Hospital Consolidation Is Changing Seattle's Medical-Services Landscape

How hospital mergers and acquisitions are changing health care
SCALING UP. Bill Robertson, chief executive officer of MultiCare, views the escalating cost of health care infrastructure as a major driver of hospital-system consolidation, which produces the scale necessary to remain profitable.

This article appears in the September 2019 issue. Click here for a free subscription.

The independent, locally based hospital is increasingly as quaint a feature of the regional health care system as the doctor’s little black bag carried on house calls.

After a whirlwind decade of mergers, acquisitions, affiliations, joint ventures, link-ups and expansion, the regional hospital industry has consolidated into a handful of clusters with the hospitals themselves being the nucleus of a network of physician groups, walk-in and outpatient clinics, specialty practices, urgent-care offices and anything else related to health care.

“There has been more change in the health care industry in the last five years than in the previous 25 years,” says Lisa Brandenburg, vice president for medical affairs at the University of Washington and chief health system officer for UW Medicine, one of those remaining hospital clusters.

Nationally, a PwC report says health care merger and acquisition activity rose 14.4 percent last year.

The gobbling up and pairing off of most of the potential and available partners represented one chapter of the regional hospital industry’s history. Now the question is: What’s next?

With the independents mostly gone, is it time for the consolidators to be consolidated themselves? Will the remaining clusters be further reduced to just two or three in the Puget Sound region? Will the remaining groups go outside the market for expansion opportunities, as Tacoma-based MultiCare Health System did when it added Rockwood Health System in Spokane? Will one or more of the clusters here prove attractive to an out-of-market entity, such as when Kaiser Permanente took over Group Health Cooperative? Will hospital groups here become part of ever larger national operations, as happened with Tacoma-based Franciscan Health System, which became part of Catholic Health Initiatives, which in turn combined with Dignity Health to form CommonSpirit Health?

Or will the regionals go it alone and focus on building out their networks through expansion and the occasional acquisitions?

The landscape may not look very different in the next decade. The names on the buildings patients see now are likely to be the same. But what’s less visible — the relations and arrangements between them — will be very different.
Rather than operating as direct competitors, or combining through a merger or acquisition, the region’s hospital-centric enterprises are likely to add services and build out their operations while saving money and avoiding duplication through affiliations, partnerships, referral agreements and the like.

“Most of the hospitals in the area already are talking to each other,” says Jaja Okigwe, the chief executive officer of First Choice Health, which is a Seattle-based hospital-and-physician-owned health care plan. “My hope is they’ve found a way to work together to streamline care. There are lots of points of competition, but there are also points of collaboration.”

Hospital executives agree. “I’ve been very impressed with how a lot of the CEOs are starting to talk to one another like never before about what is possible together,” says Dr. Guy Hudson, chief executive of Swedish Health Services, itself a part of Renton-based Providence St. Joseph Health. “It’s a healthy dialogue because everybody’s facing the same pressures. Some have deeper pockets and can ride it out a little longer. We are all on the same ride, particularly the nonprofits.”

“We need to be flexible going into the future,” Brandenburg adds. “Are there places we should partner that we wouldn’t have historically, with people we previously would have considered our rivals?”

Examples abound. MultiCare and CHI Franciscan may be nearby rivals in the South Sound region, but the two collaborated on the formation of Wellfound Behavioral Health Hospital, a $45 million, 120-bed facility that opened in May. CHI Franciscan, meanwhile, opened an urgent-care clinic on Bainbridge Island, reopened an obstetrics program and partnered in radiology and oncology programs at two of its hospitals, all in conjunction with Virginia Mason Health System.

Swedish has partnerships with two Olympic Peninsula hospitals that include sharing of patient medical records on one platform. MultiCare and UW collaborate on purchasing.

Even two of the remaining independents, EvergreenHealth in Kirkland (which itself has a second hospital, in Monroe) and Overlake Medical Center in Bellevue, two years ago announced formation of Eastside Health Alliance, a joint venture to focus on shared services such as cardiac, neuroscience and thoracic surgery.

Multiple factors are driving the trends toward building what Okigwe calls “constellations” of interconnected health care services. Not surprisingly, most of them revolve around money. A big one is the cost of technology such as electronic records platforms.

“When you look at the infrastructure required to run a 21st-century hospital, like an Epic system, then scale becomes important,” says Bill Robertson, MultiCare’s CEO. “The cost of running that on a smaller platform becomes prohibitive.”

The traditional model of a stand-alone hospital isn’t financially structured to generate the kind of revenue needed to keep up, adds Swedish’s Hudson.

“Swedish has been built around acute care,” he says. “Just to rely on acute care is only going to make costs increase. There are very few things on the high-end acute side that actually bring in a lot of revenue like they used to.”

“Core hospital operations struggle with margin,” says Munzoor Shaikh, with health care consultancy West Monroe Partners. “Other assets such as post-acute care centers and even home health agencies have better profitability.”

That’s why hospitals have been expanding into health care systems with the hospital as just one piece. Like others, Swedish has been investing in ambulatory networks to treat patients in a lower-cost setting. Last year, Swedish treated 1.2 million outside its hospitals; only 68,000 were admitted.

But internal expansion can be expensive too, so health care systems are looking to shared services and resources as a way to expand their menu of offerings without incurring the costs of doing so.

“Hospital care is only one piece of the care puzzle, and hospital administrators have realized they can control quality of care and costs better through a continuum approach versus purely building up market share in one area,” says Dan Howell, a director of West Monroe’s health care and life sciences practice in its Seattle office. “The ability to take careof a patient from primary care to hospital to home care and beyond brings not only patient stickiness, but, importantly, access to the information providers need to make better decisions for each patient and the system overall.

This vertical integration has also led providers to understand what they should own and what they should include in their portfolio but operate separately.

“In a study we did on health care M&A last year, 79 percent of dealmakers said they planned to pursue joint ventures or alliances over pure mergers and acquisitions in the following 12 to 18 months,” Howell adds. “Joint ventures and alliances allow for both growth and control of referral patterns without all of the integration headaches.”

Health care executives are well aware of the financial pitfalls. In May, Astria Health, the nonprofit operator of hospitals in Yakima, Toppenish and Sunnyside, filed for Chapter 11 bankruptcy protection.

“We have to continue to generate a bottom line,” says Gary Kaplan, chief executive officer of Virginia Mason. “Many in this market are losing money. We don’t want to be in that position.”

BIG PICTURE. Gary Kaplan, M.D., chief executive officer of Virginia Mason and winner of Seattle Business magazine’s 2019 Leaders in Health Care Lifetime Achievement Award, believes hospitals must find ways to remain profitable, but he also says the creation of multiregional conglomerates in the health care space may not be what’s in the best interest of communities and the larger society.

Two huge uncertainties hover over the debate about the future of the hospital sector. One is the future of government funding. Many of the Democratic contenders for the presidency in the 2020 election are advocating an expansion of Medicare beyond seniors, or an outright single-payer system — a type of universal health care funded through taxes which covers the cost of basic services for all Americans. A massive change in hospital reimbursement policies is also likely to have a significant impact on the finances and structure of the industry.

The other is the entry of outsiders into the industry. There’s little consensus on what the joint venture of Amazon, Berkshire Hathaway and JPMorgan Chase, known as Haven, might do, but just the size and influence of the participating companies is generating considerable interest.

“There’s a lot of venture capital lining up to see how that capital can create returns for investors in interesting ways,” says MultiCare’s Robertson.

But outsiders are already influencing the industry, directly and indirectly. Dismayed by the cost of health care benefits for employees, “employers are hiring chief medical officers,” Okigwe says, and calling more of the shots on how those benefits are delivered.

Health care systems also are partnering with outsiders much as they are with each other. The regional drug chain Bartell paired with Group Health, now Kaiser Permanente, to put clinics in stores.

But few are expecting outsiders to come up with some sort of miracle cure to fix what ails the hospital industry. “If health care were an easy fix, it would have been done already,’ Swedish’s Hudson says.

There’s a division of opinion on the future, or benefits, of combinations with health care organizations from outside the region. Virginia Mason’s Kaplan, for one, is skeptical of the benefits of multiregional conglomerates.

“The evidence increasingly suggests that on the espoused intentions of quality care, access to care, economies of scale, the achievements are few and far between,” he says. “The real impact is to increase prices. I don’t think that’s what our communities or our society need.”

CHI Franciscan, on the other hand, is part of a 142-hospital group operated by Catholic Health Initiatives, based in Englewood, Colorado.

“With aggregation of scale comes the ability to share best practices, build upon complementary resources and capabilities, and reinvest in critical programs and services that benefit our communities,” argues Ketul Patel, CHI Franciscan’s chief executive. “Locally, CHI Franciscan has made many investments in the greater Puget Sound region to expand access to care and resources. Being a part of a national organization only strengthens our ability to provide care for future generations as our region continues to grow.”

Hospitals such as Highline Medical Center in Burien and Harrison Medical Center in Silverdale — both of which are owned by CHI — that want to expand need access to the capital that larger entities can provide.

But health care organizations can’t do deals just to bulk up, without paying attention to whom they’re doing deals with, Patel adds.

“Size and scale for the sake of size and scale is not what this is all about,” he says. “Understanding the strategic purpose for a deal and having the right cultural fit are key. If you don’t have that, a merger, consolidation or an acquisition is never going to work.”

If anything, the regional hospital groups here are finding ways to offer their services outside the market with the same sort of affiliations and partnerships they’re negotiating with one another. Virginia Mason has been picked as a center of excellence by major employers such as Walmart and Lowe’s, a program that provides employees incentives to travel to those facilities for treatments, such as knee and hip replacements.

Swedish has an agreement with the Southeast Alaska Regional Health Consortium. The Alaskan consortium sends patients to Swedish in Seattle, and Swedish sends specialists to the consortium’s clinics.

Hudson sees Swedish becoming a destination hospital, much as the famed Cleveland Clinic is for heart surgery. “There’s no reason Swedish can’t do the same thing with neurosciences, cardiovascular or even cancer,” he says.

Formal mergers and acquisitions may be less prevalent in coming years, West Monroe’s Shaikh says, but partnering and affiliations will continue. “Hospitals, if they do nothing, could be disrupted in the future,” he says. “The one way out of that is for them to participate more in value-based care, especially with the commercial population via partnership with employer groups. Inaction is dangerous.”

Hospital Stew
Keeping track of health care system consolidation can be a full-time job

Can’t tell the players in the regional hospital game without a scorecard? Here’s a quick rundown of who belongs, through ownership, affiliation or operating arrangement, to whom:

MultiCare, Tacoma: Hospitals and medical centers include Allenmore, Tacoma General and Mary Bridge Children’s in Tacoma, Auburn, Covington, Gig Harbor, Puyallup; and Deaconess, Valley and the Rockwood Clinic in Spokane.

CHI Franciscan, Tacoma: Harrison Medical Center, Bremerton and Silverdale; Highline Medical Center, Burien; St. Elizabeth Hospital, Enumclaw; St. Francis Hospital, Federal Way; St. Anthony Hospital, Gig Harbor; St. Clare Hospital, Lakewood; St. Joseph Medical Center, Tacoma; CHI Franciscan Rehabilitation Hospital, Tacoma; Wellfound Behavioral Health Hospital, Tacoma (in partnership with MultiCare).

Providence St. Joseph Health, Renton: Swedish Health Services, Pacific Medical Centers, Seattle.

Providence Health & Services, Renton: Hospitals in Everett, Colville, Centralia, Spokane, Chewelah, Olympia, Walla Walla.

Virginia Mason, Seattle: Virginia Mason Hospital and Seattle Medical Center; Virginia Mason Memorial, Yakima.

UW Medicine, Seattle: UW Medical Center; Harborview Medical Center; Northwest Hospital & Medical Center, Seattle; Valley Medical Center, Renton

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