As a new wave of consolidation sweeps through Connecticut’s healthcare industry, the state’s remaining independent hospitals are weighing their future options, including potentially creating their own alliance to share resources, combine purchasing power, and protect their market share.
Over the past year, several Connecticut independent hospital CEOs have talked about forming a partnership that would allow them to rein in operating costs by pooling resources and combining their purchasing power when shopping for medical supplies and other services like health and medical malpractice insurance, said Middlesex Hospital CEO Vincent G. Capece Jr., who has been involved in the discussions.
More importantly, Capece said, independent hospitals have talked with insurers about developing new tiered or limited network insurance plans that incentivize patients to go to lower cost hospitals for certain care. Such a model — common in other states but not in Connecticut — could allow smaller, independent hospitals, which tend to offer lower cost care than larger medical centers, to protect their market share as other healthcare networks extend their geographic footprint.
“While we believe that being an independent hospital has its advantages we have always recognized there are also advantages to being part of something bigger,” Capece said. “We are trying to develop a way we can have the best of both worlds.”
Competitive pressures
The need for an independent hospital alliance could become all the more urgent given a recent bill passed by state lawmakers earlier this month. The legislation, which awaits Gov. Dannel P. Malloy’s signature, gives Dallas, Texas-based Tenet Healthcare Corp. — a for-profit, publicly traded company — a path forward to acquire Waterbury, Bristol, Rockville General and Manchester Memorial hospitals in partnership with the Yale New Haven Health System. If those deals happen, it will ratchet up regional competition and provide a much needed capital infusion for those four hospitals to invest in facilities, staff and technology.
Capece declined to name other independent hospitals that have been in talks about forming an alliance, but St. Mary’s Hospital CEO Chad Wable also confirmed that such discussions have taken place. Other independent hospitals in Connecticut include Derby’s Griffin Hospital, Lawrence + Memorial Hospital in New London, Stamford Hospital, and Charlotte-Hungerford Hospital in Torrington, among a few others.
Capece said the alliance’s goal would be to allow the independents to be part of something bigger, while preserving their decision-making autonomy. An agreement could be reached within the next several months, he said, and the alliance could consist of six to 10 hospitals, some of which would agree to take an equity stake in a separate business entity responsible for things like supply purchases. Non-equity partners would be able to contract with the alliance to leverage some of its services. They’d also like physician practices to participate.
Many legal and operational questions remain, Capece admits, but he said he’s optimistic some type of arrangement will be worked out.
“It is a bit of an experiment, but we believe it has potential,” Capece said.
Brian Mattiello, vice president for organization development at Charlotte-Hungerford Hospital, said the economic justification for becoming part of something larger is clear.
“There are definitely scale arguments; there’s leverage with payers, particularly commercial payers,” said Mattiello, a former state legislator, who declined to comment on independent hospital alliance talks. “Those are all really good arguments.”
Getting payers involved
Perhaps most intriguing is the participation of insurers. Capece said he has held discussions with insurers — some more receptive than others — about creating insurance products that incentivize patients to go to lower cost hospitals for certain care. That could include insurance plans with narrow or tiered networks, meaning patients would either be restricted in their provider choice or be offered discounts on co-pays and/or premiums for choosing a lower-cost care center.
Such insurance plans, Capece said, would give some smaller, independent hospitals the ability to better protect their market share as they typically offer lower cost care for certain services than larger acute care medical centers.
Tiered plans are offered through the state’s insurance exchange, Access Health CT, but largely not in the commercial market. Instead, provider networks in most Connecticut health plans include every doctor and hospital, making coverage more costly to consumers and businesses.
Capital muscle
Wable, St. Mary’s CEO, said he thinks insurers would be open to negotiating with any group of hospitals that have a large enough patient base.
His concern, however, is whether a “value collaborative” of independent hospitals would have the financial wherewithal to support their collective infrastructure needs. If other hospitals don’t think there’s enough capital to give the network negotiating leverage with insurers and suppliers — or the money needed to invest in facilities, technology and personnel — they won’t want to join, he said, and the network wouldn’t gain traction.
Wable, however, said there could be a way for independent hospitals to team up with a for-profit operator that could provide a much needed capital infusion.
“I don’t see why the for-profit options couldn’t work its way into the partnership,” he said.
Indeed, St. Mary’s has flirted with the for-profit model before. In 2012, St. Mary’s and its cross-town rival Waterbury Hospital agreed to merge and be jointly acquired by LHP Hospital Group — a Texas-based for-profit hospital operator — but the deal fell apart.
Since then, St. Mary’s has been rethinking its future, but Waterbury Hospital has agreed to be acquired by Tenet Healthcare Corp. That deal is awaiting regulatory approval, but if it moves forward it will create competitive challenges for St. Mary’s since Tenet has promised to make a significant capital infusion into Waterbury Hospital, which has struggled financially over the years.
In Wable’s mind, Waterbury Hospital’s pending acquisition is just one factor that has accelerated the need for small hospitals like his to rethink how they do business.
Another challenge is shrinking Medicare and Medicaid reimbursements, which have squeezed margins even thinner and forced hospitals to make tough staffing and purchasing decisions.
“An independent hospital is a thing of the past,” Wable said. “My sense is time is not on our side.”
Community considerations
Middlesex Hospital’s Capece said he is not overly concerned about competitive pressures posed by Tenet’s potential entrance into Connecticut, but there are many other industry challenges weighing on his mind. One is the move toward population management, where hospitals are increasingly being asked, incentivized and paid to keep people healthy rather than simply provide sick care.
That’s a major shift in how hospitals operate, Capece said, and to adapt effectively healthcare institutions must invest significantly in health information technology, data management personnel, and case management workers.
If smaller hospitals form an alliance it could defray some of those costs.
“If we do it individually it will be a lot more expensive,” he said.
Middlesex Hospital, which has been one of the best performing hospitals in the state (it had a 4.66 percent operating margin in fiscal 2013) has considered affiliations or mergers in the past, particularly with Hartford Healthcare and Yale New Haven Health System, but has chosen to remain independent to preserve its local decision making authority, Capece said.
Independent hospital CEOs say they remain cognizant of their community ties and are concerned about how local residents and patients will react if they join a larger network. That’s why an alliance with like-minded hospitals could be a better strategic option.
“If we can come together, leverage our lower cost, high quality position and work with insurers, it could move market share in our direction,” Capece said.n
