Rising costs and reductions in government reimbursements related to health care reform could lead to consolidation among the state’s 29 acute care hospitals in the coming months and years, industry experts said.
Indeed signs of consolidation in Connecticut are already taking shape. Danbury and New Milford hospitals, for example, recently signed an affiliation agreement that will put both organizations under the control of a single corporate parent.
Meanwhile, the Central Connecticut Health Alliance, which is the parent company of the Hospital of Central Connecticut, has signed a memorandum of understanding to affiliate with Hartford Healthcare. If that deal gets federal regulatory approval, the two organizations would be integrated under the Hartford Healthcare umbrella.
Hospital officials say talks of mergers, or other types of partnerships, are likely to continue as the economy remains on shaky ground and health reform changes the landscape of how the industry does business.
Officials say reform will lead to reduced Medicare reimbursements from the federal government and require significant capital investments as hospitals prepare for larger patient loads and acquire new technology to provide more efficient care.
In some cases, deals could be fueled by the needs of cash-strapped, independent hospitals to find larger, more stable partners. In other cases, independent hospitals that have remained financially stable may look to form partnerships to gain greater access to capital markets.
“There are a lot of hospitals that are struggling financially and I think the changes that health care reform is going to bring with reimbursements could be the straw that breaks the camel’s back,” said Vincent Capece, the senior vice president and chief operating officer of Middletown-based Middlesex Hospital, which has nearly 300 beds. “It will force hospitals to either go out of business, or find a partner.”
Mergers or partnerships allow smaller, independent hospitals to leverage the purchasing power of larger institutions — especially with insurance companies — and consolidate backroom or administrative services, among other benefits.
Nationally, merger activity is already picking up. So far this year, there have been 34 deals involving 69 hospitals and 12,960 beds, according to Irving Levin Associates, an organization that tracks the industry.
In 2009, there were 52 deals across the country that involved 80 hospitals and affected 10,600 acute care beds.
Connecticut hospitals, officials say, have been slower to consolidate compared to others across the nation.
Over the past two decades, seven hospitals have closed or merged in the state, leaving Connecticut with 29 acute care providers, said Stephen Frayne, senior vice president of health policy for the Connecticut Hospital Association.
But added pressure from the economic downturn, which led to significant investment losses and fewer insured patients, coupled with looming health care reform, could accelerate the trend in the coming years.
Connecticut hospitals depend heavily on government-run programs, which supply about 60 percent of their revenue, Frayne said. But many in-state hospitals are projecting no increase in Medicare reimbursement rates until at least 2014, as the federal government reins in spending so it can expand insurance coverage to millions of uninsured Americans.
Meanwhile, it’s unlikely the state will increase reimbursements for Medicaid, a service hospitals are already providing at a loss.
At the same time, squeezing more funding out of private insurers will become more difficult, as insurers face increasing regulatory scrutiny over the rates they charge consumers.
“There is not going to be a lot of resources available to help pay for promises that have been made,” Frayne said. “We are adding a lot more people, but not additional funding. That is a large burden on the provider community.”
Richard Henley, the interim president and CEO of New Milford Hospital, said many small hospitals face challenges by having fewer in-patient beds and a smaller outpatient base to spread costs.
New Milford Hospital, which has 85 beds, sought out the much larger and financially stable Danbury Hospital because it will allow New Milford to better manage costs, reduce overhead, and consolidate back office services, Henley said.
Danbury Hospital closed 2009 with a total margin of 8.01 percent, making it the best performing hospital in the state. Meanwhile New Milford hospital had a total margin of -5.52 percent in 2009.
If approved, the affiliation will put both hospitals under a single corporate parent — Western Connecticut Health Care — and a single board of directors.
“Our objective is to create a regional health care system that provides a greater depth of services,” Henley said.
Despite being one of the better performing hospitals in the state, Middlesex Hospital spent the past two years exploring partnerships with Hartford Healthcare and Yale-New Haven Hospital.
Capece, who will become Middlesex Hospital’s president and CEO in September when current CEO Robert Kiely retires, said health care reform has created a lot of uncertainty. The fact that the federal government will likely be paying hospitals and doctors less in the future is creating more pressure for hospitals to take a proactive approach.
“The thought was that we should try to get ahead of the curve and anticipate where the industry might be going and look at affiliating with a larger entity while we are in a position of strength,” he said.
A key consideration for Middlesex Hospital, which ended fiscal 2009 with a 5.79 percent total margin, is access to capital markets.
Capece said it’s expensive to maintain an up-to-date hospital and pressures to improve efficiency, along with the expected added patient loads, will require greater capital investments in the years to come. Middlesex spent $30 million a few years ago to build a new emergency department and has been spending in excess of $20 million a year for routine improvements.
But smaller hospitals often find it more difficult to access capital, or they are forced to borrow at much higher rates than their larger counterparts. That makes it attractive for small hospital systems to join a larger one.
Even so, Capece said Middlesex Hospital has decided to stay independent for now. He said the hospital doesn’t want to cede managerial control, which is one of the major drawbacks of a hospital merger.
“The conclusion that the board reached was that we weren’t ruling out doing an affiliation, but at this point and time we didn’t feel there was a need to do it,” Capece said.
On the other end of the deal-making spectrum is Hartford Healthcare, the state’s health care giant, which is always in the middle of merger talks.
Hartford Healthcare employs about 11,000 people and includes several hospitals like Meriden-based MidState Medical Center with 144 beds, and Windham Hospital in Willimantic with 130 beds. Hartford Hospital has 867 beds.
Jim Blazar, Hartford Healthcare’s senior vice president and chief strategy officer, said the deal with Central Connecticut Hospital Alliance will allow the hospitals to share fixed costs and best practices across a larger group of entities.
It will also bring the Hospital of Central Connecticut greater access to technology, capital, operating efficiencies and standards of care.
Blazar said Hartford Healthcare is not negotiating with any other hospital in the state, but he didn’t rule out future partnerships down the road, especially once the CCHA deal is complete.
“We are trying to evaluate ways to continue to improve quality and services to patients,” Blazar said.
