July 18, 2016

Hospital consolidation brings competitors closer together

PHOTO | Contributed
PHOTO | Contributed
Trinity Health-New England CEO Christopher M. Dadlez.

The mergers and acquisition wave sweeping through the state's healthcare sector has led to a surprise pairing, bringing together Greater Hartford's two biggest industry rivals — at least for the time being — as business partners.

As a result of two state regulatory decisions made last month, St. FrancisCare (now part of Trinity Health-New England) and Hartford HealthCare are technically in business together, each holding equal minority stakes in a Tolland imaging center and a cancer services provider with locations in Enfield and Manchester.

Trinity acquired a 15 percent stake in Tolland Imaging Center and a 25 percent stake in Northeast Regional Radiation Oncology Network (NRRON) from Johnson Memorial Medical Center in Stafford Springs. Hartford HealthCare subsidiaries hold existing stakes in each business — equivalent to Trinity's.

The rest of the equity in the two companies is owned by Eastern Connecticut Health Network, whose pending for-profit acquirer, Prospect Medical Holdings, has received regulatory permission to absorb those stakes.

It doesn't appear that Hartford HealthCare or St. FrancisCare intend to stay in business together for the long term, but the joint ventures underscore the complex, even confusing nature of the industry deal making that has ensued over the years, as health systems have aggressively added new pieces in search of greater size and scope.

"It creates an awkward situation, so we're going to just try to make sense of it," said Trinity Health-New England CEO Christopher M. Dadlez. "We're working through [it]."

Taking control

Trinity says it intends to sell its stake in Tolland Imaging Center, though it couldn't say when that might happen. Meanwhile, Trinity said its understanding is that it would control NRRON's Enfield location while Prospect, once its acquisition is complete, would control the Manchester facility.

"Hartford Hospital owns 25 percent of NRRON, so we're not sure if they'll divest or if they'll continue to own a piece of the Manchester site," said St. Francis spokeswoman Fiona Phelan.

Hartford HealthCare spokesman Shawn Mawhiney didn't disclose the system's exact plans for its stakes in the two side businesses, but he didn't rule out any possibilities.

"As new healthcare ownerships and affiliations occur, we examine the status of our existing partnerships on a case-by-case basis," Mawhiney said. "Meeting community need is our top priority, and in today's complex healthcare world that can mean changing existing arrangements — or participating in alliances that would not have been possible just a short while ago."

In a written statement, California-based Prospect Medical Holdings declined to comment on both facilities because they don't own them yet. The company said it hopes to close its ECHN purchase later this summer.

In the grand scheme of things, Tolland Imaging and NRRON wouldn't make much of a dent in either competitor's overall business. The jointly owned companies are projected to bring in combined revenue of $8.4 million for fiscal year 2017. Hartford HealthCare recorded $2.2 billion in net patient revenue in its most recent fiscal year. Meanwhile, the newly formed Trinity, which also includes Springfield-based Sisters of Providence and their Mercy Hospital along with St. Francis Hospital and Medical Center and Johnson Memorial, anticipates revenue of $1.7 billion, assuming its pending acquisition of Waterbury's St. Mary's Hospital is approved this summer, Dadlez said.

A new system

Dadlez, formerly CEO of St. Francis, is now overseeing a new regional system that's set to have five licensed hospitals, several hundred ambulatory centers and more than 12,000 full-time employees.

There may be more pieces to add, though Dadlez didn't reveal any potential targets in a recent interview. Already, Trinity has acquired, through Sisters of Providence, a 600-employee medical group in Springfield, Mass., which could signal the kinds of deals Dadlez and his team would consider in Connecticut.

Trinity Health-New England is a significant new system in Connecticut and Western Massachusetts. Its formation will add about 10 percent in revenues to its parent company, Trinity Health. The Michigan-based Catholic hospital operator calls its regional health systems "regional ministries," and its New England outpost is set to be among its largest yet.

Trinity Health-New England is solidifying itself just as several other deals are being done around the state: Prospect recently received preliminary approval to acquire ECHN and Waterbury Hospital; Yale has applied to acquire New London's Lawrence + Memorial Hospital; and Charlotte Hungerford Hospital in Torrington expressed interest in February to affiliate with Hartford HealthCare.

While the deals involve both for-profit and nonprofit providers, Dadlez said some of the reasons such consolidation is happening in Connecticut and across the country overlap: cheaper access to capital, eliminating duplicate functions, and building up large bases of patients to help spread financial risk increasingly included in insurance contracts.

Not about leverage

He dismisses the notion that hospital consolidation is about gaining leverage over insurers.

"There may be some large regional [hospital] players, but the insurance industry has way more leverage than the hospitals will ever have," he said.

He said changing the delivery system is the biggest focus for Trinity Health-New England.

Risk-based contracts with insurers pay according to certain metrics being met related to costs and health outcomes. Those contracts are being pushed by Medicare and commercial payers alike.

Dadlez said St. Francis' management concluded five years ago that it wouldn't be able to compete with Hartford HealthCare or Yale New Haven Health System in that new environment unless it could add more patients and upgrade its infrastructure to move towards population health management and away from fee for service.

"Bigger isn't necessarily better, but you have to have some scale to be effective," Dadlez said.

Change in risk

He estimates that the majority of Trinity Health-New England's insurance contracts will contain both upside and downside risk within several years. The system is just starting to delve into downside risk, which means it will bet some of its own money that it can hit financial and health metrics. It's a risk St. Francis may not have been eager to take when it was on its own, he said.

That march towards a population health system, advocates hope, will lower or slow the growth of healthcare costs. Does Dadlez believe it? "If it's done right and for the right reasons it should be better," he said.

If costs are lowered, Dadlez said the savings would go into the health system and towards lowering patient bills.

"In order to keep innovating … you have to have enough money to reinvest in your own organization," Dadlez said.

New record system

One planned capital expenditure in the next several years is the installation of an Epic electronic medical record system at Sisters of Providence and St. Mary's. Johnson Memorial went live with the system in January, and St. Francis already has it.

Using one system will allow the hospitals to share records and data, boosting population health efforts, Dadlez said.

"If you really want to do real accountable care and risk contracting, you can't be on paper," he said. "You all have to be on a common information system."

Cost cutting

In an effort to trim spending, Trinity recently offered nearly 300 employees an early retirement incentive. Nearly one-third applied for it. The retirements are expected to happen later this year.

Dadlez said the offering could result in ongoing annual savings of as much as $5 million for the system.

"We need to slim down our operations," he said. "We need to be efficient."

Dadlez said he was happy to be able to offer a retirement incentive rather than issue pink slips.

In May, St. Francis settled a lawsuit that alleged it had underfunded its employee pension fund. The settlement requires St. Francis to make an immediate payment of $17 million and then $10 million per year for the next nine years.

Dadlez said the early retirement incentives were not related to the legal settlement. He said St. Francis had already been contributing $9 million per year to the pension fund, so while the net impact in the first year is larger, the net annual increase for the next nine years will be $1 million, which Dadlez called immaterial to the hospital.

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