EVERETT — Monolithic forces seem to be reshaping health care industries in America: sweeping federal regulations, escalating drug costs, and an aging population demanding top-shelf care, among others.
Faced with such daunting challenges, insurers and providers have often fallen back on an age-old business tactic — get bigger by gobbling up other companies. The consolidation trend has touched nearly every corner of the country, including Washington.
Kaiser Permanente is trying to buy Seattle-based Group Health Cooperative, which has about 590,000 members in the state. Last month, the roughly 250 doctors who own the Everett Clinic, the state’s largest independent regional healthcare provider, agreed to sell to DaVita Healthcare Partners, which has operations across the country. In 2012, two of Western Washington’s biggest health care providers — Swedish Health Services and Providence Health &Services — formed a cost-sharing partnership that also gave Providence significant influence over Swedish.
In each case, executives said the mergers were necessary to control costs, which is commonly cited by health care executives to justify consolidations across the country.
The results from most mergers and acquisitions, though, don’t deliver the hoped-for benefits, says Leemore Dafny, a professor at Northwestern University’s Kellogg School of Management. Her research has focused on the health care industry.
Too often, consolidating is a “knee-jerk reaction” by health care companies, she told The Daily Herald. “It sounds like a good idea.”
“The harsh reality is that it’s difficult to find well-documented examples of mergers that have generated measurably better outcomes or lower overall costs,” she said in an analysis of health care mergers that appeared in May in the New England Journal of Medicine. “The most consistently documented result of provider mergers is higher prices, particularly when the merging hospitals are in close proximity.”
Research by University of Pennsylvania professor Lawton R. Burns and colleagues has found that sprawling hospital systems are more expensive to run than independent community providers. Of course, there are exceptions. For example, systems with fewer hospitals and many centralized services tend to have lower operating costs.
Dafny, Burns and other researchers have found similar results from consolidations among health care insurance companies.
Rising costs are a real concern in health care. Many experts say the industry has to shift away from paying providers for each service and procedure performed, to payments based on patient outcomes. The Everett Clinic, for example, has changed its care model to fit the new approach, called value-based care.
The clinic, which has about 319,000 patients, is not big enough to force suppliers, contractors and insurers to fit its new approach, Everett Clinic CEO Rick Cooper said.
As a result, the clinic’s expenses are expected to exceed revenues in five years, he said.
The Everett Clinic plans to grow its way to a better financial future by expanding into Seattle and doubling in size by 2020, which will give them negotiating strength. But it could not raise enough money on its own, Cooper said.
DaVita has promised to bankroll the clinic’s expansion plan and to invest in system upgrades. The Denver-based business is a publicly traded Fortune 500 company and had net revenue of $12.8 billion, including $723 million in profit, last year.
Both companies say they expect to complete the sale by March. The Federal Trade Commission has to make sure the sale does not kill market competition.
Details of the sale remain confidential, said Dr. Al Fisk, the clinic’s chief medical officer. “While we cannot discuss the financial terms of the merger publicly, we are confident the merger will help us better negotiate in the marketplace on behalf of our patients and provide them with more choices about where they receive their health care.”
If approved by federal regulators, the Everett Clinic will have significant independence as its own operating division, said Joe Mello, a senior executive at DaVita.
University of Wisconsin professor and patient advocate Meg Gaines is skeptical when promises are made during mergers.
“When it’s one big thing eating another big thing, eventually everyone gets absorbed,” she said.
That is not an inherently bad change, though. Locally controlled health care might be familiar, but it is not necessarily better. How the system is run and having smart consumers matter more than geography, said Gaines, who runs the Center for Patient Partnerships at the University of Wisconsin.
Consolidation, too, is not always good or bad.
If a merger or acquisition pares costs, what matters is “what they do with those savings,” she said. “Do they pay shareholders, or clean mold out of houses” to drive down asthma rates?
Under the current fee-for-service model, providers, in theory, would make money from high asthma rates, Gaines said.
The CEOs of Kaiser Permanente and Group Health Cooperative have said that their proposed deal will improve patient care. Delivering quality care to Group Health patients, including about 54,000 in Snohomish County, would be impossible as an independent provider, according to executives from the nonprofit.
As a cooperative, Group Health members elect the nonprofit’s board of trustees. There is a 60-day waiting period after a member registers to vote, and 27,000 people are registered.
Group Health has scheduled voting to start Jan. 30, 57 days after the proposed sale was announced. If voting members OK the deal — and state regulators approve it — they will lose their voting rights and Kaiser will become Group Health’s sole member.
The nonprofit is holding town hall style meetings this month to discuss the sale with members.
But members are not getting enough information to make an informed decision, said Maralyn Chase, Democrat state senator from Shoreline, and a Group Health member since 1969.
Chase and other members are advocating against the sale. They have asked for a mailing list of voting members, but Group Health has rejected the request, she said.
A Group Health spokesman said the nonprofit believes its members will support the sale “in order to ensure the Group Health approach to care is sustained for generations to come.”
Kaiser Permanente said it is up to Group Health to decide when details of the agreement are released.
The goal of the sale “is to expand access to the high-quality, affordable care and coverage that are at the heart of both organizations’ missions,” said Donna Lynne, an executive vice president with Kaiser.
“Success will be defined first by the quality and affordability of health care and coverage” provided to “current Group Health members and the broader population of Washington,” she said.
Dan Catchpole: 425-339-3454; dcatchpole@heraldnet.com; Twitter: @dcatchpole.
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