Rural hospitals continue to close, and patients would be better served if Republicans would stop blocking Medicaid expansion. But constraints in rural healthcare can be overcome through innovation and collaboration.
As I peck out my last column of 2015, scrolling through stuff I've written over the past 12 months, I am struck by the tremendous challenges and changes underway in rural healthcare delivery. I don't know whether to be depressed or heartened. As with so many things, I suspect it's a dose of both.
On the negative side, the biggest challenge facing rural health is the hard-headed refusal by Republicans in 20 states to expand Medicaid under the Patient Protection and Affordable Care Act. By no coincidence, many of these holdout states score lowest on national health rankings.
Let's be clear: this is a political issue, not a healthcare issue, which is why I don't spend a lot of time writing about it. It must be said, however, that this is all on Republicans, who irony tells us are the intellectual godparents of Obamacare and the individual mandate that they now so roundly despise.
There is no valid policy argument for blocking the expansion of Medicaid. No reputable study has made a compelling argument that expanding Medicaid is a net negative for any state. In large part, that is because Medicaid does not create the need for healthcare. The need already exists. Simply ignoring the problem and refusing to expand the program doesn't make those care costs evaporate. People still get sick and need care, whether or not they're on Medicaid, and someone has to pay for it.
This is all particularly mean-spirited because it needlessly harms the poorest and most vulnerable people in our nation. Fortunately, there are signs that resistance is splintering as Republican governors with reality-based budget challenges push for expansion. Let's hope more states end this embargo in 2016. Unfortunately, it would not be surprising if the expansion blockade—which seems based on personal animus against President Obama—remains in effect until he leaves office in 2017.
A far more complex issue these past several years and into 2016 is the financial status and survivability of rural hospitals, particularly low-volume and critical access hospitals. Since 2010, 61 rural hospitals have closed, according to a watch list that's updated, all too often, by University of North Carolina researchers.
While there is no easy solution, that's not necessarily a negative. It's becoming obvious that rural care delivery is in the midst of profound and fundamental change. There aren't enough doctors or money in many parts of rural America to maintain a shaky status quo, and that means that the very process of providing care in rural areas is transforming. How that happens, and what the end product resembles, are subject to conjecture, but I choose to believe that ultimately this will be a very positive development.
I got some sense of what could transpire in the coming months and years after speaking with some rural healthcare visionaries over the past few months. In Beulah, ND, for example, Coal Country Community Health Center, a federally qualified health center, has learned the value of cooperation with one-time rival Sakakawea Medical Center, a 25-bed critical access hospital in nearby Hazen.
Darrold Bertsch, CEO of Sakakawea, told me the two providers—neither with resources to spare—found themselves fighting for market share and competing for redundant primary care and ancillary services. The inefficiencies threatened to shutter Coal Country Community in 2011, before the two sides forged a pact to coordinate care services.
This idea resonates. Two of the most urgent healthcare needs for rural healthcare are access to primary and emergency care, so it seems downright silly that rural hospitals and FQHCs don't coordinate and collaborate to effectively use precious resources. Turf wars are ridiculous when you can't afford the fertilizer. I expect we are going to see more of these sorts of alliances in 2016.
I was also impressed by a number of initiatives detailed in a piece I wrote about rural population health management for HealthLeaders magazine. What was particularly striking was that some very smart rural healthcare innovators who I spoke with were not content with adapting to a healthcare delivery and payment model designed around urban settings. They recognize that population health in rural America poses its own unique problems, with a generally older, sicker, isolated, and less-educated patient mix.
The common theme in the several initiatives detailed in the magazine article was the recognition that resources are scarce and collaboration is vital. It should be glaringly obvious that not everyone can provide every service to everyone, but some rural hospitals out there are still trying to do exactly that. They probably won't be around much longer.
For 2016 and beyond, we can expect to see more of these collaboration models among rural providers of all stripes, including hospitals, FQHCs, physicians, nurses, pharmacists, mental health professionals, and dentists. This teamwork will be facilitated by continually improving electronic medical records that allow every provider along the care continuum to access and monitor their patients' progress.
On balance, this outlook for rural healthcare in 2016 is heartening.
The director of the FTC's Bureau of Competition says she has seen no evidence that consolidation leads to higher quality.
In the past two months, the Federal Trade Commission has blocked three hospital mergers in West Virginia, Pennsylvania, and Illinois. In each case, the FTC said the proposed mergers would create a dominant provider in the respective market that could potentially raise prices for payers and patients.
Deborah L. Feinstein
Deborah L. Feinstein, director of the FTC's Bureau of Competition, spoke with HealthLeaders Media about the commission's recent actions against these hospital mergers. The following is an edited transcript.
HLM: The FTC has intervened to block three hospital mergers in three states in the past two months. Is this a coincidence owing to the increased number of hospital mergers, or has the FTC enhanced scrutiny of hospital mergers?
Feinstein: We have looked at hospital mergers for decades. This is not a new development. There are more hospital mergers these days than in the past for a number of reasons and that inevitably means that some of them will be challenged. The fact that there were three of them in recent weeks is really a coincidence. There hasn't been any shift in how we think about these or anything like that. It's a constant focus. Some of them raise problems. Many do not, and we happened to challenge these three.
HLM: The three cases in Illinois, West Virginia, and Pennsylvania all appear to be problematic because of geography.
Feinstein: That is always going to be the case. We are concerned about the elimination of competition. The elimination of competition is going to be more problematic when the hospitals are in close proximity to each other and there are few other competing hospitals in the specific geographic territory.
HLM: Does the Affordable Care Act's push for population health and economies of scale create a friction with the FTC's charge to regulate competition?
Feinstein: That is literally the most asked question I get in this job. We don't think there is a conflict between the ACA and the antitrust laws. In fact, the ACA explicitly makes clear that it is not designed to supplant antitrust laws. I would say the ACA encourages collaboration that does not need to be done through consolidation. The narrow networks can be put together by an insurance company from competing suppliers, and there are lots of examples of those. There are hundreds of accountable care organizations. The FTC has not challenged a single ACO because they have been set up in ways that don't violate antitrust laws. We clear dozens of hospital transactions every year because they don't raise competitive concerns. There are a handful that do, and those we are going to bring an action against.
When the parties say "We have to merge to do this," we can come up with examples of providers who are accomplishing the same goals in different ways, without consolidating, without joint negotiations with payers. They do them in collaborations that allow them to compete and collaborate at the same time.
HLM: When reviewing hospital mergers, does the FTC factor in potential quality or value improvements that the consolidated system could provide?
Feinstein: The antitrust laws and the government's merger guidelines allow us to examine whether or not there are those kinds of efficiencies and pro-competitive benefits arising from a transaction. To be credited, however, they have to show three things; merger specific, verifiable, and cognizable.
Merger specific means that it can't be accomplished other than through a merger. A good example of that is in the St. Luke's case in Idaho. The parties argued that the acquisition was going to allow them to do all these amazing things. The judge found that "well, maybe," but they were already doing a number of these things in the community without having to be consolidated. It is not merger specific.
Verifiable means they can show that it is really going to happen, as opposed to speculation, or "five years into the future" or "it might happen."
Cognizable means it is an efficiency that doesn't reduce with less output or lower quality. Often we find that the claims that entities make about why they have to merge—and this is true in the hospital context and elsewhere—simply don't meet that criteria. Sometimes they do and sometimes the efficiencies are such and the competitive effects are such that we don't think we need to challenge it. But again, in a handful of deals we do not think that overall consumers and patients are going to benefit.
HLM: Do you review these mergers with the assumption that consolidation leads to higher pricing?
Feinstein: With each investigation we look at the facts. When the facts show that it is likely to increase concentration substantially in the relevant geographic market we know from empirical studies that in those situations prices will go up. But we go in with an open mind because we don't know what the relevant geographic market is until we examine it. We don't know what the market shares look like. We don't know what the strengths and weaknesses are of other competitors in the market. So, we examine each one case by case. Although there have been dozens of hospital mergers, we issue second requests, which is our more detailed inquiry, on only a small number, and we challenge an even smaller number.
HLM: How does the FTC feel about joint ventures and other alternatives to mergers and acquisition?
Feinstein: It depends on the structure. A joint venture is typically just a relabeling if they are coming together with existing facilities and negotiating jointly with a provider that raises all of the same types of issues. But there are things that entities can do without consolidating. Everybody in the community can get together and agree on an electronic medical system. Hospitals can share information on things like infection rates to see what it looks like overall in the population.
It might be OK for hospitals in an area to collaborate on certain population health management goals. It depends on if they are continuing to compete independently but collaborate in other areas. That may well be unproblematic. There is a lot of that going on under the ACA, and much of it does not raise antitrust concerns.
HLM: Can hospitals make a valid argument that consolidation will improve quality or provide value?
Feinstein: Antitrust is necessarily forward looking, always making predictions both about the anti- and pro-competitive concerns. Often hospitals will come and say, "Look I bought a hospital two years ago and here is what happened two years after I bought it. Let me show you how I made things better and that is going to happen in this hospital merger." So, you can look at the past to help get an idea of what is likely going to happen in the future.
Secondly, we have numerous empirical studies that show when concentration increases, prices go up. If somebody wants to show me the empirical evidence that acquisitions tend to lead to quality improvements—something that we have not seen—that would be interesting to us. We would have to see if that would apply to the particular facts at issue and whether or not those pro-competitive effects outweigh the anti-competitive concerns we have that consolidation leads to price increases.
HLM: What questions should providers ask themselves to ensure their proposals pass FTC muster?
Feinstein: They have to ask not only "who is my closest competitor?" but "who do I compete with? When I am negotiating with payers and I am giving them a decent price, is it because I am worried about being kicked out of network and this other hospital that I am about to merge with is able to be included in the network? What do my documents say about who I compete with and why I upgraded my labor and delivery wing last year? Is it because I competed with this merging hospital and we wanted patients from them?" All those things are helpful.
Frankly, you're going to have to get experts involved, anti-trust lawyers who've been through this and who know the drill. Early advice is often crucial in any big deal that folks are considering because we have lots and lots of information out there. There are merger guidelines that set forth the mode of analysis. You can look at the previous hospital merger complaints to see what we are concerned about. There is a lot of guidance out there about what may raise competitive concerns and what may not.
HLM: Does the FTC provide help identifying potential problems for hospitals in the M&A vetting process?
Feinstein: We are not in a position to provide advisory opinions. We have to deal with thousands of mergers that are actually signed up and that get filed to us. We are not in a position to do advisory opinions on deals that are still in the consideration phase.
HLM: There seem to be numerous consolidations in just about every industry these days. Why?
Feinstein: That is a question you're going to have to ask an investment banker. I am sure there are a number of forces and I'm not sure what they are. We just deal with what comes before us.
The Federal Trade Commission is attempting to block three hospital merger proposals in IL, PA, and WV. A growing body of evidence links healthcare costs and hospital market share.
The Federal Trade Commission's recent efforts to block three hospital merger proposals in Illinois, Pennsylvania, and West Virginia are under a challenge by the affected healthcare systems in those three states.
On Friday, Chicagoland's Advocate Health Care and NorthShore University HealthSystem jointly announced that they will fight the FTC, shortly after the commission announced that it was taking action to block the merger.
"We remain steadfast in our commitment to come together for the betterment of the patients and communities we serve," Mark Neaman, NorthShore president and CEO said in a written statement. "We believe that by bringing together our two organizations, we will lower costs, enhance care, and expand access while driving innovation."
Neaman's comments came one day after Pennsylvania's PinnacleHealth System and Penn State Hershey Medical Center said they will fight efforts by the FTC's and Pennsylvania Attorney General to block their merger under Penn State Health.
"The integration of the Milton S. Hershey Medical Center and PinnacleHealth makes good sense for patients, employers and our community and we intend to prove it in federal court," A. Craig Hillemeier, MD, CEO of Penn State Health, said in prepared remarks. "As one health system, we can better provide patients with the highest quality care, in the most appropriate setting at the lowest possible cost. Our integration also provides a powerful platform to produce future generations of healthcare providers and make discoveries that improve health."
The FTC said in its administrative complaint filed earlier this month that the Penn State Hershey/PinnacleHealth merger would create a dominant provider of general acute care inpatient services sold to commercial health plans in a four-county region of south-central Pennsylvania. The merged health system would control 64% of this market, which the FTC said would lead to increased healthcare costs and reduced quality of care for more than 500,000 regional residents.
On Friday, the FTC used the same line of reasoning to block the Advocate/NorthShore merger. In that administrative complaint, the FTC said the proposed merger would create the largest hospital system in the North Shore Chicago area that would control more than 50% of the general acute care inpatient hospital services.
"Advocate is one of the largest health systems in the Chicago area, and it competes directly with NorthShore in the northern suburbs of Chicago," Deborah Feinstein, director of the FTC's Bureau of Competition, said in a media release. "This merger is likely to significantly increase the combined system's bargaining power with health plans, which in turn will harm consumers by bringing about higher prices and lower quality."
The FTC authorized staff to seek a temporary restraining order and a preliminary injunction in federal court to prevent consummation of the Advocate/NorthShore merger pending an administrative hearing.
Advocate President and CEO Jim Skogsbergh challenged the FTC version of events and said the two health systems had done their homework in the 15 months that led up to the merger agreement.
"We laid out a detailed roadmap with the FTC on our plans to advance the delivery of care, improve quality, and reduce cost," he says. "Our commitment to elevate the model of care with new thinking requires an openness to new approaches in this fast and evolving marketplace."
CHH President and CEO Kevin N. Fowler said the FTC action "misreads the highly competitive landscape in our Tri-State region and overlooks the enormous community benefits that would result from the combination of CHH and SMMC."
"Despite the FTC's decision, we remain committed to this acquisition as we believe it assures quality medical care for the residents of our region," Fowler said.
It is not clear if the FTC is intensifying its review of hospital mergers because these combinations are inherently problematic, or simply because more hospital M&A occurring right now.
Generalizations are difficult because each healthcare M&A is unique and "fact-specific," Jay Levine, an antitrust attorney with Porter Wright's Washington, DC, office, told HealthLeaders Media. "There are more mergers being put in front of the FTC and DOJ, and there are probably more strategic mergers put before them because the thought process is that these types of strategic combinations will cause the types of efficiencies and cost reductions the parties are trying to achieve. At the same time they also can produce the kind of anticompetitive effects that the enforcement agencies are worried about."
The "physician gun gag" or "Glocks vs. docs" bill was signed into law in 2011 and has been in court ever since. Enforcement is in abeyance.
For a third time, a three-judge federal appeals panel has upheld the constitutionality of a Florida law that imposes guidelines and restrictions on physicians who talk about firearms hazards with patients.
The State of Florida appealed the ruling to the 11th Circuit Court of Appeals in 2012, where a three-judge panel has issued three separate 2-1 rulings upholding the law, each time vacating the two-judge majority's earlier opinion after considering challenges from three physicians, along with the Florida chapters of the American Academy of Pediatrics, the American College of Physicians, and the American Academy of Family Physicians.
In the Dec. 14 ruling, Judges Gerald Bard Tjoflat and L. Scott Coogler wrote that the law "codifies the commonsense conclusion that good medical care does not require inquiry or record-keeping regarding firearms when unnecessary to a patient's care—especially not when that inquiry or record-keeping constitutes such a substantial intrusion upon patient privacy—and that good medical care never requires the discrimination or harassment of firearms owners."
In dissent, Judge Charles Wilson said the law "does not survive First Amendment scrutiny. However, I have already written two dissents to this effect, and the plaintiffs have sought en banc review. Accordingly, I decline to pen another dissent responding to the Majority's evolving rationale."
The physicians' attorney, Douglas Hallward-Driemeier, with Boston-basedRopes & Gray LLP, says they've been trying to get the case heard en banc by the entire 11th Circuit, but that each time the case is corralled by the same three-judge panel, which each time upholds the law on a 2-1 majority.
"A year-and-a-half ago, the panel in a divided opinion overturned Judge Cook's injunction holding the law unconstitutional. In that opinion, the majority held that doctors' speech to their patients was not entitled to any First Amendment protections," Hallward-Driemeier says.
"We sought a rehearing en banc, and our petition explained that the opinion was inconsistent with controlling Supreme Court precedent. A year later, the majority of two vacated their original opinion and substituted a new opinion that said the doctors' speech was entitled to intermediate scrutiny or protection under the First Amendment and that the law satisfied that level of scrutiny."
Media inquiries submitted this week by HealthLeaders Media to the National Rifle Association's public relations office received no response.
Hallward-Driemeier says the "ever-shifting rationale" used by the two-judge majority exposes the underlying problem with the law, "which is that it is unconstitutional."
"The suggestion this time around that the statute satisfies strict scrutiny because it is necessary to protect Florida citizens' Second Amendment right to own guns is preposterous," he says. "We wouldn't think in any other context that someone's First Amendment rights might be restricted because they might persuade someone with their speech to forgo conduct that would be protected under the constitution. The suggestions that that is a compelling state interest here is certainly unprecedented and inconsistent with other decisions, including decisions that protect, for example, the right to abortions."
Hallward-Driemeier says the Florida physicians will file for yet another en banc hearing in January, although there is no certainty that the full court will hear the appeal.
The good news for Florida physicians, Hallward-Driemeier says, is that the District Court's 2011 injunction against enforcing the law remains in effect until the appeals court directs Judge Cooke to set aside her earlier injunction.
"We are going to file yet another rehearing en banc, and as long as that remains pending, the injunction will remain in force," Hallward-Driemeier says. "If the en banc court rehears the case and disagrees with the panel majority, then the injunction would remain in force permanently. And even if the en banc court did not agree to rehear the case, we would be able to seek a stay from the Supreme Court while we sought Supreme Court review."
Hallward-Driemeier says he's surprised that the fight over this law has gone on this long, and that physicians may have to look to the highest court for a resolution.
Legal opinions on Wollschlaeger v. Farmer (lawsuit filed against "Glocks vs. docs" bill):
The joint venture intensifies the Dallas health system's push into retail urgent care and freestanding emergency departments. CHRISTUS is bringing the consumer-friendly tactics of retail operations into its acute-care hospitals.
CHRISTUS Health has created a joint venture with Velocity Care Urgent Treatment Centers and its four locations in Shreveport and Bossier City, LA, and Little Rock, AR.
Paul Generale, senior vice president of financial operations and ambulatory services for CHRISTUS Health, says the deal allows the Dallas-based Catholic health system to jump into the region's retail-based convenient care market.
Paul Generale
"Quite frankly, what really brought us together was that our analysis on the market in four or five locations was within a quarter mile of where they were," Generale told HealthLeaders Media. "After spending time with these doctor/partner/owners at Velocity Care, we found we were very aligned on mission and patient care. We said for Louisiana, let's try this hybrid where we are in control, we have the percentage. It allows us to get there today and pick up 55,000 visits or access points that we can integrate into our system and truly do population health, rather than spending about the same amount of money, if not more, to open four or five clinics and taking the time to tweak those."
Generale says CHRISTUS last year intensified its efforts to enter the retail urgent care and freestanding ED markets.
"We had a lot of employed primary care docs in offices with extended hours, but nothing that was true retail urgent care and acting like that hybrid, with transparent pricing and times, etc.," he says.
CHRISTUS's push toward retail operations started with the acquisition of four urgent care clinics in San Antonio that took in a combined 60,000 patient visits a year. Generale expects to have as many as 15 urgent care centers system-wide operating by January.
"We picked the right business with the right platform, and we saw that as a good way to get speed to market while we were building urgent care," he says. "In Texas we went from zero to, [that] by the end of the year, we will have seven [sites] that do about 75,000 visits."
Generale says CHRISTUS originally expected to wholly own its urgent care operations in Louisiana and Arkansas, as it does in Texas. But the health system instead entered into a JV with Velocity Care after meeting with the company's physician leaders.
"It's about finding the right partner," Generale says. "We said we wanted to wholly own this because we know it can get complicated. However, we do a lot of partnerships and it is in our DNA, so we're able to make it work."
One reason for the JV, he says, is that the physicians at Velocity Care know the region they serve, but need the business acumen of the larger organization.
"It's like any small business. When you have the original owners and the chassis is small enough and they have their fingertips on it, it does well," Generale says. "When they start to spread into other locations outside of what they know—and we've seen it in Velocity Care numbers and in other businesses—you see longer wait times, you see the financials not working out. It's about finding the bread and butter, and then if you can leverage it with the larger system that has the assets and intellectual property to help grow outside that market, that should be a good recipe."
Hospitals and other traditional medicine venues, which are notoriously laggards in the retail medicine movement, can learn a lot about transparency and pricing from spry newcomers such as Velocity Care, Generale says.
"With the retail and the urgent care, we know our pricing. We've got the visit costs down. We've got our times down. We don't play the out-of-network game. All of our contracts are in-network, and we know that care cost on average is going to be about $100. Your in-and-out copay is $20. [The business model] is trying to not complicate things."
On the acute-care side, CHRISTUS hospitals are adopting the consumer-friendly tactics of urgent and convenient care centers, Generale says. "As you see the market shift to that, you are going to see hospitals shift to this consumerism and use the technology so you can schedule appointments, or geo-tracking so they know where you are, and transparent pricing.
The new market models are "is kind of exciting," he says. "You are seeing doctor-on–demand, and technology where you can be looked at and triaged by a physician using technology in a good-quality, low-cost manner. You're already seeing access to care [improve], whether urgent care [or] immediate care. You're seeing a lower cost base for access rather than the traditional 250 beds and ancillary areas. You are going to see more micro-hospitals, more telehealth, more immediate urgent care, and more money go to this space as you see private equity and others try to gobble up what they can."
A key learning from CHRISTUS's retail ventures is to avoid commingling urgent care costs with other costs within the health system. "What we have tried to do it create a retail ambulatory division that can run independently while integrating into a larger system and maintain those efficiencies and transparencies," Generale says. "That is how you do it, and that is truly key."
In the second of a two-part interview, a veteran observer of rural healthcare gives his views on the evolving role of rural hospitals and the mounting challenges to rural providers.
Jamie Orlikoff, a Chicago-based healthcare management consultant and observer of rural healthcare for the past three decades, spoke at length with HealthLeaders Media this month about the challenges rural hospital leaders and boards face, and the hard questions they'll have to ask themselves about their own viability. The following edited transcript is the second in a two-part interview. Read part one.
Jamie Orlikoff
HLM: What will rural hospitals look like five years from now?
Orlikoff: "It's a very difficult question. It's also very individualistic. It depends upon how isolated the community is. If you're talking about something which is exurbia, an hour away from a hospital, you could make the argument that maybe it's not so critical to have a full-service hospital in that community.
If you are talking about a place that's a four-hour drive over mountains, then other issues come into play. That was the original purpose for critical access hospitals, but CMS saw an abuse of that.
There are many CAHs where there shouldn't be. CMS has seen that the program has been abused and if a community can get healthcare in other ways, either through driving to another hospital an hour away, or telemedicine, or Minute Clinics, I don't think anyone outside of any particular community has a loyalty to the traditional hospital-based model, certainly not CMS.
Their mission is how to maintain the solvency of Medicare and Medicaid and [determine how] we most appropriately ensure that beneficiaries receive services. When CMS sees that these federally qualified health centers are pretty good at delivering patient-centered primary care services to populations and they can break even or make money on the Medicaid rate, it asks 'why should we do a cost-plus model for CAHs?'
It represents the slow moving revolution that we are in the middle of right now.
HLM: How do you see the role of rural hospitals evolving?
Orlikoff: It depends on the community. There are some retirement communities that are very well-heeled that have a tremendous philanthropic base of support. The people are not looking for tertiary services, but they want a good emergency department and good secondary care and they're willing to donate money for that.
You have other communities where they have proximity to other healthcare. 'Why should I give you my money when I can get in my car and drive 45 minutes and get world-class care somewhere else?'
Those hospitals are either going to affiliate or get acquired. You are going to see the extension of systems into rural markets because the systems are thinking about trying to grow their feeder networks and maintain their tertiary and quaternary capacity, but also to grow the capacity in their population health models so they can spread the risk and be able to be profitable.
A stand-alone independent rural hospital is going to be much rarer.
If you see one, it will be because it's in a market where there is strong philanthropic support or it's a public district facility where the community is willing to have its tax rate increased and they're willing to subsidize the institution through a tax structure. Or [it will be] where it's been acquired or affiliated with a large system which maintains services in the community, but not all services. Or, they lose their facility.
There will be some that make it. There will be some that are smart and nimble enough to redesign their services and cut services and develop strategies that keep them in business. Those will be the minority. It will be very tough to do that.
HLM: Do you see an expanded role for FQHCs?
Orlikoff: I don't know if they could expand to include emergency medicine. That is one option for rural hospitals to survive. Establishing very close linkages or affiliations with FQHCs is going to be critical, but many hospitals resist doing that.
If you do it well, it means you've got to relinquish many of the services you currently provide. FQHCs for years have been the bald-headed step child of the American healthcare system and now everybody wants to dance with them. They're like 'wait a minute. You didn't want to talk to us before. Now we're doing fine, so why should we talk to you?'
HLM: Given these challenges you describe, how can rural hospitals survive?
Orlikoff: First, if you're a CAH, you must perform the calculation of 'can we survive if we are put into a prospective payment system?' If the answer is 'no,' which is the answer for many CAHs, then you need to run scenarios about what you would need to do to survive if you were put under a prospective payment system.
It's important to do that rather intellectual exercise before it happens so you can get a sense of the decisions you're going to have to make, because you are going to have to cut certain services. You are going to have to ramp up other services, and map out a retail strategy and think about all these kinds of things that many organizations haven't thought about, and one of the reasons why they haven't thought about it is because a lot of them have been in denial. That is step one for a CAH.
If you crunch the numbers and go through the scenarios and the multitude of the probabilities points you into the direction that you probably wouldn't survive, then you need to start thinking about affiliating.
If you maintain independence for the sake of maintaining independence, you become a decaying asset. You 'fight the good fight' until you close your doors and then you have to go out and try to get acquired or affiliated. You want to do it from a position of relative strength when you can negotiate with several potential partners and pick the one who is best of you.
A lot of rural board members don't want to think that way. They want to remain independent as long as they can, and then they back themselves into a corner. When the time comes and they can't find a partner or they have nothing to bargain with, the partner will say 'we will acquire you, but we are not going to maintain a hospital or the services you want.'
For a non-critical access rural hospital, they have to do more complex sets of scenario calculations. First of all, what is their out-migration? I am amazed at the number of rural facilities that have not done that calculation. 'How much business that we should be capturing are we losing right now?' It's a good opportunity because if you're losing a significant amount of business it is usually the people with money in their pockets and good insurance.
The first question is: 'If we were able to come up with a strategy that could recapture a significant proportion of that population what would that do to our financial position?' If the answer would allow you to stay afloat and maintain your margin, then you aggressively pursue a growth strategy which is figuring out why you are losing them, and then combatting that.
HLM: What do you see as the main drivers of out-migration?
Orlikoff: Usually it's due to perceptions of poor quality and things like that. If the perception is a reality, you have to address that. That requires facing some hard truths. Because of your position you can't do everything well.
That means you have to let go of the old model, which was based on the assumption that it's better that we provide a service, even if we don't do it well, than not provide the service. That is what many organizations have done. 'The community needs this service. We know it's not very good, but we provide it.' You have to cut those or get them on par so they can compete effectively. The whole notion that 'we can do everything for everyone in the community' is going to have to go by the wayside.
You're going to see a movement towards focus. 'What does the community need and how can we do it well? What are the three or four services we are going to do really well so we stem the out-migration?'
Obviously, if you run that calculation and you capture all your out-migration and it's still not sustainable, then you start going down the affiliation path. Another option is do you have enough reserves and enough leadership that you can expand and steal from other markets? Usually, the answer is 'no' because people don't tend to perform this type of scenario-based calculation until their back is against the wall. Ultimately, for many of them, it's going to precipitate an affiliation.
HLM: What role do you see for rural hospital boards in this process?
Orlikoff: They need to embrace the whole notion of taking the issue before the community. I am really struck at how many communities don't understand these issues. Communities say they want a hospital, and then the questions become 'what are you willing to do to support the hospital and what are you willing to tolerate for changes that the hospital has to do to stay in existence?' There is a question of communities taking ownership of this issue. That is something that boards should do, because boards are the primary conduit to the community.
HLM: What else?
Orlikoff: Look at the demographics. Is the community on an economic upswing or a downswing? Do people come here to retire, or do they leave and retire elsewhere? These are the questions you have to ask in addition to the traditional payer mix questions because there is such an amazing demographic change coming.
What is your payer mix today? What is it going to be in five or 10 years? You need to take all this stuff and stir it in the pot and then leaders have to do their job, which is to come up with the provisions and strategies that will minimize the weaknesses and maximize the strengths to see if you can make it work.
The key is honesty. If you're not willing to ask the questions, that means you don't want to know the answers and you're not willing to come up with a credible strategy. You need to start affiliation questions now. If you're willing to ask the tough questions get data that shows you have a chance for success, but you're going to have to make a bunch of tough decisions. It's gut check time. Are you willing to make these decisions?
Finally, if you're willing to ask the tough questions and the data tells you 'oh my god we can't make it,' you have to operate on that information and start looking for partners. There it is. It's cold. It's stark. It's not fun. But, being a charitable, nonprofit organization does not mean you have the right to exist. You have to earn that right.
Participating doctors would be retrained and credentialed to serve as primary care physicians at VA medical centers, community health centers, and school-based health centers.
Congressman John Sarbanes (D-MD) has re-introduced the Primary Care Physician Reentry Act, which identifies and supports programs that retrain doctors to work as primary care providers in health centers serving veterans, local communities and schools.
Rep. John P. Sarbanes, (D-MD)
Sarbanes says the bill would help medical schools, hospitals, and nonprofit organizations provide training and education programs to physicians who have left medical practice for a number of reasons, including to raise their families, to retire or for a career in administration or academia. Participating doctors would be retrained and credentialed to serve as primary care physicians at VA medical centers, community health centers, and school-based health centers.
"We have begun, wisely, to turn our healthcare system in the direction of prevention and primary care and delivery of care at the community level and that all make sense. But if you don't have enough caregivers, physicians in place to deliver those services then you aren't going to make progress on that overall vision," Sarbanes said in a recent phone interview.
"We want to help fill that shortage. And certainly there are traditional ways to do that, such as making sure that recruitment into medical schools and other traditional avenues that bring physicians into the workforce," he says.
"We can also think outside of the box and look for more non-traditional ways of bringing physicians into the workforce, or in this case back into the workforce. If we just streamline the process then we are going to generate more supply and meet the needs of the healthcare system we are designing."
"It's pretty much the same bill. Ninety percent of success in life is showing up. The equivalent of showing up for legislation is you keep reintroducing it. As long as it has merit, eventually you will get there," he says. "Frankly, that's part of the process around here. You have to keep running at the chamber and your colleagues over time and begin to bend their consciousness. We think we are making progress. We've kept the provisions pretty much intact."
"That is why you always keep coming back in a new Congress, introduce the bill, assemble your supporters, and continue to make the case to your colleagues and the people who decide what pieces of legislation get put on the floor and what don't."
The bill hasn't been officially scored for cost, but Sarbanes says a back-of-the-envelope calculation puts the cost at around $4 million.
Malpractice Liability Protections
"We don't have an official score, but we sort of estimate that is what it would be," he says. "That is real money, but it is frankly a modest investment when you consider the kinds of returns it could generate in identifying the design and modeling of what these programs can look like."
The bill contains malpractice liability protections that provide physicians with coverage under the Federal Tort Claims Act.
"We knew from the outset that having those protections would be critical and it turned out to be the case," Sarbanes says. "Critical not just for enlisting the support of the professional community that is in a position to take advantage of this re-entry program, but also critical for some of the politics here on the Hill. That is something I can point out to my Republican colleagues."
The bill has the support of key physician professional associations, including the American Academy of Family Physicians, American Academy of Pediatrics, the American Association of Colleges of Osteopathic Medicine, American College of Osteopathic Family Physicians, American Osteopathic Association, the Federation of State Medical Boards and the School-Based Health Alliance. Sarbanes says he expects the American Medical Association to voice its support once the bill is in the House pipeline.
There is no Senate co-sponsor, but Sarbanes says he's "gotten some nibbles" from the staff of several senators who've expressed an interest.
Election-Year Prospects
Next year is an election year, and Sarbanes says he's not sure if that will help or hurt his bill's prospects.
"During election years, we spend less time in Washington because people are back in their districts campaigning. So, the calendar in the election year there are fewer days in Washington. That makes it tougher," he says.
"I hope that members recognize that the public is desperate to see bipartisan collaborative efforts in D.C. because they've gotten fed up with the gridlock. Proposal like this that are common sense that we can assemble bipartisan support around are exactly the sorts of things we ought to pass to show the electorate that we working together and getting common sense measure passed. In that sense, an election year and trying to meet the expectations of the voters could help us to move this along."
Beyond that, Sarbanes says that after 50 unsuccessful attempts to repeal Obamacare, the opposition is starting to weaken.
"As that opposition wanes, there is going to be more opportunity to focus people on where we can further strengthen the ACA and fill in gaps and make refinements," Sarbanes says. "We can have those conversations in a non-threatening environment—conversations about how we can maximize some of the opportunities we were trying to create with the Affordable Care Act that will lead people to focus on some of these gaps and shortages of physicians in the system."
Although hospitals with employed physicians gain revenue, expenses rise simultaneously. Hiring doctors is "a strategic move by hospitals for a variety of reasons, but it does come with a financial penalty," says one analyst.
Hospitals with very high physician employment generate stronger revenue growth but are less profitable than peer institutions with fewer employed physicians, Moody's Investors Service says.
"It's pretty simple. Physicians are very expensive to employ," says Daniel Steingart, vice president and senior analyst at the rating agency.
"Typically when doctors come from being in private practice or a small group practice and they come under the hospital's employ it's not even just a straight transfer of their revenues and expenses. Oftentimes the expense base actually grows. Hospitals typically have a more generous benefits package and there is additional overhead associated, oftentimes with new IT systems, etc."
"So, although the hospital gains the revenues that the practice had been generating, the expenses of the hospital go up, and physicians earn quite a bit of money," Steingart says. "It's a strategic move by the hospitals for a variety of reasons, but it does come with a financial penalty."
For the study, Moody's divided hospitals into four categories based on employed physicians as a percentage of total medical staff. Low physician employment was defined as 1% to 15% of total medical staff and high physician employment was defined as 65% to 100% of total medical staff. The physician employment medians data was taken from 226 rated hospitals in Moody's portfolio from 2012 to 2014 and compared with the rating agency's not-for-profit and public healthcare medians data for fiscal 2014.
Moody's found that the median operating cash flow margin is 10.7% for hospitals with low physician employment, compared to 8.5% for hospitals with very high physician employment.
However, hospitals with very high physician employment saw a 6.8% three-year revenue compound annual growth rate, compared to 4.9% for hospitals with low physician employment.
Hospitals with very high physician employment have a median operating revenue of $950 million, compared with $431 million for hospitals with low employment, and $673 million as the national medial.
Hospitals with very high physician employment also report that outpatient revenues (54%) exceed inpatient revenues (46%), Moody's says.
Steingart says there are some indications that expenses related to physician employment level off in time, or at least don't grow as quickly, as hospitals find more efficient ways to operate practices.
No Goldilocks Formula
"It's an iterative process. It takes a little bit before it levels out," he says. "We have some systems that began employing docs in the mid-1990s and never stopped and have very mature practices. So for them, you don't see it in the financials anymore, but you still have plenty of others still in the growth phase."
There also appears to be no institutionalized Goldilocks formula for the perfect percentage of employed physicians.
"It's case-by-case and what makes sense for your market and your strategy," Steingart says. "We aren't in the business of giving advice. That being said, if your primary competitors are going all out and employing every last doc they can, you're forced to either adopt an aggressive employment strategy yourself or you're positioning yourself in the market as somebody that is open to any sort of arrangement. The point being that you would have to react to what your competitors are doing. Every market is different."
Steingart says this trend is expected to continue because hospitals are employing greater numbers of physicians to gain market share and the transition to risk-based contracts, and because younger physicians generally prefer to be employed.
"There is a large generational divide in how doctors want to practice," he says. "Physicians 40 and under generally are more interested in work/life balance and not running a practice and not dealing with the business aspect. There is both a demand from the hospitals for this, but there is also a very willing supply from physicians."
Steingart says anyone paying attention to this issue wouldn't be surprised by the study's findings.
"If you're following the industry everybody pretty knows this already, but it's one thing to 'know something' and another to show it with the data," he says. "We've been collecting the data for several years and, sure enough, it tracked out the way we expected it to. We thought that was worth commenting on."
The Federal Trade Commission's administrative complaint says the merger would create a dominant provider of general acute care inpatient services sold to commercial health plans in a four-county region of south-central Pennsylvania.
For the second time in about a month, the Federal Trade Commission has rejected the proposed merger of two healthcare systems.
This week, the FTC and the Pennsylvania Office of the Attorney General jointly moved to block Penn State Hershey Medical Center's proposed merger with PinnacleHealth System after stating that the combined providers would "substantially reduce competition in the area surrounding Harrisburg, PA, and lead to reduced quality and higher healthcare costs for the area's employers and residents."
The FTC and the Pennsylvania Attorney General said they would file a complaint in federal district court this week for a preliminary injunction to stop the deal, pending an administrative trial.
"The proposed merger would eliminate the significant competition between these hospitals, resulting in higher prices and diminished quality," Debbie Feinstein, director of the FTC's Bureau of Competition, said in prepared remarks.
Penn State Hershey and PinnacleHealth issued a joint statement saying they were "extremely disappointed" by the FTC's actions, and that the boards of both systems will "examine our options" over the next several days to determine if they will fight the ruling.
"We firmly believe that the integration of PinnacleHealth and Penn State Hershey serves the best interests of patients and the entire central Pennsylvania community," the two systems said. "The joining of our two health systems is completely consistent with the goals of the Affordable Care Act. It creates the depth of services and scale that is required to manage the health of distinct populations of patients and better positions us to provide the most appropriate care, in the most appropriate setting at the lowest possible cost."
The FTC's administrative complaint said the merger would create a dominant provider of general acute care inpatient services sold to commercial health plans in a four-county region of south-central Pennsylvania. The merged health system would control 64% of this market, which the FTC said would lead to increased healthcare costs and reduced quality of care for more than 500,000 regional residents.
Hershey is a 551-bed, not-for-profit healthcare system in Dauphin County. It also owns the Penn State Hershey Cancer Institute and the Penn State Hershey Children's Hospital. Hershey's total revenues in FY2014 were $1.39 billion.
Pinnacle is a not-for-profit three hospital system also in Dauphin County, which operates three acute care hospitals: Harrisburg Hospital, Community General Osteopathic and West Shore Hospital with a combined total of 610 beds. Pinnacle had total revenues in fiscal year 2015 of $1.07 billion.
The Commission vote to issue the administrative complaint and the vote on the temporary restraining order and preliminary injunction were both 4-0. The complaint was filed in the U.S. District Court for the Middle District of Pennsylvania, and the administrative trial is scheduled for May 2016.
More FTC Scrutiny of Healthcare M&As?
In early November, the FTC said it would block Cabell Huntington (WVA) Hospital's proposed acquisition of St. Mary's Medical Center.
"The combination would create a dominant firm with a near monopoly over general acute care inpatient hospital services and outpatient surgical services in the adjacent counties of Cabell, Wayne, and Lincoln, West Virginia and Lawrence County, Ohio likely leading to higher prices and lower quality of care than would be the case without the acquisition," the FTC said in an administrative complaint.
Jay Levine, an antitrust attorney with Porter Wright's Washington, DC, office, says it's not clear if the FTC and the Department of Justice are targeting health system mergers.
"Is this part of a trend? The trend is that there are more of these combinations happening," he says. "There is a perception that we may be seeing more of these [FTC actions], but that is partly because more of these [mergers] may be happening."
Levine says healthcare mergers have been on regulators' radar screens for years now as market pressures and economies of scale push providers toward consolidation.
"To the extent that this is causing providers to merge, then there are more mergers being put in front of the FTC and DOJ, and there are probably more strategic mergers put before them because the thought process is that these types of strategic combinations will cause the types of efficiencies and cost reductions the parties are trying to achieve. At the same time they also can produce the kind of anticompetitive effects that the enforcement agencies are worried about."
Levine says it's hard to generalize or identify trends with state and federal regulators because each healthcare M&A is unique and "fact-specific."
"Any two systems, especially if they are large systems and they are close geographically, they are going to be somewhat of a red flag," he says. "Look for big hospitals getting together and touting the big efficiencies that they are going to get. If that is the rationale they're hyping, then it could well be that they're looking to get together because they think they can essentially pressure the managed care companies. Beyond that, it's the same old, same old. All of these deals are going to be scrutinized. It's not going to go away."
The nation's population is growing while the number of its hospitals is declining. Rural areas are most affected. "If you don't need as many… trying to maintain hospitals for reasons other than for what they're designed doesn't make a lot of sense," says an industry expert.
The past 12 months have been rough for rural and non-urban hospitals, many of whom are seeing their very existence under threat. Unfortunately, there are no indications that life is going to get easier in 2016.
Jamie Orlikoff
So says Jamie Orlikoff, a Chicago-based healthcare management consultant and veteran observer of rural healthcare for the past three decades. He has long called for critical access and community hospitals to wake up and ask the tough questions about margin and mission. Orlikoff spoke with me this week about some of the challenges that 2016 will bring. The following is an edited transcript.
HLM: What's your outlook for rural and nonurban hospitals in 2016?
Orlikoff: The pressures are going to build and accelerate and you are going to see the departures of the weaker players expanding into the middle range of the market. These pressures are going to be exacerbated by several things hitting simultaneously.
First of all, the sugar rush of Medicaid expansion is over.
Secondly, the impact of retail healthcare and high deductibles and premium shares and copays is going to put tremendous pressure on rural hospitals to provide a meaningful retail consumer-facing alternative to both new and emerging disruptive competitors, as well as larger hospitals in different markets that can draw people with money in their pockets.
Another issue is more pressure on critical access hospitals' reimbursements. There is a potential—and now we're guessing—that CAHs may be put on the prospective payment model as opposed to the cost-plus model.
Most CAHs that have done the analysis conclude that they couldn't stay in business if they were on the prospective payment model. Many have not done the analysis because they're in denial. I've had people tell me 'Oh, CMS would never do that!' and then they did do that. If you go back a few years, the reimbursement used to be 105% of cost and now it's 101%. We've already seen a lot of downward pressure.
Because of this, a lot of these rural facilities, especially the CAHs, are thinking long and hard about whether or not they can remain independent or whether they need to take part in the affiliation and merger craze, [and] whether they [have to] become part of a larger system to still be able to provide services to their communities.
HLM: It sounds like you don't see the M&A market cooling in 2016.
Orlikoff: We are going to see a lot more absorption of the independents. Small rural and CAHs [will be absorbed] into larger systems and that will move from the affiliation model to the more formal acquisition model. The organizations that will be under the most pressure will be the public, district, or county authority hospitals. They are the ones that are publicly owned with publicly appointed boards that are required to have board meetings in public.
The paradox is that they have all the restrictions of public ownership, but the vast majority of them receive no benefits of tax financing.
Many small rural communities are going to be confronted with a very stark choice: Lose the facility or raise taxes and fund the facilities with tax dollars. The smart organizations are thinking about privatizing to become a 501 (c)(3). Number one, so it can be more flexible with dealing with the issues of the market and maybe they can survive. Number two, so they have a greater ability to seek out merger or affiliation partners.
HLM: Will the increased numbers of insured patients help rural providers?
Orlikoff: Most of the plans purchased on the exchanges are low-premium high-deductible plans. That shifts the whole issue of migration of bad debt away from bad debt for uncompensated care to bad debt for individuals with insurance who cannot pay their deductibles or copays.
That's what I meant when I said the sugar rush is over. Bad debt migration will be particularly impactful on small rural facilities. Then, you are going to start seeing disruptive competition. Telemedicine or clinics in Walgreens or CVS will tend to draw because of the low cost and defined prices and because of the convenience for people who have some money in their pockets to get services that they otherwise might have gotten from smaller rural providers.
The people who have 'good insurance' increasingly are going to compare the services and quality they get from small rural facilities to larger hospitals that might be an hour or two away. The risk is that you'll lose the people with money in their pockets who can pay their deductibles, which then generates the revenues to cross-subsidize the-mission based patients who generate a loss.
HLM: Will CMS eliminate the CAH program?
Orlikoff: No. They want to curb the abuses and increase the degree of accountability so that if you are a CAH five years from now you're in a place where they need one and you're working hard to provide quality care at low cost.
It's no longer a pass. It no longer will be a perfunctory demonstration of need and therefore pay on a formula that is going to guarantee that a hospital continues to exist regardless of how they perform. That is going away.
There is an underlying notion that all hospitals are going to have to operate on the same level and if you're not providing quality care, or controlling your costs, and that care can be obtained within a reasonable distance elsewhere, why should we finance you?
HLM: Does CMS understand the negative economic consequences of these rural hospital closings for the communities they serve?
Orlikoff: First of all, it's not the mission of a hospital to be an economic driver of a community. The problem is that many board members take that as their implicit mission. That leads to a notion that it is better to maintain a hospital even if it's not a good quality hospital, even if the costs are high and the quality is low, because it's good economically for the community.
That kind of thinking has put us exactly where we are today, at overcapacity. Patients in the community will say 'I'm not going to go to a hospital where the quality isn't good and it's not safe and the costs are high when I can go somewhere else.'
Second, CMS is under no obligation to think of the best economic interests of a community. It's not their purposes. CMS is looking at this tsunami of aging that is going to completely destroy the pyramid of financing model for Medicare. They are doing everything they can to maintain the solvency of Medicare for as long as they can.
HLM: What other challenges do you see?
Orlikoff: There's a trend we are seeing that doesn't bode well for hospitals. Since 1980 there has been an increase in the population of about 30 million and there has been a reduction of 15% to 20% in the number of hospitals in that same period.
Something strange is going on.
If you increase demand, which presumably an increase in population would do, you would expect the supply to remain at least constant or go up. This means the traditional supply-and-demand co-efficient doesn't apply anymore. There used to be a formula that you needed four inpatient beds per 1,000 population. The average was something like 2.9 beds per 1,000 in 2013.
The interesting question is, how many beds per 1,000 are needed? And the answer is no one knows.
So, if CMS or local board members or policy makers operate a hospital based on the economic impact that it has on a community all it does is create the dam effect that delays the re-equilibration, but doesn't prevent it. Then when it happens, it is much more aggressive.
Unfortunately, we are facing tremendous market forces with length-of-stay declines and need-for-hospitalization declines. In 1980 the average daily census in the U.S. was about 747,000 people. In 2013 that was down to 500,000.
If you don't need as many hospitals, trying to maintain hospitals for reasons other than for what they're designed doesn't make a lot of sense. It is very painful for these small rural communities. There is a notion that if you're community doesn't have a hospital it's a red flag that your community is not vibrant and may be on the decline.
(Look for part two of my interview with Jamie Orlikoff, and his recommended action plan for rural providers in next Wednesday's column.)
