According to the Healthcare Association of New York State (HANYS), approximately 85 percent of hospitals in New York state have undergone some sort of affiliation or merger since 2006. That statistic doesn't factor in the consolidations, affiliations and mergers at other healthcare entities such as nursing homes, behavioral health centers for mental health and substance abuse, physician practices and at-risk youth agencies. The healthcare landscape is changing in New York, but the question of 'to what end' is still uncertain. While most consumers of healthcare would hope consolidations are occurring to seek cost reductions in the healthcare system, that may not be the driving force for agencies seeking them. So, what’s occurring as a result?
Difficulties in cost reduction.
Major systems are vying to get bigger, gather more market share and establish a position whereby they have leverage in negotiations with vendors, funding sources and the competition. A merger or affiliation may identify opportunities to reduce or consolidate duplicative services, however a primary impediment is the board governance and the determination of decision-making authority. Many affiliations occurring today involve organizations in different geographic markets, with boards not willing to give up services in their region. In addition, increasing complexities with technology and data are consuming a greater percentage of the budget, so even consolidations with the best intentions to reduce cost and eliminate duplicative services are losing the benefits of such, as the greater entity now has greater technology and compliance needs.
Yet another important, difficult to predict variable is the politics of federal and state government. With those funders now being responsible for approximately 75 percent or more of hospital and other healthcare entity revenue, the political ping pong game that occurs in Washington and Albany impacts the strategic direction of many organizations. With governmental payers usually paying cents on the dollar for reimbursement, the ability and bandwidth for healthcare entities to be creative in restructuring is problematic.
Additionally, elimination of duplicative services can be a complicating factor with respect to physician recruitment and retention. The supply of qualified physicians and nursing staff has been at a crisis level in certain areas of New York state, particularly in rural communities. Larger healthcare systems are an attractive option, or requirement, for physician practices or smaller community hospitals that cannot meet the financial challenges associated with sophisticated technologies, increased requirements for data analytics, as well as the vast array of regulatory compliance requirements mandated by the Health Insurance Portability and Accountability Act (HIPAA).
Margin versus mission.
The evaluation of margin versus mission is now one of the most prevalent decision-making assessments for health system management personnel and board members. Larger systems are evaluating how many attributable lives they can obtain in their markets, and mergers are an attractive approach to obtain a larger market share. However, eventually those systems will evaluate whether they can continue to provide deficit-producing services or programs. Healthcare systems must evaluate the positive patient benefits of continuing to provide these services in relation to the deficit subsidy required to continue providing them. In addition, larger health systems will generally assess less-populated, rural areas as not being desirable from a cost benefit margin analysis. As a result, competition and consolidation may have a slow, long-term adverse effect on underserved rural and vulnerable patient populations, which will increase the need for community-based organizations (CBOs) to expand their services and fill the gaps that will inevitably occur. In the interim, it will be interesting to monitor the continued proliferation of urgent care centers, which are designed to be a first point of patient contact to avoid unnecessary, higher cost emergency room visits. Can the larger healthcare systems restructure certain models of care and still maintain bottom line performance?
Complexities in care for the aging population, technology advancements, and data analytics are now additional assessment requirements for all hospitals and many community-based organizations. These factors can generate deficits in certain service or program areas, and, as a result, the bottom-line financial results are more stressed than in previous decades. Facing monumental financial challenges, organizations cannot remain autonomous unless they have substantial community support from contributions and bequests or some other means of support.
Affiliations of a different kind.
As mentioned, hospital systems are not the only avenue of care impacted by consolidation and affiliations. Currently, mental health providers and substance abuse clinics throughout the state are joining forces to form regional provider networks known as behavioral health care collaboratives. These provider networks are examining all opportunities for reduction of costs and improved efficiencies while participating in value-based payment (VBP) contracts that award providers for improved service quality and targeted outcomes. Not so long ago, it would have been unheard of for providers to come together in this fashion, however, with New York State funding providing support, these regional provider networks perceive the transition from service volumes to “valued outcomes” as an opportunity to generate additional revenue while at the same time creating bridges among providers to collaborate, clinically integrate, and develop desirable incentive-based service outcomes. The underlying concept and design is modeled after the Performing Provider Systems (PPS) that were created and lead by hospital systems in the past five years.
DSRIP and beyond
From a financial perspective, healthcare systems will continue to evolve through both service expansion and contraction with the objective of improving bottom-line margins. One additional, and significant, piece of the puzzle is the effect the New York State Department of Health’s Delivery System Reform Incentive Payment (DSRIP) Program.
DSRIP´s purpose is to fundamentally restructure the healthcare delivery system by reinvesting in the Medicaid program, with the primary goal of reducing avoidable hospital use by 25 percent over five years. More than $6 billion has been invested in developing 25 Performing Provider Systems (PPS) and the related infrastructure in New York state since 2014. The program is slated to end on March 31, 2020, though logic and rational decision-making would likely result in some form of DSRIP/PPS continuation after the end date, albeit likely with reduced government funding. The next iteration of DSRIP/PPS must address the massive capital costs associated with the movement of healthcare services away from hospitals towards community-based and/or home care service sites to continue to address the delivery of care. It must also focus on the consumer and develop the appropriate infrastructure for consumers to assess and compare quality and cost among providers.
In the not so distant future, companies such as Amazon, Walmart, and other larger health systems such as the Mayo Clinic, will be entering the healthcare space with much greater emphasis. The overall industry is approximately $18 billion largely without them – put simply there’s too much money and these giants have too many resources for there not to be major disruption in the delivery of healthcare. If these business disruptors are not an existential threat now, they will be a motivating factor for current providers to seek to get bigger.
At the bottom line, consolidations are helping entities compete and retain, but the cost savings many consumers hope for in their copayments and premiums may not come out of the consolidation game at the provider level or in consumers’ pockets.