Michigan merger points to national trend

June 26, 2014

ACA’s emphasis on accountable care organizations, patient-centered medical homes, readmission penalties and pricing pressures on hospitals makes it attractive for hospitals to work together to share services and increase the efficiencies

While mergers and affiliations are difficult to execute, there is much in the Affordable Care Act (ACA)-along with general healthcare trends-that is encouraging such moves.

Case in point: The recent merger of three Michigan healthcare systems that are combining operations into a new $3.8 billion nonprofit organization. The consolidation of Royal Oak-based Beaumont Health System, Dearborn-based Oakwood Healthcare and Farmington Hills-based Botsford Hospital will create Beaumont Health, the largest hospital system in that region. This move is part of a nationwide trend, according to industry experts.

“Health plans have a direct interest in merger, affiliation, and acquisitions happening with hospitals and physician groups,” says Marianne Udow-Phillips, director of the Center for Healthcare Research & Transformation (CHRT) at the University of Michigan. “These activities change the nature and ownership structure of providers who are often key participants in health plan networks offered through managed care products.  Such changes can mean that health plans will face a different set of negotiating challenges as the leadership of the provider systems changes.”  

These activities can also concentrate some key providers into one negotiating entity, which can change the leverage and dynamics of health plan negotiations and affect pricing, contracting and reimbursement strategies, according to Udow-Phillips.

“For example, many such entities will attempt to negotiate a single pricing model across health systems, trying to bring up the rates at one of the health systems that may have been paid at lower levels than others within the new system,” she explains. “These new, consolidated entities will be able to share data within their system and potentially gain greater insight into plan pricing and reimbursement strategies.”

Among other things, the ACA’s emphasis on accountable care organizations, patient-centered medical homes, readmission penalties and pricing pressures on hospitals makes it attractive for hospitals to work together to share services and increase the efficiency of back office functions (such as human resources, information technology, accounting and the like) and to do more to integrate and coordinate care across a population segment, according to Udow-Phillips.

The CEOs of each of the systems said that are anticipating initial savings of at least $134 million from greater efficiencies and streamlining back-office functions, according to the Detroit Free Press.

“Shared medical records, the ability to centralize certain services with providers who specialize in those services and an increased ability to learn from each other can improve outcomes and safety,” she says. “Such mergers and affiliations are also of interest to providers who want to increase their negotiating leverage with health plans by controlling a greater share of the market.”