Innovate to Differentiate - Ohio Hospital Association

Ohio Hospital Association

2015 Annual Meeting

Innovate To Differentiate –

Collaboration And Partnership In

The Health Care Industry

June 9, 2015

Presented By:

Jolie N. Havens

614.464.5429 | jnhavens@vorys.com

Matthew E. Albers

216.479.6196 | mealbers@vorys.com

Vorys, Sater, Seymour and Pease LLP

Higher standards make better lawyers.

®

© Copyright 2015, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved.

Today’s Agenda

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Modern health care marketplace

›

Overview of industry consolidation trends

›

Discussion of historical models and methods of alignment

›

Modern consolidation drivers and incentives

›

New and emerging collaboration models

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Hospitals in the payor game



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If You Listen To

Nothing Else We Say…



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3

Sound Familiar?



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Modern Health Care Marketplace

›

Trending up:

• Focus on primary care and preventive care

• Focus on care coordination and population management

• Providers assume some risk

• Evidence-based care

• Increased capital needs

• Overall revenue pressure

(providers and payors)

• Increased oversight/regulation

• Employed physicians and practice acquisitions

›

Trending down:

• Focus on acute care

• Revenue predictability

• Independent (nonhealth system) competitors

• FFS payments/volume

• Margin for erro r



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5

›

ACA

Influences On Market Trends

• Service delivery reform (comprehensive, coordinated care executed through provider teams, patient-centered care, education, innovation, HIT/data sharing)

• Reimbursement reform (value over volume, clinical quality incentives/penalties, provider transparency and accountability, various forms of bundled payments)

• Health coverage access reform (Medicaid expansion,

Marketplaces, more services covered, less coverage limits, tighter insurance regulation)

›

Aging population/potential for higher acuity patients

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Proliferation of chronic conditions

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Return to physician employment/affiliation model



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Current Response To Market Trends

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Band together to survive and grow - or risk failure alone…



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Current Consolidation

Who’s Zooming Who?

›

Horizontal integration continues

• Material increase in hospital/hospital activity

› Since 1998, almost 20% increase in hospital systems of more than 21 hospitals

• In Q1 2015, 23 hospital transactions announced nationally

(27 – Q1 2014)

› 35% involve acquisitions by for-profit organizations, a slight uptick from recent years

›

Horizontal and vertical integration occurring across the industry, not just hospital/hospital

• Hospital/physician practice/home health agency/ASC

• Physician practice/physician practice

• Hospital/payor

• Payor/payor



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Current Consolidation

Notable Recent Activity

›

Total operating revenue of the acquired organizations nearly

$5B:

• Meridian Health and Hackensack University Health

• Lancaster General Health and University of Penn Health System

• National Surgical Healthcare and Optum Healthcare

• Ventas (REIT) and Ardent Medical Services (10 Hospitals)

• Peconic Bay Medical Center and LIJ Health System

• LifePoint Hospitals and Roaring Spring Nason Hospital

›

Ohio hospitals are definitely in the consolidation/collaboration game

• Hospital/hospital:

› University Hospitals and Samaritan Regional Health System

› Cleveland Clinic and Akron General

› Mercy Health and Summa

• Hospital/physician practice: everyone!



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“I Do” Circa 1990-2008

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Traditional (early 20 th century) marriage principals:

• Courtship: identification of complimentary partners and business synergies

• Engagement: up front cash/capital contributions with little long-term specificity

• Two become one: what’s mine, and what’s yours, is now ours

› High initial value propositions

› One dominant or controlling partner



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Does Traditional Marriage Still Work?

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Large capital infusion:

• Still a preferred term and driver

• Limited in duration

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Merger into single entity:

• Less common

• Liability and successor issues

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Community property:

• Gets more and more complicated

• Foundations, spin-offs, JVs

›

Dominant/controlling partner:

• Still evident, but no longer presumptive



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Why Get Married At All?

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Access to capital:

• Debt market factors

• Growth = survival

›

New service lines:

• Population health movement ≠ reduced need for subspecialty (tertiary and quaternary) services

›

Payor contracting leverage

›

Market expansion/pressure:

• Introduction of new provider segments (retail clinics, employer-sponsored clinics)

• Scale is required to compete

›

Technology needs:

• Largest cost to hospitals is no longer “bricks and sticks”



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What Do Happy Marriages

Have In Common?

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Governance compatibility:

• Maintenance of local control

• Avoidance of micro-management

• Leveraged sophistication and resources

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Cultural compatibility:

• Town & gown

• Employment models

• Mission similarities



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The Modern “Marriage”

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M&A activity is now much more than traditional transactional structures

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New players in the hospital M&A marketplace

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Some regulatory concerns have shifted/increased

• Antitrust enforcers are finally paying attention to health care, specifically not-for-profit health care

›

Consolidation now exists on continuum, with various relationship possibilities across the continuum

›

No “one size fits all” approach

›

Hospitals have a variety of different relationships in place at any one time



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Marriage Alternatives &

“New” Relationship Models

›

1. Joint operating agreements

›

2. Service line arrangements

• Brand sharing/extension

• Data sharing/aggregation

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3. ACO/PCMH models

• Private v. public payor models

›

4. Membership/share interest purchase

›

5. Hospital/payor integration



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1. Joint Operating Agreements

›

Relatively common historically

›

Contract relationship, often described as a virtual merger/virtual integration

›

Can be an interim or long-term solution

›

Can avoid certain legal/regulatory issues:

• CHOW

• Foundation/gift instrument restrictions



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(cont’d)

›

Typical arrangement:

• Two entities, each “contributing” to the JOA structure

• Creation of a combined oversight board to govern the combined operations

• Often involves the creation of a joint operating company (JOC)

• Participants maintain their own boards, subject to the control of the JOC



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(cont’d)

›

Advantages:

• Offers expedient combination method and flexibility to unwind

• Can provide significant tax advantages if financial and structural integration meets the ITS standards

›

Disadvantages:

• Limited durability

• Perceived (but not actual) simplicity

• Antitrust skepticism



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2. Service Line Arrangements

›

Identified synergies to either develop new or expand upon existing service lines

›

Often involve specialty services and/or notable industry players

›

Driven by competitive advantage and/or community needs

›

Less resource intensive

›

Interdependent, but independent



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2. Service Line Arrangements

(cont’d)

›

Advantages:

• Independence maintained

• Additional services with limited investment

• Brand identification

• Improved competitive position

›

Disadvantages:

• Limited relationship

• Death by 1,000 cuts?

• Potential regulatory scrutiny (concern is veiled attempt to pay for referrals)

• Teach potential competitor new tricks



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3. Accountable Care & Patient Homes

›

Accountable Care Organizations (ACOs)

• Team care concept involving multiple provider segments

• Government programs v. private payors

• Goal of overall cost reduction, along with shared savings and shared risk

• ACO “label” applied to variety of relationships

›

Patient-Centered Medical Home (PCMH)

• Team care concept to support primary care

• Care coordination hub

• Extensive patient contact



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3. Accountable Care &

Patient Homes

(cont’d)

›

Nationally, hospitals are limited participants

›

Counterintuitive incentives for hospital participation

›

Wholesale care delivery initiative, but limited integration tool

›

Not a “consolidation” method per se

• Still requires aligned interests and significant coordination (among providers and with payors)



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4. Membership/Share Interest

Purchase

›

Limited financial commitment

›

Limited control acquired

›

Long-term commitment potential, with limited investment

›

Competitive “blocking” strategy

›

Return to engagement stage



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5. Hospital/Payor Integration –

Strange Bedfellows?



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5. Hospital/Payor Integration –

Blurred Lines

›

Presently, distinction between payor and provider is blurring

›

Both parties entering the market of the other and taking on new roles in own market

›

Notable activity:

• Highmark and West Penn

• Aetna and Inova

• Cigna and Weill Cornell Physician Organization

• WellPoint and CareMore Health Group

• UnitedHealth and Monarch Healthcare

• Humana and Concentra

• UnitedHealth/Optum 360 and Mayo Clinic (revenue management and patient satisfaction services)

• Anthem Vivity (includes competing hospitals)


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5. Continuum of

Hospital/Payor Relationships

›

Degrees of hospital/payor relationships

• No relationship:

› OON/non-participating (UCR/higher patient cost-sharing)

› Direct provider contracting with employers

› Provider discounting arrangements/concierge medicine

• Partnership:

› Network contract relationship/participation (agreed-upon discounts in exchange for volume)

› Preferred provider relationship/narrow network (potentially lower rates with higher volume, with or without hospital care coordination/management services)

› Risk-sharing payment arrangements (managed care/P4P – typically only partial risk)

• Vertical integration.

›

Hospital as payor – full risk (JV, merger, etc.)

›

Payor-owned provider v. provider-owned payor



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5. Hospital/Payor Integration

Where We’ve Been

›

Traditionally seen as adversaries - payors want to cut costs, while hospitals want quality care

• Resulted in fragmented, expensive health care, along with patient dissatisfaction

›

Pre-ACA industry model for care access, care affordability, and care quality not sustainable – significant portion of population would be unable to access or afford quality care

›

Adversaries must work together post-ACA

• Gain efficiencies and align incentives by integrating payor’s payment system with provider’s care delivery system

• Much easier said than done



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27

5. Hospital/Payor Integration

Where We’ve Been

(cont’d)

›

Hospital/payor vertical integration is not a new concept

• Has existed for decades in variety of forms, although quietly in some cases

› Many prior attempts have failed and/or parties pulled out – major concerns over internal conflicts, weakened profits, physician alienation, etc.

(Humana – sold off hospitals in early 1990s)

› Few truly successful at complete integration

(Kaiser, UPMC, Geisinger, Intermountain Health)

› Often provider-driven (dominant provider in geographic area [hospitals and physicians] with lesser payor)



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5. Hospitals As Payors

›

Renewed interest from hospital perspective:

• Provider/payor interests must become aligned (movement toward risk-based payment models, and industry focus on access, care coordination, cost containment, and population management)

• Less revenue predictability under new reimbursement models

•

•

•

•

•

•

•

• Reduced emphasis on inpatient care (keep patients healthy)

Significant capital investments outstanding

Payor role can be used to develop key relationships with other industry players

Prior consolidation supports robust network development and expanded care coordination/management

Potential for differentiation and competitive advantage

Diversification/alternative revenue streams (premium payments, potential ASO fees, increased MA payments)

Data access/sharing/aggregation

› Payors have full spectrum of health care data on covered lives (hospitals know only limited episodes of care)

› Sophisticated analytics support delivery of quality care while also managing costs, as well as provider role in population health management

Millions of new patients/insureds flood industry post-ACA



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(cont’d)

›

Hospitals can take on payor role in a variety of ways:

• Joint venture with existing insurer (equity or contractual)

• Merge with/acquire existing payor

• Create new insurance product from scratch

• Potential insurance license leasing/assignment arrangement

›

Each model presents distinct opportunities and challenges, both legal and business

›

Many providers remain cautious regarding potential payor role

• HealthLeaders Media Survey (released March 2015): Surveyed 300 leaders nationally at health systems, hospitals, and physician organizations

› 26% health systems report ownership/operation payor arm (16% hospitals and 7% physician organizations)

› 28% respondents report assessing and deciding against payor arm

›

Ohio hospitals are in the game (examples: Premier Health and

CHP/HealthSpan Partners)



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5. Hospitals As Payors – JV

›

Hospital considerations (in addition to traditional JV issues):

• Potential for lower cost market entry (especially contractual JV – private label product, risk pool arrangement, enhanced contracting arrangement)

• Access to insurance expertise, management expertise, and other key resources and capabilities (each party does what they do best)

• New compliance obligations and liability segregated in new entity (equity)

• Data sharing/aggregation

• Independent, but interdependent

• Easier to unwind - could be short-term or long-term

• Competition issues (between insurer JV partner and JV plan entity)

›

Examples:

• Elevate Health Solutions – Harvard Pilgrim Health Care, Dartmouth

Hitchcock, and Elliot Health System

• Innovation Health – Aetna and Inova

• Tandigm Health – Independence Blue Cross and DaVita HealthCare

Partners

• Blue Cross Blue Shield of Arizona Advantage – BCBS AZ and Banner

Health



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5. Hospitals As Payors – M&A

›

Hospital considerations (hospital purchase):

• Large upfront capital investment and ongoing reserve funding requirements

• New licensure/new regulatory framework (insurance), for transaction and ongoing

• Significant capture of market share in single transaction, but consider network adequacy

• Potential for duplicative infrastructure, at least initially

• Potential integration challenges

›

Examples:

• Ascension Health and US Health and Life Insurance

Company

• Catholic Health Initiatives

• MemorialCare Health System


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32

5. Hospitals As Payors – Create New

Health Plan Product

›

Hospital considerations :

• Large capital investment with probable early losses

• Resource intensive

• New licensure/regulatory framework (insurance) – initially and ongoing

• Potential for delays to eventual market entry

• Must buy/develop necessary expertise

• Must carefully define market in relationship to network capabilities

• Competition, market reception, branding

›

Example: Sutter Health (reported $50M start-up costs)



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33


Preliminary Hospital Considerations

›

Level of desired integration, if any, and timeline

›

Criteria for identifying and vetting potential payor partners

›

Available capital, resources, and expertise

›

Impact on other hospital projects and payor arrangements

›

Culture and business shift (adopting the “payor mindset”)

›

Overall potential for achieving efficiencies due to providing and

financing the care (cutting out the middle man/less need for policing)

›

Trust issues/capacity for alignment (insurers and physicians)

›

Ability to manage complex integration, including financial losses

›

Population to be covered/managed

›

Capacity to build/maintain robust provider network

›

Defining market and understanding unique market dynamics

›

Understanding scale and “critical mass”

›

Many legal issues (state insurance law, tax/non-profit status)

›

Exit strategy



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34

Industry Predictions

›

Hospitals and payors will continue to partner, integrate, and move into each other’s markets

›

Newer models will continue to expand and change industry landscape

• Payors opening retail clinics

• Retailers opening clinics

• Employer-based clinics (both wellness and occupational)

• Direct provider relationships with employers and consumers (MedLion)

›

Additional government scrutiny?

›

*Difficult to predict provider and payor activity on national scale due to influence of unique regional/local market factors

*Standard attorney disclaimer



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35

Questions?



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36

Innovate to Differentiate - Ohio Hospital Association

Innovate To Differentiate –

Collaboration And Partnership In

The Health Care Industry

Today’s Agenda

If You Listen To

Nothing Else We Say…

Sound Familiar?

Modern Health Care Marketplace

Influences On Market Trends

Current Response To Market Trends

›

Band together to survive and grow - or risk failure alone…

Current Consolidation

Who’s Zooming Who?

Current Consolidation

Notable Recent Activity

“I Do” Circa 1990-2008

Does Traditional Marriage Still Work?

Why Get Married At All?

What Do Happy Marriages

Have In Common?

The Modern “Marriage”

Marriage Alternatives &

“New” Relationship Models

1. Joint Operating Agreements

1. Joint Operating Agreements

1. Joint Operating Agreements

2. Service Line Arrangements

2. Service Line Arrangements

3. Accountable Care & Patient Homes

3. Accountable Care &

Patient Homes

4. Membership/Share Interest

Purchase

5. Hospital/Payor Integration –

Strange Bedfellows?

5. Hospital/Payor Integration –

Blurred Lines

5. Continuum of

Hospital/Payor Relationships

5. Hospital/Payor Integration

Where We’ve Been

5. Hospital/Payor Integration

Where We’ve Been

5. Hospitals As Payors

5. Hospitals As Payors

5. Hospitals As Payors – JV

5. Hospitals As Payors – M&A

5. Hospitals As Payors – Create New

Health Plan Product

5. Hospitals As Payors

Preliminary Hospital Considerations

Industry Predictions

Questions?

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