Potential Emory, WellStar Union Hinges on 5 Points

Beyond announcing that they are in formal discussions, neither organization is talking. But history and circumstance yield five reasons why now may be an ideal time to partner.

The press release this week announcing whatever Emory Healthcare and WellStar Health System are up to is a bit of a work of art. Lots of words, little substance.

''Here's what we do know: negotiations will be ongoing for the next 45 days or so to "create a new, unified system." But whether that means the two organizations would actually merge is to be determined.

I'm betting it won't be a merger. Notice the absence of the words "merge," "merger," or "acquisition" in the release.

Unfortunately, for those of us tasked with making sense of it all, there isn't much to go by. Fortunately, I have spoken with the leaders of both organizations within the past year or so, though not on this topic, so I can offer a little insight as to why a strategic alliance, or even a full merger, would make sense.

For starters, 'WellStar already has a strong collaborative agreement, and a joint health plan, with Piedmont Healthcare, another large local system, so that could be a model. It can be exceedingly difficult to merge two cultures.

Doing so may not be necessary to achieve the economies of scale and skill that a lighter partnership might entail. So why spend the extra time, money, and risk necessary to create a merger when any number of "merger-lite" options are available?

But Emory Healthcare has already tried a joint venture with another healthcare company, for-profit HCA Healthcare. And after 12 years, that partnership was dissolved in 2010.

The case for a full merger can be made in part, based on the fact that academic medical centers are increasingly being split off from university control to stand on their own. Emory University has not done that, and in a recent interview with John Fox, the outgoing president and CEO of Emory Healthcare, he was circumspect when I asked him about managing in that environment of university oversight.

He did indicate he was excited to be joining Beaumont Health as its CEO and that although it has a strong academic component, it does not have a university to answer to. Further, Beaumont has recently completed a full merger with two other organizations.

Whether that augurs a full merger with Emory health system and a competitor is anyone's guess—and probably has little to do with how the ongoing discussions play out.

Let's go through some of the likely talking points between Emory Healthcare and WellStar:

1.Fox is Moving On
Fox has been with Emory Healthcare for 14 years—12 as its top leader. Now that he's announced he is moving on it could mean that Emory was put in play in response to his decision—or prior to that point.

Fox's first day at his new post will be around the end of March, close to the expiration of the 45-day window of further negotiations announced by both organizations this week. Emory has not named a successor for him, nor has it announced a search beyond saying that the executive leadership team will report to Wright Caughman, MD, the CEO of Emory's Woodruff Health Sciences Center, and Michael Mandl, chairman of Emory Healthcare's board, until a successor has been named.

It's a smart move in a significant leadership shuffle to look at all the M&A and partnership options.

2. Negotiating Posture with a Dominant Commercial Insurer
Anthem's Blue Cross Blue Shield of Georgia has the dominant share of the commercial insurance market in the state. Other states have more dominant insurers, but this health plan, as of 2012, controlled 50% of the large group commercial market in Georgia and 32% of the small group market. Its closest competitor controls 19% and 23% of those markets, respectively.

WellStar's collaboration with another big Atlanta competitor, Piedmont Healthcare, through its Piedmont WellStar Health Plans, could make serious inroads not only in negotiations, but in competitiveness, by adding Emory Healthcare into its orbit.

There are also ample opportunities for clinical collaboration through such a vehicle, and those wouldn't require a merger. If a full merger isn't ultimately the plan, we could still see Emory split off from university control in an independent transaction, as many 'other AMCs have done recently. (See reason 5.)

3. Adding an AMC to the ACO structure
WellStar, as previously mentioned, has a recent history of partnership with its competitors, rather than acquisition. Besides the fact that a full acquisition would be considerably more of a hill to climb than another type of collaborative arrangement, WellStar President and CEO Reynold Jennings said in a previous release announcing another clinical partnership with Piedmont that "we believe that the future of healthcare in America is through organizations working together and partnering and not through owning and controlling."

That leaves little room for wiggling unless the calculus has changed markedly since 2012. He said essentially the same thing to me back in 2013, when I was primarily discussing with him how the partnership has helped WellStar focus on reducing all-cause readmissions.

So a full merger may not be in the cards with Emory, even if that is the preference of Emory University (which again, we don't know).

4.Coordination of Care and Standardization of Practice
Jennings has expressed to me the difficulty of changing practice patterns and care utilization while at the whims of divide-and-conquer historical negotiations with health plans. One way to collaborate with competitors is through the health plan.

That leads to standardization of practice under their own terms to some degree, and provides somewhat of a bulwark against the diktats of other plans. But that type of entity needs scale, and Emory can provide it.

5.AMCs' Move Away from University Control
I've said a lot about this previously, but there are many reasons academic medical centers are under more financial pressure to remake their business models than just about any other slice of the hospital sector.

Not only is the inpatient line of business no longer a growth area, but thanks to the Patient Protection and Affordable Care Act, many of the subsidies that supported the educational mission of such organizations are ratcheting down significantly.

Disproportionate share funding is also being reduced. This is a particularly acute problem in states like Georgia, where the state government has chosen not to expand Medicaid. Sequestration is a major problem. Universities in many cases, have decided that they don't want the uncertainty.

Regardless of how this story turns out, it will be interesting and will likely be something others will try to emulate. Vertical integration is the way of the future in healthcare.

Wellstar and its current partners are building that. Whether it will ultimately make a difference in cost and quality of healthcare is complicated by so many factors as to be un-knowable.

But for hospitals and health systems trying to remake the business model into one which can thrive under value-based reimbursement, the consolidation trend—whether in actual mergers or tight partnerships—is their friend.