Posts Tagged ‘Nick Reed’

The Consolidation Wave in Healthcare

Tuesday, February 4th, 2014

Remember the Telecommunications Act of 1996? This was one of the signature pieces of legislation by the Clinton administration. The 1996 Act was intended to transition our communications laws and regulations from the era of natural monopoly to an era of market competition by eliminating barriers to entry at the local level. At the signing ceremony, former President Clinton put it this way:

“This revolution has been held back by outdated laws, designed for a time when there was one phone company, three TV networks, no such thing as a personal computer. Today, with the stroke of a pen, our laws will catch up with our future. We will help to create an open marketplace where competition and innovation can move as quick as light.”

It did have positive outcomes for consumers — increasing competition in local and long distance phone service, for example – but others said it led to a much more consolidated landscape. Before passage of the Act, a company could not own more than 40 radio stations in the entire country. With the Act’s sweeping relaxation of ownership limits, a company like Clear Channel by 2002 was able to own 1225 radio stations in 300 cities.

Could something similar be happening in healthcare? Cleveland Clinic CEO Toby Cosgrove, MD, thinks that in time to come, consolidation will lead to a dozen or more integrated regional health systems dominating the marketplace.

The reason? Under this Act, providers are being reimbursed not for individual episodes (“fee-for-service”) but for outcomes (the long-term health of the patient population). This is real: last year for the first time, Medicare penalized more than 2,000 hospitals with excessive readmissions — one of the major red flags for poor performance. Part of the institutional change to improve outcomes is the concept of the Accountable Care Organization.  ACOs are essentially consortiums promoted as a bigger, better model that manages health at the population level across a broader swathe of the healthcare specialties. So, an ACO might include a hospital, various specialty groups, surgery center, imaging, Emergency Department, even nursing homes, with all payments made to the head of the ACO (usually the hospital or large physician multi-specialty group) which then disburses to the rest of the group. So providers can’t operate in a silo anymore or they won’t get paid. It’s now about the alignment of physicians and hospitals, working as a team.

As a result, the ACO has caused the biggest wave of consolidation that I’ve ever seen in the sector. What’s more, in 2015, Medicare reimbursements will be reduced for physicians who haven’t made inroads with electronic medical records, which can be expensive for small independent practices to install – resulting in more consolidation so providers can be compliant. Consider that a quarter of specialty physicians and 40% of primary care physicians are already employed by hospitals, up from 5% and 20%, respectively, in 2000. Some larger specialty practices are combatting this trend by merging with other practices to avoid being purchased by healthcare systems or hospitals. Nick Reed, Vice President of Professional Banking Services at Wells Fargo Bank, paints the picture: “Some independent practices are moving out of condominium office buildings and grouping together to buy office buildings. The costs of maintaining small independent space are becoming burdensome, particularly as the technological pressures on integration and connectivity are imposed.” Mr. Reed sees information technology financing as an ever increasing part of medical office loan commitments. “We see a lot of IT expenditures in the $30,000 to $50,000 range, while multi-specialty groups have larger expenditures to fund.”