Fighting Bad Guys With Health System Consolidation

Roy Smythe–(Forbes)–The Power Rangers and Transformers have been staples on “children’s” television and in toy stores for a number of years. In case you have somehow missed these cultural icons — please allow me to enlighten.

Power Rangers are a diverse group of young people that dress in single-color samurai superhero uniforms and fight bad guys with an improbable array of weaponry and powers. Every now and then (in every episode), when a giant bad guy appears, they deploy an array of interesting devices that first create giant individual robots (“Zords”) that combine into a single giant robot-like entity called a “Megazord.”

I have young boys, but I swear I had to look this stuff up… really.

Transformers, on the other hand, “shape shift” between giant robots that look a lot like Megazords, and everyday cars and trucks. These latter vehicles are frequently seen occupied by young women such as Megan Fox – usually wearing a halter-top. The key difference is that the Megazord easily assembles and disassembles. The Transformer just “transforms” and cannot be taken apart.

Why have I started a column about healthcare delivery with this preamble? Naturally, I thought about these two as structural examples when contemplating the potential benefits and drawbacks of American health system consolidation.

Health system consolidation is a red-hot commodity in the moment, with about 100 or so deals consummated each of the past two years – up by about 100% since the mid-2000′s. In this context, this activity is apparently “good for business.”

However, is it actually good for the delivery of healthcare?

A health system C-suite executive that we work with at AVIA who has had significant success in consolidating in a large market recently told me that “we have to grow, there is no other way… those that achieve scale will have the flexibility to change care delivery — those that don’t won’t survive.”

Health system executives frequently talk about this concept of “achieving scale” — the benefits of creating larger platforms for negotiation with insurers and development of myriad needed population health management capabilities. However, critics say all that has been objectively achieved by this activity are price increases for healthcare services.

Leemore Dafny, the Herman Smith Research Professor in Hospital and Health Services at Northwestern’s Kellogg School of Management, is one of the country’s experts on healthcare industry consolidation and is a frequent writer and resource for policy makers on the topic. In a 2014 New England Medical Journal article, she wrote:

…the last hospital-merger wave (in the 1990s) led to substantial price increases with little or no countervailing benefit.  Since the primary driver of growth in private spending in recent years has been price increases for health care services a compelling argument can be made for putting the brakes on consolidation…

Many health system leaders disagree.  Kenneth Davis, the CEO of the Mount Sinai System in New York, commented last year in the Wall Street Journal:

…the fear that mergers curtail competition, leading to higher prices for medical care, reflects an old way of thinking that doesn’t account for the introduction of population-health management. This line of thought ignores the fact that health-care delivery has become more efficient…

I recently met with Dr. Dafny and suggested there were a number of theoretical benefits to health system consolidation.

The first I suggested is the potential to “regionalize” care, or to eliminate unnecessary redundant overheads and provision of specialty care in geographic regions – lowering cost and improving quality in the balance as there is an immutable cost-quality-volume relationship.

The second is the ability for health systems to assume the burden of risk management for patients – if they collect the premium, then they have an incentive to keep patients healthy, and not just perform procedures. Larger numbers of patients make the overhead for insurance administrative and technical activities more cost effective, and “smooth” the risk of individual catastrophic medical expenditures.

Finally, I suggested the use of the digital tools that are going to be necessary to better manage population health and wellness will be rendered increasingly efficient over larger populations. Many are billed based on numbers of providers using them, or on a per-member per-month basis where rates decrease with increasing volumes. As more are used, more patients are cared for, and the tools cost less to use — creating a virtuous cycle.

I also added the combination of these types of activities could lead to better clinical outcomes. She thought all of that sounded “great” but reminded me I had used the word “theoretical.”

“The problem is,” she said, “that intentions are only realized when there is a market imperative.”

I don’t want to give anyone the impression Dr. Dafny is “against” all consolidation activity in healthcare. She co-authored a more recent essay in the New England Journal of Medicine entitled “The Good Merger”:

…providers would be well served by considering the extent to which their proposed transactions generate “cognizable efficiencies.” This term, known to few health care providers, is familiar to every antitrust expert: if a merger has the potential to reduce competition and thereby enable the merging parties to raise prices (or reduce quality), only cognizable efficiencies can offset this potential harm… In short, cognizable efficiencies are real and measurable improvements in costs or quality.

Proposed mergers may threaten robust competition — but they could also be moments of opportunity, which, if seized, could help providers make major advances in their ability to compete on outcomes and costs.

A major part of the problem, in Dafny’s opinion, is the difficulty in unraveling health system mergers once they have occurred, if the parties involved are found to not be creating cognizable efficiencies. She suggested to me that “antitrust enforcers are not regulators, and it is really hard to unscramble scrambled eggs.”

She suggested we consider the merits of “robust affiliations” among various health care providers across the continuum of care (e.g., acute and post-acute services), where the affiliates are held accountable for delivering on some of the theoretical benefits of consolidation I mentioned. Regulators could compel these affiliations to break up if they do not deliver on their promises. While she suggests that this may be a better approach, she recognizes that there are “marketing and clinical reputation issues that could be difficult to overcome.”

I agree, but would add that the costs associated with developing affiliations must be recouped somewhere… Health systems pay millions for consulting engagements to prepare for the possibility of merger, and then once the deals are approved by local and federal regulators, millions more are spent to re-order care delivery, combine academic programs and on innumerable other activities. Changing the name and the color of logo aren’t free either. Developing and implementing a “robust affiliation” – essentially a joint venture – might not be that much cheaper.

It’s my opinion continued health system consolidation will be an important prerequisite for many of the changes we all want from health care, but I understand the counterarguments.

So… back to the Power Rangers and Transformers. Perhaps a “Power Rangers approach” could work better here – putting together structures that can be dissembled if need be, rather than creating irreversibly consolidated “Transformer” enterprises from the outset.

Here’s some food for thought. Why not let healthcare providers create “robust affiliation agreements,” even in areas that the FTC might cringe about (geographically co-located, etc.), that state clearly from the outset the cognizable efficiencies that these arrangements are to achieve. Include items such as the ones that I presented to Dr. Dafny, in addition to others such as lowering overall costs and objectively improving disease outcomes. If systems achieve these goals for a period of time, they can become “Transformers,” i.e., if still desired, a formal merger or consolidation structure could be allowed.

After all, item number one on the Power Ranger code of conduct is… “never use your power for personal gain.”

Dr. Roy Smythe is a Forbes contributor and the Chief Medical Officer for Valence Health, a Chicago-based health care consulting, services and operating company that seeks to facilitate the ability of providers of care to manage medical and financial risk.