Hospitals Bulk Up With Deals as Insurers Encroach on Their Turf

(Bloomberg) -- A spate of hospital deals stands to further remake the U.S. health-care landscape, pushing up prices for consumers and insurers and changing how individuals get care.

Just this month, health systems with at least 166 hospitals and $39 billion in combined annual revenue have announced merger plans. There’s likely more to come: The Wall Street Journal reported on Sunday that Ascension and Providence St. Joseph Health, a pair of nonprofits that together have 191 hospitals and nearly $45 billion in annual revenue, are in deal talks.

A fast-moving shakeout in the health-care sector has led to once-unorthodox deals across formerly distinct corners of the industry, as large insurers shift their business models amid pressure to bring down costs. That in turn has led hospitals to look for ways to preserve their revenues.

Health systems say joining forces allows them to better marshal resources and coordinate treatment. But mergers can also boost their bargaining power with insurers and employers, driving up costs and reducing options for consumers, research by economists has found.

“Health care is a product delivered with a tremendous amount of friction, and it doesn’t have any of the convenience or accessibility that many other products in our economy have,” said Ken Kaufman, managing director and chairman of Kaufman Hall, which advises health systems. “These large organizations are really trying to come together to accumulate the intellectual resources and the financial resources to solve that problem.”

Battle for Leverage

Hospitals are looking to increase their muscle as insurers push into providing care. Last week, UnitedHealth Group Inc., the biggest U.S. health insurer, struck a $4.9 billion deal to acquire DaVita Medical Group, which has approximately 15,000 affiliated or employed doctors and other providers, according to a May presentation to investors. The insurer’s Optum unit already had more than 30,000 affiliated physicians.

CVS Health Corp., meanwhile, agreed to acquire Aetna Inc., the No. 3 U.S. health insurer, for about $67.5 billion in cash and stock. CVS and Aetna are betting they can care for customers more cheaply and effectively in health clinics they plan to build in some CVS stores.

Insurers have tried to steer customers away from hospitals, which are typically the most expensive place to get care. Instead, they’re pushing doctor office visits and surgeries via outpatient clinics, telemedicine, and home visits. That could hurt margins for hospitals, though they’ve been building up outpatient practices and shifting away from inpatient care as well.

Johnny Smith, a spokesman for Ascension, didn’t respond to requests for comment on the Wall Street Journal report. Spokeswoman Colleen Wadden at Providence St. Joseph Health declined to comment.

This month’s announced mergers include:

  • Dignity Health and Catholic Health Initiatives said Dec. 7 that they’d agreed to combine into a Catholic health system spanning 28 states, with 139 hospitals. Dignity has about $12.9 billion in annual revenue and CHI has $15.1 billion.
  • Advocate Health Care and Aurora Health Care said on Dec. 4 that the Illinois and Wisconsin-based systems would combine, forming the 10th-largest nonprofit system. Combined, they’ll have $11 billion in annual revenues and 27 hospitals.

The Federal Trade Commission typically reviews combinations of health-care providers. In recent years, it’s challenged some deals, saying that they’d harm competition in defined geographic regions, including a proposed merger of Penn State Hershey Medical Center and PinnacleHealth System in Pennsylvania and a deal between Advocate Health Care and NorthShore University HealthSystem in Illinois.

“Their activity in this area is aggressive. It tends to be bipartisan aggressive,” said Jennifer Rie, a Bloomberg Intelligence analyst who follows antitrust issues. “I don’t think Republicans are easier on hospital deals.”

Hospital deals among systems in different geographic regions tend not to face the same challenges, Rie said. 

Hospitals and health systems announced 561 transactions covering about 1,260 hospitals from 2010 to 2015, according to the American Hospital Association. 

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