CEOs want partners but increasingly not a merger

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When describing Nemours Children’s Health System’s growth strategy for this year, CEO Dr. Larry Moss steers clear of the term “mergers and acquisitions.” But the provider doesn’t intend to go it alone, either.

Instead, his team’s energy is dedicated to partnerships that will help the Jacksonville, Fla.-based system address the social determinants of health that affect kids the most. Nemours provides medical care, but Moss said actually improving health extends well beyond that, and will require the help of adult health systems. “We’re always on the lookout for those win-win opportunities,” he said.

Nemours’ strategy fits with a broader trend among health systems of seeking out joint ventures and partnerships that carry many of the same benefits as M&A but require less capital and carry less risk. That trend was apparent in the results of Modern Healthcare’s 2020 CEO Power Panel survey, in which 69.2% of the 26 respondents said joint partnerships were a component of their growth plans for this year, up from just half of respondents in the 2019 survey. It’s also the second year that CEOs said M&A activity is less of a strategy at their systems.

“Partnerships will be increasingly important,” said Marna Borgstrom, CEO of Yale New Haven Health. “Money doesn’t exchange hands for acquisitions as much as you’re going to try to align care along a continuum that supports better outcomes and patient care.”

In some cases, a health system wants to buy a hospital from another system, but the price is too high, said Doug Swill, a healthcare partner with law firm Faegre Drinker Biddle & Reath. “The health system says, ‘We want you, but we’re not going to put in a premium right now,’ ” he said. “So they do a JV and the health system buys a percentage of that hospital.”

In that example, the health system—often a not-for-profit—will buy less than 50% of the hospital so that the seller retains ownership control. In some cases, the buyer provides a capital commitment to the target system in exchange for board seats. Such deals would need to undergo antitrust analyses, especially if the providers are in the same market, Swill said.

Those partnerships also make sense when the seller has attributes, like a strong ambulatory outreach strategy or electronic health record system, that would benefit the buyer. It’s a common scenario when a large health system has a pricey EHR system, and a smaller hospital can’t afford the system, but needs to improve its medical records system. In that case, the smaller hospital will contract with the larger one, which will then serve as an EHR host, Swill said.

“We’re definitely seeing an uptick in that,” Swill said.

For Nemours, one example is its partnership with Lakeland Regional Medical Center in Orlando. Nemours’ specialists provide inpatient cardiac care at Lakeland Regional, and the two organizations jointly staff an outpatient health campus that offers cardiology, endocrinology, gastroenterology and other specialties. The partnership includes an agreement by Lakeland to send its sickest patients to Nemours.

“That’s a wonderful partnership,” Moss said. “It’s in the best interest of kids and our medical center.”

Yale New Haven Health’s Borgstrom said she doesn’t buy into the idea that her health system should, for example, strive to be a $7 billion system in two years. Yale New Haven drew $4.6 billion in revenue in 2018. “That doesn’t make any sense to me,” she said. “I think you have to be focused on what your vision is for the system for growth and how you get there.”

Vertical joint ventures are also increasing in popularity, especially in the social determinants arena, such as care access or housing issues, Swill said. It’s also becoming common for health systems to partner with payers to create narrow networks, he said.

In addition to partnering with other hospitals and health systems, Morristown, N.J.-based Atlantic Health System has partnerships emerging with insurers like its local Blues plan, Horizon Blue Cross and Blue Shield of New Jersey, said CEO Brian Gragnolati. Atlantic has also partnered with UnitedHealth Group’s Optum to open urgent-care centers in its coverage area. “I think those types of activities are going to continue,” he said.

The Power Panel survey results also highlight the fact that health systems face challenges from every direction.

Asked to pick their greatest challenges in 2020, many CEOs checked most or all of the boxes. High on the list were competition for talent (53.8%), regulation and reimbursement (50%), rising expenses (46.2%) and consumerism and transparency (38.5%). Other responses included changes to Medicaid, transitioning to value-based payments and changes to the Affordable Care Act insurance markets.

Despite that, 69.2% of CEOs still think their organizations will perform better this year than in 2019. Another 26.9% predict their organizations will perform the same. And just one, Yale New Haven’s Borgstrom, thinks her organization will perform worse.

“I worry that it’s going to get harder,” she said. “The basic reason is we’re busier than we have ever been, and it’s not translating into revenue. But the expenses are going up.”

One of the biggest challenges in Borgstrom’s opinion is the fact that healthcare still doesn’t pay for value. Payment structures don’t create incentives, for example, for post-acute care. They also don’t reimburse for home care or other forms of long-term care, she said. It puts providers in a strange world of trying to survive in the current fee-for-service environment, while also preparing for a value-based world. “You’re not going to be around to live for the evolution of healthcare payment and delivery if you go bankrupt doing it, so you‘ve got to operate successfully in the current model,” she said.

Atlantic Health’s Gragnolati is among those who checked off just about every box. Atlantic uses a long-term financial plan that’s refreshed every six months. Planning efforts involve a focus on growth, performance, quality and service, he said.

“That’s why I say all of those things are important,” he said. “You have to measure and manage all of those. The reason I have confidence in the future is because we are laser-focused on how to do that.”

At Nemours Children’s Health System, Moss said the biggest challenge this year will be changes to Medicaid, a program that covers up to three-quarters of the children who visit its hospitals. While he’s heartened by the CMS’ efforts to allow Medicaid dollars to pay more broadly for things like education, food security and freedom from poverty, he worries the agency could start to remove Medicaid programs that protect children.

On the expense side, 46.2% of CEOs said drugs will be their fastest-growing expense this year, followed by staffing and labor at 38.5%.

At Nemours, “game-changing” spinal muscular atrophy drugs like Zolgensma and Spinraza offer hope to patients where there previously wasn’t, Moss said. But their high cost will necessitate a societal solution about how to pay for them, he said.

“I don’t have a ready baked solution,” Moss said. “It’s challenging. We want to work with the developers to be able to offer them to every child who needs them.”

Despite what could be viewed as a pessimistic response about her health system’s future, Borgstrom said she’s an optimist. In the long run, she believes Yale New Haven won’t just survive, it’ll learn how to thrive.

“You’ve got to keep your hand on the rudder and keep flying or driving this at a safe and steady speed going forward because that’s what the people getting care expect and deserve,” she said.

A particular challenge for Atlantic Health System has been recruiting the people who help patients with their most basic, yet fundamental, activities, Gragnolati said. That includes tasks like eating, bathing and going for walks.

These employees are typically called patient-care associates or patient-care assistants, although there are a number of titles for the role. The looming shortage in this field is typically discussed as being a problem of the post-acute and home health sectors, but health system CEOs say they’re also feeling the squeeze. Asked which job categories system they’re most trying to fill, 69.2% of CEOs responding said frontline caregivers, which was far and away the most common response, and some mentioned patient-care associates specifically in interviews. That’s compared with 75% in the 2019 survey.

“I think that is one of the underexplored areas of care and support for communities,” Gragnolati said.

Patient-care associates—PCAs—are particularly important because they allow nurses to work closer to the top of their licenses. Without them, nurses would be even more overburdened than they are already, CEOs said. The U.S. Bureau of Labor Statistics projects employment among personal care aides, as it calls them, and home health aides will grow 36% from 2018 to 2028. That’s compared with just 5% among occupations across all industries in that time.

The problem is the U.S. population is aging and it’s hard to keep employees around if they’re paid less than $15 an hour, said Eugene Goldenberg, a managing director with investment banking and advisory firm Edgemont Partners. Bureau of Labor Statistics data show PCAs’ median annual pay was $24,000 in 2018, compared with nearly $39,000 for occupations across all industries.

In response, some cities and states are eyeing increases to their minimum wages to encourage PCAs to stay put.  “Amazon and Target are paying $15 and a PCA is working 10 to 12 hours a day caring for someone with dementia making $9 an hour,” Goldenberg said.

Today, only between 3% and 5% of Medicare Advantage plans cover PCA services, but Goldenberg said he expects that to increase rapidly, and with it, the demand for these caregivers.

When it comes to needing more PCAs, Yale New Haven Health is no exception, Borgstrom said. It’s imperative to keep nurses working at the top of their licenses, and the employees who do the crucial work of feeding, bathing and toileting are a crucial part of that, she said.

That’s especially true as the health system shoulders a crushing demand for services. Its academic medical center, which is licensed for 1,541 beds, hit 1,520 patients on a recent weekday, Borgstrom said. That kind of gridlock—some of which is flu-related—has become commonplace for Yale New Haven, and it has increased the need for more PCAs and nurses.

“Even if you staff for high occupancies, you’re not going to staff for 1,520 beds being occupied,” she said. “That puts a real strain on staff.”

One potential solution is to hire pre-nursing or pre-med students into PCA roles, said Kyle Cooksey, president of CareThrough, a company doing just that. CareThrough, a sister company to ScribeAmerica, pairs each nurse in a health system with a PCA, who spends up to 40% of their time doing documentation that would otherwise be the nurse’s job, he said.

“Nurses get to go back to top of their license and do what they went to school to do, which is to be a nurse and not be changing bedpans constantly,” Cooksey said.

Carl Armato, President and CEO, Novant Health
David Bailey, President & CEO, Nemours Children’s Health System
Marna Borgstrom, CEO, Yale-New Haven Medical Center
Joanne M. Conroy, CEO, Dartmouth-Hitchcock
Lloyd Dean, CEO, CommonSpirit Health
Tina Freese Decker, CEO, Spectrum Health
David Entwistle, CEO, Stanford Health Care
Peter Fine, CEO, Banner Health
Brian Gragnolati, CEO, Atlantic Health System
Chris Van Gorder, CEO, Scripps Health
Joseph Impicchiche, CEO, Ascension Health
Catherine Jacobson, CEO, Froedtert Health
Thomas E. Jackiewicz, CEO, Keck Medicine of USC
Gary Kaplan, CEO, Virginia Mason Medical Center
Howard Kern, CEO, Sentara Healthcare
Sarah Krevans, CEO, Sutter Health
Stephen K. Klasko, CEO, Jefferson Health System
Randy Oostra, CEO, ProMedica Health System
Ronald Rittenmeyer, CEO, Tenet Healthcare
Terry Shaw, CEO, Adventist Health System
Wayne Smith, CEO, Community Health Systems
Susan Turney, CEO, Marshfield Clinic
Penny Wheeler, President & CEO, Allina Health

Learn more about opportunities and pitfalls of mergers and acquisitions by attending Modern Healthcare’s Transformation Summit on May 12 for a conversation about partnering for success.

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