Bracing for the Inevitable… and for the Unknown

For years, the health-care landscape in Kansas City has been marked by a period of relative stability in the ownership of the hospitals that define quality care for a region of 2 million people.

That’s changing—and the change is picking up momentum. Consider: Just this month, a California-based company formally completed the acquisition of two key hospitals in the northwest quadrant of the metropolitan area, Providence Medical Center in Wyandotte County and St. John Hospital in Leavenworth County. Last fall, Carondelet Health System announced that it would enter talks with national hospital ooperator HCA to acquire St. Joseph Medical Center in south Kansas City and St. Mary’s Medical Center in Blue Springs. And most recently, turmoil has engulfed North Kansas City’s municipally owned hospital, with a legal battle being waged over issues of governance—and another potential sale feared by those who want to keep North Kansas City Hospital locally owned.

It would be a mistake, health-care professionals say, to view those changes strictly through a parochial prism: The forces at work are strong, deep and national in scope. And they aren’t going away. More change is coming for a sector where executives are frenetically seeking ways to deliver higher levels of care at lower costs. And they’re doing that against a backdrop of uncertain revenue streams as federal officials mull changes in health-care reimbursements, and demographic trends in the physician ranks that more than hint of a provider crisis in the making.

All of that raises some key questions about the near-term future for health-care delivery in this market: How might additional consolidation affect delivery of care here? And what are hospitals doing to position themselves for success in the face of those trends?

The Consolidation Uptick

Assessing the first wave of ownership changes around the region’s hospitals, Bob Page has a succinct forecast: “The speculation among my peers across the country is, this is the beginning,” says the CEO at the University of Kansas Hospital, the region’s largest. “Given the pressures we have to take cost out of the health-care system, it requires a lot of hospitals to rethink their strategy in terms of standing alone. I think you’ll see much more consolidation nationwide.”

Kansas City, though, presents a more interesting dynamic, Page said. “There are not a lot of independent hospitals left here. I don’t know what that means for our marketplace, but I expect that the independents will become part of a system, because of the constant pressure to take costs out, and you do that by getting scale, growing larger. Spreading your overhead across that expense base is going to help you.”

Mark Laney, the chief executive for St. Joseph-based Heartland Health, sees things much the same way. “There’s just a frenzy of mergers and acquisitions happening across country,” he said. “Some experts say you need to get to net revenues of $7 billion to be a major player in the future. So a number of health systems are really gobbling up hospitals or trying to acquire them.”

Compare the $7 billion figure that Laney cited to hospitals currently in the Kansas City market: The largest, KU, had 2012 revenues of barely half that figure—$3.53 billion. Saint Luke’s Health system’s four locations had a combined $3.21 billion for the year. Only one player, HCA Midwest, likely topped those figures, but the organization refuses to disclose revenues. The most recent full year of reporting showed that HCA Midwest’s seven hospitals accounted for roughly 17 percent of admissions in this market; other factors being equal, that would have placed the system’s revenues in the range of $3.7 billion—still a far cry from the $7 billion level.

Frank Brady, who consults with hospitals nationwide at Brady & Associates, said the impact of sweeping change could assert itself with fewer hospital beds in the market, reduced physical access to services that many consumers have come to expect from the nearest hospital, more advanced nursing certifications to take the load of primary-care physicians, and employment levels overall in health-care settings.

“They’re all probably in play,” he said, but noted that “there’s a problem of looking at this through too parochial a lens.” The bigger picture, he said, was the national push to consolidate services and the increasingly—and alarming—shortage of primary physicians.

“The folks that sit on top of good-sized systems, that’s how they’ve been trained to do things—the notion that bigger is better, and that an economy of scale makes sense in the short term.” Longer-term, he said, cost trends suggest that all-encompassing heath systems may be dinosaurs. “Hospitals are in the business of reinventing themselves, and health care five to 10 years from now will not look anything like it does now. That classic structure is morphing into something else.”

Brady expects we’ll see a much flatter delivery system, one more decentralized, where nuring or diagnostic imaging would occur through a different organizational matrix—organizations that perform different functions owned by different entities, but linked contractually. “The technology today says we don’t need to have everything in that
big box we call a hospital,” Brady said.

Revenue Risks

Much of the change at work today, said Brady, is driven by reimbursement levels, particularly within the government-payer systems. “The Affordable Care Act is putting pressure on hospitals with reimbursement levels, and the readmission penalties in there were a shock to a lot of hospitals.” But the shock isn’t over, he cautioned: “There are things buried in there that we still haven’t seen.”

That’s why steps to consolidate now run counter to a flatter-structures model: “With the demographic trends and an aging consumer base, that will be a completely different healthcare environment. I’m a little concerned that some of the steps that seem to make sense in the drive to consolidate and get our arms around enough of these pieces, and still maintain control, are an illusion.”

Sandra Lawrence, chief financial officer at Children’s Mercy Hospitals and Clinics, noted the challenge posed by a regulatory environment that still hasn’t been fully landscaped. “Reimbursement is a big challenge for health-care providers at this time,” she said. “And Medicaid transformation is just beginning and no one knows how that will ultimately look.”

The hospital is actively seeking out venues so it can have a say in policy discussions about the design and delivery of Medicaid, she said, and it’s also making structural changes of its own. “Our Pediatric Care Network is one example,” Lawrence said, “and we’re looking at establishing a medical home environment, providing a medical home environment for kids so we’re more efficiently able to deliver better care.”

Medicaid is a particularly thorny concern for a hospital with a unique revenue model like that of the region’s premier pediatric hospital. “For us, we’re always concerned about the risks to the uninsured, and in addition, the under-insured,” she said. “Even with reform and all the changes happening, we’ve had this long, long 115-year history of taking all patients without regard for their ability to pay, and we will continue to do that.” The hospital has also centralized services where possible, not just within each of its locations, but across the enterprise, she said.

The Physician Shortage

Ten years ago—even then, the media were referring to American health care as being in a state of crisis—warning bells were going off about a looming national shortage of physicians overall, but particularly those in primary care practices. A lot of efforts have been aimed at addressing that, but the problem is still there, big as ever. It is one that will affect urban and rural hospitals alike, with particular challenges for those in smaller communities.

“Frankly, in some ways, it’s terrifying,” said Dave Dillon, spokesman for the Missouri Hospital Association, in assessing the impact across the state. “Rural physicians tend to be older, and they tend to have heavier caseloads.”

Dillon noted successes in grow-your-own initiatives to draw new physicians back into smaller markets, and the focus on increasing support services. Those could relieve some of the load on the physicians themselves, as with more advanced nursing  and nurse practitioner certifications. “You have to do those types of programs to increase the capacity of the health-care infrastructure from the practitioner perspective,” Dillon said.

“One of the things that keeps us up at night is, if say they don’t pass Medicaid reform this year and other states do, it may become a situation where Missouri is less attractive to new physicians than other states,” he said. “When they finish residency and are deciding where to hang up their shingle, they want to be in the most attractive, rather than least attractive, locations.”

Laney and Dillon both noted that smaller communities, especially, could be threatened by developments affecting their community hospitals.

“Major metro areas are less impacted than smaller areas,” said Brady. “Half the hospital in the country have less than 100 beds—half. And most of those are in small, rural communities. Not only are they the largest provider of health services, they’re often the largest employer. They are the engines that drive those local economies.”

In the long run, what happens with those hospitals will impact the major medical centers as well, Brady said. “Hospitals are already competing with outlying areas to get feeders into their systems because they have these tremendous cost structures to support,” he said. Smaller hospitals are increasingly unable to handle the costs of regulatory compliance, operating at levels that ensure continuing Joint Commission certification and other structural costs imposed on them.

Pressures on them to survive with reduced reimbursements could compel many to seek refuge as part of larger systems, industry executives and analysts say. Heartland itself has moved more boldly into Platte County from its neighboring base in Buchanan County, though with a different strategy.

“We intentionally decided not to try to buy any hospitals” as part of that move, Laney said. “Our mosaic strategy is primarily based on outpatient services and optimizing health vs. acute health. There are already enough hospitals and beds in the Kansas City area.”

But in the more distant exurbs, the potential for acquisition of satellite hospitals poses some interesting possibilities for the larger hospitals and systems in the Kansas City market, he acknowledged.

Will Care Levels Change?

Last year, the Robert Wood Johnson Foundation updated a 2006 report that examined various studies of cost impacts of hospital mergers. Its conclusion: increases in market concentration led to increases in the price for hospital care—more than 20 percent higher, in concentrated markets.

Not all of that, the foundation  said, could be directly attributed to the mergers themselves. But its assessment said that, depending on the pricing structures of the institutions involved, hospital concentration reduced quality for some procedures. And in general, it found that that competition improved quality of care.

America’s Health Insurance Plans, a Washington-based trade association, also argues that consolidation is indeed driving higher health-care costs. Through mergers or outright acquisitions of physician practices, hospitals increase their negotiating power and limit competition. Result? Higher patient costs, often without better care.

Still, says KU’s Bob Page, the Kansas City market can do with a little shaking up. “I would hope that there is a change in delivery of services, that we take a serious look at how many respective programs we have and how many the community needs,” he said.

Too many of those specialties are cost-drivers, and “at the end of the day, we have to get the value proposition on the table,” he said. “I can see a consolidation of service where we may not have as many open-heart procedures at as many locations.

“Ultimately,” Page said, “the days of individual hospitals looking at profitability for certain service lines are being called into question. If you’re doing low volume, it’s hard to maintain high-quality standards and outcomes.”