Getting to Yes: Clinical Services Talks Key in Hospital Mergers

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By Mary Anne Pazanowski

Deciding which merger partner will offer which health-care services after a merger is a key negotiating point for merging multi-hospital systems.

Large-scale mega-mergers involving systems made up of hundreds of hospitals, such as the proposed merger of Ascension Health and Providence St. Joseph Health announced in late 2017, showcase the need to put issues surrounding management of service lines—such as cardiac or neontal care—front and center during merger negotiations, health lawyers told Bloomberg Law. A disagreement about how clinical services will be redistributed is rarely the sole factor that kills a deal, but it can be an important issue, they added.

With costs per service unit increasing, recalibrating how and where health care services are provided—designed to eliminate duplicate services and promote the strongest clinical programs—can go a long way toward helping determine whether a prospective merger, looking to reap the quality, financial, and competitive gains associated with consolidation, succeeds or fails, they said.

The Ascension/Providence deal, which would result in a system with 191 hospitals and $45 billion in revenues, is an example of a type of deal that is quickly becoming the rule rather than the exception, they added. Another deal announced in December, between Catholic Health Initiatives and Dignity Health, involves 139 hospitals and combined revenues of nearly $30 billion.

Disagreement has figured in the failure of smaller-scale deals, such as the proposed merger between Northwest Indiana’s Methodist Hospitals and Franciscan Alliance. Their talks fell apart after nearly a year because the systems couldn’t agree on the “clinical service line implications of the proposed partnership,” according to a statement released by Methodist.

Identifying Strengths

Negotiations about consolidating or strategic positioning of clinical services should begin early—maybe even before the parties sign their letter of intent or initial merger documents, Paul A. Gomez, of Polsinelli’s Los Angeles office, told Bloomberg Law. Gomez also said merger partners should watch out for a combination of other factors regarding how clinical service are provided that could derail the deal at a later time.

The starting point is for each party is to identify their clinical strengths and weaknesses, Gomez said. They should undertake a review of how well each clinical service line is operating at every hospital in the system. While Gomez urges systems to be honest with themselves, he said it is common to find disagreement in this area.

The merger also may lead to a “marriage of equals,” in which each system has hospitals in the same geographic area that perform at a high level of excellence, Gomez said. The goal in that event may not be to stop offering a clinical service at one hospital or the other, but to standardize policies and protocols between the two. The key is to ensure both locations meet the same quality and value goals, he said.

Sometimes the issue comes down to branding, Gomez said. Two hospitals may offer the same level of care, but one is better known for a particular service. The second hospital will want to find a way to gain or build on the other’s reputation.

Occasionally, the closing or improvement of a service line, such as when there are regulatory or compliance issues with a particular service, can be made a condition of closing the deal.

Assessing Community Needs

Clinical service delivery talks may be required to ensure the new system continues to meet the needs of the community the hospital serves, Douglas B. Swill told Bloomberg Law. If one of the parties is affiliated with the Catholic Church, for example, issues regarding access to certain services arise because the U.S. Conference of Catholic Bishops’ Ethical and Religious Directives for Health Care Services prohibit Catholic hospitals from offering some services, like voluntary abortions and sterilizations. Swill, of Drinker Biddle & Reath in Chicago, chairs the firm’s health care practice group.

Access issues also move to the forefront when larger hospitals acquire smaller, rural facilities, Swill said. On paper, it may not make sense to continue offering certain services at the smaller hospital because there doesn’t appear to be a large demand for them. Those services, however, can be crucial to the people who live in that community. Swill pointed to behavioral health services as an example.

State law requirements, like certificate-of-need programs, also can complicate service redistribution. About 37 states have some form of CON requirement under which health-care providers must get state approval before opening new facilities, adding new equipment, or expanding service types.

Hospitals that want to join together to offer high-quality, lower-cost services that meet their patients’ needs but don’t want to merge have other options, Swill added. Service line joint ventures, affiliations, and cooperative agreements are just a few examples, he said.

Legal Complications

A plan to realign clinical services in order to lower costs and improve quality after a merger or other affiliation must be thought out carefully to avoid potential legal problems, Swill said. Antitrust considerations, for example, can figure prominently in the decision. The Federal Trade Commission has challenged hospital mergers even in relatively small geographic areas, so a plan to combine or realign services may trigger review.

For example, if system A and system B each have a hospital that offers cardiac imaging services, would combining the two groups in one hospital potentially have anticompetitive effects? Alternatively, if system A’s hospital offers cardiac imaging services and system B’s hospital performs open heart procedures, combining the two at one hospital might offer efficiencies, but would it interfere with competition in the region?

Swill suggested merger partners hire a third party to conduct a service-by-service efficiency analysis to identify services that could be centralized at one location. The partners would put all their sensitive or confidential information in a “black box,” so that only the third party, not the systems, would have access to it. The resulting feasibility study could be a “road map” for service line redistribution, especially in states where attorneys general are taking closer looks at hospital mergers, he said.

Realigning or consolidating services also could affect independent physician groups that provide coverage in the hospitals. Groups that have been left out of new arrangements have been known to sue, claiming antitrust violations. Health systems need to consider whether those groups can be accommodated and how they could fit within the new structure.

Other Factors

Hospital-based physicians, employees, board members, and administrators can add complexity to the service line question as well. The clinical leadership must buy in to any attempt to change how a service is offered in a particular facility, Gomez said. The leaders will be the first ones required to adapt to any changes, and they have to help educate and persuade professional colleagues about the anticipated benefits.

Combining or realigning services can result in job losses, and the remaining employees might balk at changes that would require them to travel farther to get to their jobs. A proposed change could cause an uproar in a community, especially if the residents come to believe their access to services or jobs will be cut.

Post-Closing Considerations

A strategy for managing clinical services should be considered early on, but it’s not necessarily set in stone. Swill told Bloomberg Law that merger closing agreements often contain continuity of service provisions. For example, the contract could require a particular service line to remain substantially intact at one hospital for a defined period of time. These agreements rarely are for indefinite time periods, Swill said.

Contingencies also can be made for changes in the law or regulations. Thus, if the Centers for Medicare & Medicaid Services changes the way it reimburses hospitals for particular procedures, the parties can provide for that possibility.

Payer-driven issues, including challenges posed by CMS reimbursement policies and private payer decisions, “can be a disruptive force” with respect to service offerings, Swill said. If payers think the cost of a service is too high or the quality is lacking, they can force changes, he said.

Cultural issues, and the challenge of merging what may be two very different workplace cultures, also can creep in post-merger, Gomez said. Systems, he said, must ask themselves beforehand, “are we too different?”

Health systems considering a merger must know the why, what, who, where, and when of the deal, Swill said. Having clear objectives and setting goals are essential, so they should have a good sense of the benefits they wish to gain from the affiliation even before they start looking for a partner or buyer.

These systems should take a hard look at their existing operations and clinical services, and consider how a merger could improve the quality, cost, and value of their services, he said.

To contact the reporter on this story: Mary Anne Pazanowski in Washington at mpazanowski@bloomberglaw.com

To contact the editor responsible for this story: Brian Broderick at bbroderick@bloomberglaw.com

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