Hospital Rivals Explore Benefits of Partnership

by Mark Friedman  on Monday, Oct. 1, 2012 12:00 am  

It might be a perfect marriage between the University of Arkansas for Medical Sciences and St. Vincent Health System of Little Rock.

But the same market forces that are encouraging the union could also make it a very stressful time to try to establish a blended family:

  • Reduced Medicare and Medicaid reimbursement rates as part of federal health care reform;
  • Even bigger cuts if Congress isn’t able to avoid the “fiscal cliff” of combined spending cuts and higher taxes looming on Jan. 1;
  • A new outcome-based payment plan for Medicaid in Arkansas; and
  • Resistance by Republican state legislators to expanding Medicaid coverage, initially at the expense of the federal government.

Both parties announced on Aug. 30 that they had started formal talks to see if there’s a way that the state-owned UAMS Medical Center could work with Catholic Health Initiatives’ St. Vincent to improve health care and reduce costs.

“We really believe to achieve the societal goals of better health care and lower costs that we really need to see some fundamental changes in the health care system,” said UAMS Chancellor Dan Rahn.

Provided the partnership talks don’t break down during the next several months, St. Vincent and UAMS will join other hospitals across the country that have partnered with competitors in an attempt to improve their financial health.

“What you’re seeing between UAMS and St. Vincent is maybe the first time we’ve heard of something like this around Arkansas,” said Paul Cunningham, executive vice president of the Arkansas Hos-pital Association. “But it’s really not surprising given the changing environment of health care that we’re entering into.”

Low Medicare and Medicaid reimbursement rates, spiraling health care costs and a sluggish economy have “ignited the national explosion of consolidation,” wrote Lisa Goldstein, an analyst for Moody’s Investors Service in her March 8 research report called “New Forces Driving Rise in Not-for-Profit Consolidation.”

“Driven by healthcare reform and an unsustainable payment system, the deep and impactful financial changes that are undoubtedly coming have led many hospitals to seek long-term partnerships,” Goldstein wrote.

In the 1990s, hospitals merged or bought other hospitals as a way to gain market share or squeeze more money from insurers because of higher patient volumes, Goldstein wrote. But “size and scale are now a more important means to gaining greater efficiencies and driving waste and costs out of the delivery system,” she wrote.

By sharing practices and pooling resources, a more efficient model for providing health care will emerge, Michael Roman, a spokesman for Catholic Health Initiatives in Englewood, Colo., predicted in an email to Arkansas Business.

He said CHI was looking for partners across the country.

“To succeed in the future, collaboration, scale and sharing knowledge will become increasingly important in providing quality care as efficiently and cost-effectively as possible,” Roman wrote.

 

A Nationwide Phenomenon

Hospitals around the country are scrambling to form relationships with other hospitals.

The Great Recession caused people to delay medical treatment, resulting in a drop in hospital admissions, wrote Moody’s Goldstein. Uncompensated care, though, has risen. Access to capital markets also proved difficult for some smaller hospitals.

Another financial blow to hospitals came as a result of the Patient Protection & Affordable Care Act, which passed in 2010. One of the goals of health care reform is lowering the cost of Medicare, the federal government’s uniform insurance program for senior citizens.

“Annual reductions to Medicare inpatient hospital payment rates are now hardwired into the Medicare payment formula,” Goldstein wrote.

Hospitals could lose even more revenue if Congress fails to address the sequestration section of the 2011 Budget Control Act when a number of tax increases and automatic spending cuts are set to kick in on Jan. 1. Rahn said UAMS would lose an estimated $12 million a year in revenue if the mandatory cuts go forward.

And if Arkansas doesn’t expand Medicaid, as encouraged by the Af-

fordable Care Act, UAMS would miss out on $22 million in new revenue starting in 2014, he said.

 

Partnerships Rewarded

Hospitals now have a financial motive to form partnerships and slash costs.

Instead of a fee-for-service model, where health care providers are paid per patient, bundled payment programs are surfacing. Under the new model, a flat amount will be given to cover a patient’s hospital, physician and recovery costs. This payment for episodes is “driving the need for greater efficiencies,” Goldstein wrote.

Earlier this year, Arkansas unveiled the Arkansas Health Care Payment Improvement Initiative, which officially starts Monday. Under the new Medicaid reimbursement policy, Medicaid will financially reward health care providers who control costs while penalizing those who don’t.

The project started with a handful of procedures out of the more than 7,500 diagnoses that a person can have. Medicaid will set a target price for a procedure, such as a hip replacement. Doctors and hospitals that keep actual costs below that target price will then share in the savings, but those that go over the price may have to pay.

“The ability to demonstrate lower costs while providing high quality care will be the key driver in governmental and commercial reimbursement going forward,” Goldstein wrote.

 

Eliminating Duplication

It’s too early to tell what an alliance between St. Vincent and UAMS might look like.

Peter Banko, the CEO of St. Vincent, said he and UAMS’ Rahn had informally talked about the idea of working together during the past several years, but talks started to become more serious about a year ago.

He said St. Vincent was in a good financial position for

the next couple of years, but after that, it is unknown what its balance sheet will look like.

“It’s nice to think of your next step before you need to,” Banko said.

For the fiscal year that ended June 30, St. Vincent Infirmary Medical Center reported a profit of $7.7 million on total patient revenue of $1.1 billion. UAMS Medical Center reported a loss of $568,712 on patient revenue of $1.4 billion.

Banko said that by working together, both sides can improve access to care and quality and slash the duplication of services.

 

Women’s Health Issues

The first hurdle UAMS and St. Vincent have to cross is paying for the consultant, Deloitte LLP of New York, to examine areas where the two could partner. A contract with Deloitte would cost at least $1 million, and each side would pay half. UAMS needs approval to spend the money from the Arkansas Legislative Council, which is expected to vote on the measure on Wednesday.

If approved, the first areas of potential cooperation to be examined are cardiovascular, orthopedic and cancer treatment services, Rahn said.

In March, UAMS ended its long relationship with Central Arkansas Radiation Therapy Institute Inc., which provided radiation therapy treatments, after CARTI announced it was building a cancer treatment facility and had bought the for-profit Little Rock Hematology Oncology group.

Still, “it’s not our intent to merge” with St. Vincent, he said.

Rahn said he hoped Deloitte could issue a report by the end of the year on areas that are ripe for partnerships. Then discussions would turn to exactly how an arrangement would work, Rahn said. “That’s something that we just have to explore.”

One area that is off the table is women’s health services, he said.

“Because of our public purpose and ethical and religious directives that they have and adhere to and respect, we’re going to keep those separate,” Rahn said.

In December, Catholic Health Initia-tives was close to merging its CHI Ken-tucky Inc. with the public University of Louisville Hospital and Jewish Hospital Healthcare Services Inc. of Louisville, when the governor stopped the deal.

One of the issues raised was how women’s services, including the delivery of contraceptives, would be handled under CHI.

Still, there are other areas where both St. Vincent and UAMS could work together without religious conflict. Banko gave the example of jointly buying and sharing expensive medical equipment, which is some cases can cost $1 million or more. Or both sides could consolidate human resources duties, he said.

Banko said a partnership could result in job losses in one area of the hospital but add jobs in another.

Rahn said there were still a number of issues that could cause UAMS to walk away from starting a relationship.

“What we do has to increase the effectiveness of our ability to accomplish all aspects of” UAMS’ mission to educate and train the workforce and provide care, he said.

Also, any potential partnership would have to get the approval of the UA System’s board of trustees and Arkansas legislators. In addition, a partnership would probably have to be reviewed by the Arkansas Attorney General’s Office for antitrust issues, Rahn said.

However, “if we didn’t explore this, we would be ignoring a potential opportunity,” Rahn said.

 

 

 

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