By Robert B. Vogel, MD, JD, Retinal Ophthalmologist at Piedmont Eye Center, Lynchburg, VA; Attorney, Overbey, Hawkins & Wright, PLLC; Adjunct Professor, Liberty University College of Osteopathic Medicine, and Matthew Hadfield, BA, Medical Student, Liberty University College of Osteopathic Medicine

Dr. Vogel and Mr Hadfield report no financial relationships relevant to this field of study.

The rapidly increasing pace of hospital merger and acquisition (M&A) in the United States over the past several years may have gone unnoticed by the average healthcare provider. Hospital M&A doesn’t appear as a major concern for the physicians or other healthcare providers in an ED. However, when hospital systems combine, the work environment and employment structure of physicians, nurses, and other healthcare providers, as well as the overall delivery of healthcare within the merged entity, changes. The institutional and workflow changes are of immense importance to ED personnel since they are based permanently in the hospital. ED staff would be affected more than other medical staff by institutional changes that result from an M&A. For example, in Philadelphia, Abington Health proposed a merger with Holy Redeemer Hospital. Some physicians at Abington opposed the merger because although their hospital would continue offering many previously available services, abortion was to be banned because of Redeemer’s affiliation with the Catholic Church. The merger was cancelled several months later, largely because of the protests of Abington’s physicians who were concerned about changes in the delivery of care.1 Although this is a more obvious example of disruption caused by the potential merging of entities with conflicting philosophies, there are other less obvious effects on institutional culture, job security, daily workflow, and patient care delivery and satisfaction, which should cause physicians and other stakeholders to pay attention to merger rumors. Why are more hospitals choosing M&A under the current operating conditions in the United States? A recent court case in which two hospital systems seeking to merge for improving efficiencies, a move opposed by the Federal Trade Commission (FTC) over antitrust issues, may help explain. Additionally, what changes may physicians and healthcare providers encounter should their hospital/employer merge with another entity?

Why Hospitals Merge

National healthcare policy drives the “urge to merge” that is endemic across the healthcare sector. Regulations aimed at making hospitals and providers accountable for cost and quality are forcing hospitals to consider best practices and consolidation in managing patient care. The merger of two small hospitals may allow the larger entity to experiment with models such as Bundled Payments for Care Improvement and other shared savings programs. Additionally, since government and private reimbursements for traditional fee-for-service care are decreasing and the cost for caring for indigent patients has not diminished, merging established institutions may be the only way for smaller hospitals to survive.

For example, in 2016 CMS announced their mandatory bundled payment program for joint replacement that holds hospitals accountable for the quality and cost of the surgery by capping the reimbursement. Recent announcements concerning certain cardiac surgery procedures show CMS intends to use this paradigm across the continuum. The change to so-called value-based care motivates hospital administrators to look for partners that can provide a platform allowing for efficient delivery of care under these new models. This may take the form of a hospital-to-hospital merger or the acquisition of clinics and outpatient services. According to RSM Consulting,2 whereas total healthcare M&A declined in the latter half of 2015, with the decline continuing into 2016, there was a steady quarter-over-quarter rise in M&A volume of transactions involving hospitals acquiring clinics and outpatient services from 2013-2015. This increase is predicted to continue despite the fact that in November 2015 CMS announced new rules lowering reimbursement for services performed at off-campus outpatient departments. Rural health clinics and EDs are not included in these new rules.3

Hospital administrators believe that hospital consolidation improves efficiency, increases access to care, and lowers costs due to economies of scale. The more patients a hospital cares for, the more efficient and less expensive the care should be.

Better Equipped Facilities

Larger systems may acquire better access to specialists and advanced medical technologies compared to smaller hospitals. Smaller hospitals have a more difficult time maintaining services; patients might have to travel to tertiary care hospitals for more advanced treatments because the cost of investing in and maintaining certain services may be prohibitive. Also, there can be difficulty in recruiting and maintaining a physician base to cover a particular specialty at a smaller hospital in a less populated area. Coupled with statistics showing physicians prefer to live in larger cities with certain lifestyle amenities, mergers can help resolve the problem of physician shortages. Much of the difficulty also can be related to call issues, as there is a critical mass of physicians required to cover a given specialty.4

Hospital mergers creating larger systems may support capital needs as well as technology and infrastructure upgrades.5 Alternately, there are disadvantages to merging.

  1. Smaller hospital systems generally are more tightly knit with their communities than larger tertiary care centers.
  2. Smaller hospitals generally are more agile than larger systems because of fewer levels of approval are required to bring about change.

The Case

Penn State Hershey Medical Center (Hershey) is a 551-bed hospital located in Hershey, PA, offering tertiary medical services typical of an academic medical center. PinnacleHealth System (Pinnacle) operates three community hospitals in central Pennsylvania focusing on general acute care services and providing limited higher-acuity services.

Hershey and Pinnacle received their respective hospital boards’ approval for merging in March 2015. The FTC blocked the merger, filing administrative and civil complaints in December 2015.

The FTC based its opposition on the concentration of control of the acute care inpatient hospital services that would be provided by the combined entity in the Harrisburg, PA, area. The FTC argued the transaction would lead to increased healthcare costs and reduced quality of care for the residents of Harrisburg. The FTC chose Harrisburg as the “relevant geographic area” because it said that, “patients choose to seek care close to their homes or workplaces,” and that hospitals outside the Harrisburg area were not meaningful competitors since they “draw very few patients from the Harrisburg Area.” This, according to the FTC, would lead to difficulties for insurers who sought to provide affordable health plans because they would be limited to the use of the hospitals and doctors affiliated with the combined entity.

The FTC sought a preliminary injunction of the merger in the Federal District Court of the Middle District of Pennsylvania.6

Ruling on Preliminary Injunction

On May 9, 2016, District Judge John E. Jones III denied the FTC and the Commonwealth of Pennsylvania’s motion for a preliminary injunction against Hershey and Pinnacle, allowing the merger to move forward. As is typically the case in hospital merger cases, the crux of the court’s analysis was defining the “relevant market from which few patients leave and few patients enter.” This is important because it defines the degree of control that the combined entity would have in that market. The court disagreed with the FTC’s contention that Hershey held approximately a 36% share and Pinnacle a 40% share of the relevant market at the time, meaning the combined entity would control approximately 76% of the market post-transaction. The court stated there were 19 hospitals within a 65-minute drive of Harrisburg that provided alternatives for patient use.

The court also found it compelling that the merged entity would alleviate overcrowding at Hershey, allowing the hospitals to operate more efficiently and upgrade infrastructure.

Judge Jones leveled harsh criticism against the FTC’s case, stating that consolidation of healthcare entities was inevitable when there is a “growing need for all those involved to adapt to an evolving landscape of healthcare” and perform efficiently under the Affordable Care Act. The opinion concluded by endorsing the merger as a reality of modern medicine, stating, “[l]ike the corner store, the community medical center is a charming but increasingly antiquated concept. It is better for the people they treat that such hospitals unite and survive rather than remain divided and wither.”6

FTC Appeals Ruling

On Sept. 27, 2016, the Third Circuit unanimously reversed the lower court decision, finding in favor of the FTC on all the key issues. Most importantly, the Third Circuit agreed with the FTC on the core issue of the “relevant geographic area” definition. The Third Circuit found that Judge Jones’ analysis was “economically unsound and not reflective of the commercial reality of the healthcare market.”

Interestingly, the Third Circuit also raised questions about the availability of the legal arguments used by the hospitals advocating the transaction based on efficiencies that would be garnered through an otherwise anticompetitive merger.7

Soon after this decision, Hershey and Pinnacle abandoned their merger effort.

The current climate of healthcare in America has forced hospitals to adapt to myriad new regulations. Mergers often provide the fastest avenue to fiscal stability and long-term survival. At the executive level, mergers can make financial and logistical sense. However, despite good rationale, mergers can create a great deal of stress among employees. Mergers change many aspects of the work environment as well as the institutional culture. It is understandable that this high degree of flux can create anxiety for employees. A clear understanding and communication of the changes, which will occur when the merger takes place, are imperative to smooth transitions. The M&A trend leads most healthcare professionals to wonder, “if it happens to my hospital, what should I expect?”

Effect on Employees

In 2014, 95 hospital mergers took place across the United States.8 Current trends predict that more than 20% of all hospitals will be considering a merger in the next four years.9 This trend signals the reality that soon every hospital employee in America will be faced with an M&A. The most serious concern for employees is job security. Data suggest that in the wake of mergers, employment for nurses may have a grim outlook. A recent study by Emory University showed that positions for RNs decreased roughly 10%, and LPN positions decreased 12% after hospital mergers.10 The loss of jobs from hospital mergers may be dependent on geographic circumstances, services offered at different facilities, and operating budgets. Proposed financial efficiencies include layoffs at the executive and management levels.

Additionally, there are fewer diverse employment opportunities in circumstances in which hospitals form one system in a small geographic region. When a person is terminated or wishes to move on, it may be necessary to relocate to find a new position. Conversely, the strength created by an M&A can positively affect job security. The efficiency proposed when mergers take place could prove beneficial to the long-term outlook of the hospitals and employment opportunities.

Effect on Institutional Culture

A proposed merger between St. Joseph’s Health System based in Orange County, CA, and Seattle-based Providence Health and Services was met with fierce resistance. The ACLU and women’s health advocates raised concerns that, despite both hospital systems being Catholic institutions, the expectation of more stringent adherence to Catholic doctrine post-merger would change current services.11 Proposed changes included provisions regarding abortions, emergency contraception, infertility treatment, vasectomies, and tubal ligations.

The merger also was met with opposition by National Nurses United, the nation’s largest nursing organization. Concerns by union leaders targeted many stipulations in the agreement between the two hospital systems, ranging from issues of charitable care to nursing benefits, working conditions, and patient safety. The two systems officially merged in late 2016.

Similarly, the merging of Good Shepherd Health System in Longview, TX, with the international Catholic faith-based Christus Health, based in Irving, TX, likely will lead to dramatic changes in terms of services offered.12 Good Shepherd’s CEO publicly announced the adoption of the principles of Christus Health concerning reproductive health and end-of-life issues. Changes in these institutional principles will affect hospital-based physicians, including ED doctors, in their practice of medicine. Services once offered by physicians may be prohibited post-merger. Conversely, physicians may be required to perform procedures or offer services that clash with their personal beliefs.

These cultural changes may prove difficult for healthcare employees who now find themselves at odds with the philosophy of their employer. These changes require an adjustment period for all employees.

Effect on Institutional Workflow

The long-term effect of M&A on patient care is the subject of fierce debate. One could argue that larger healthcare systems bring about standardization, resulting in easier access across the system to records and better patient experiences overall. A guide recently published by The Camden Group outlined important institutional steps that often take place after a merger.13 A critical early step, they argue, is establishing a clear and concise chain of command to ease the transition. A new hierarchy at the executive level can mean changes in managerial philosophies. Infrastructure changes can include the adoption of new technology, which means personnel training and adjustments in workflow.

Additionally, post-merger hospitals must consolidate human resources management for the new system. Details regarding hospital-based employee packages must be reviewed prior to the merger. Retirement plans can change dramatically as a result of a merger. For example, since 401(k) plans are not compatible with non-profit 403(b) plans, it may be necessary to reconfigure employment packages.14 Changes in human resource management frequently involve software changes for reporting work time, registering sick days, and requesting vacation time.

Effect on the Consumer

Communities post-merger often find themselves dealing with major changes in where and how they receive healthcare. A long proposed benefit of larger hospital systems is their ability to use combined negotiating power with private insurers to control costs. However, this is not always the case, as several studies have shown the cost of services imposed by hospitals on private insurance companies can increase substantially as a result of M&A.15 A 1999 merger between two hospital systems in northern California resulted in price increases for healthcare as high as 44%.16 These price spikes lead to higher insurance premiums. Higher prices for healthcare affect patients paying the bills as well as employers who provide insurance to employees.

After merging, there is a critical transition period during which employees are trained for providing healthcare services as a new, larger entity. This period of adjustment may result in difficulty in management and administrative tasks, resulting in longer wait times and ultimately stress for patients. Dissatisfied patients are more likely to negatively affect the working lives of physicians and other providers.

Conclusion

As the delivery of healthcare in America continues to be a competitive and controversial industry, hospital systems will continue consolidating in an effort to best serve their communities while remaining economically viable. The effect of these mergers on employees, communities, and patients will vary from case to case based on the many factors involved in the process. However, it is certain that when two separate healthcare entities join together to create a new entity, there will be major changes for employers and employees alike.

REFERENCES

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