent reflects the concern, especially among not-for-profit hospitals, that their mission of serving the health-care needs of the community would be threatened if local control is lost. “Yes, they need to be able to pay the bills, but that’s not why they exist,” Fletcher says. A larger system might be inclined to shift some services to another location to reduce its overhead. “There’s a fear that if that if you don’t have that local control, you’ll be less responsive to community needs.”
Others, though, see advantages in joining bigger systems. For one thing, the knowledge base is better, they say. “For example, if I’m in my own hospital, I’ve got a team to help determine best practices,” says Megan Perry, Sentara’s vice president for mergers and acquisitions. “But if I’m part of a team of 12 hospitals, everyone in the system gets the advantage of that knowledge. We’re able to expedite best practices faster. These smaller hospitals would have gotten there, but it’s faster this way.”
The economies of scale apply, too, in keeping up with technology. For example, tomosynthesis is the new 3D mammography. “It’s a game-changer in terms of early detection and reducing the number of unnecessary callbacks,” says Dale Gauding, a Sentara communications adviser. Sentara has deployed nine machines over three months and will add two more, bringing it into more communities. These units are now in Norfolk, Newport News, Suffolk, Virginia Beach and Williamsburg. “Our desire is to have the best quality and most effective technology, and our economies allow us to do that on the rollout.”
Perry adds that there’s a lot of support that goes into a rollout, too, beyond the equipment purchase. Technicians have to be trained on how to take the images, and radiologists have to learn how to read them. “All of that goes into the cost of ramping up a system; we can do that.”
Burnette tends to agree. “Prior to the affiliation, I made the decisions here,” he says. “But now there are certain decisions I have to send out. So it’s different, but from the community standpoint, there is no downside. They have the assurance that the hospital is going to be here, and it is going to be more modern and efficient.”
The benefits can flow both ways. Sentara learned from the patient-satisfaction success that Martha Jefferson Hospital in Charlottesville had achieved, Perry says. And a bigger health-care group has more to offer to employees and can retain its brain power. “Young professionals coming through have more options,” she says.
Expanding their reach
Burnette says many of the corporate suitors who wanted his hospital, such as Duke Lifepoint, saw advantages in expanding their reach. Otherwise, why would they want a struggling hospital? “Some of the systems we looked at have their own health insurance products … if you have a group coverage to offer, when you’re negotiating with [larger insurance firms] if you have a larger service area that you cover, it makes it easier to negotiate,” he says.
Doug Gray, executive director of the Virginia Association of Health Plans, agrees. In general, larger entities appear to be a trend that continues in health care. “Many argue that larger entities are the approach necessary to treat more patients at a lower cost under the ACA,” he says.
Despite the desire for local control, financial pressures likely will win out. Today’s technology, including electronic medical records, is expensive, Perry says. “The American public has said we can’t keep paying more, but we want the best and latest technology, and we wanted to be connected and we want to be affordable. That’s why you see hospitals coming together, either in mergers or partnerships such as purchasing groups.”
Burnette says his hospital in South Hill still has enough local control to satisfy the community. If the state approves its expansion plans, a new hospital could break ground next summer and open in three years. And, if all goes as planned, the new facility will include a new 70-bed hospital and a 120-bed nursing home, he says.
VCU Health System is also seeking permission for a cardiac catheter unit and OB/GYN care, he says. Even the process of planning those services lets the hospital start recruiting cardiologists and other specialists. “So it’s an attractive package,” Burnette says.