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Expert: No Pain, No Gain Applies to Healthcare Innovation, Too


A healthcare economist explains that not all experiments with new payment models need to succeed, because failure can show the system what not to do.

Healthcare is going through a period of innovation—and while some experiments will work, some will fail, and that’s normal, according to a health economist and antitrust expert who appeared in New Jersey last week.

Cory S. Capps, PhD, of the Washington, DC-based consulting firm Bates White, was the keynote speaker at “The Urge to Merge: The Impact of Health System Mergers and Consolidation on Healthcare Quality, Costs, and Access in NJ.” The New Jersey Health Care Quality Institute presented Capps’ talk and a panel discussion that followed at its winter conference on November 2.

Change in healthcare is driving the current wave of mergers, between physician practices and hospitals and also between health systems themselves. As Capps outlined, this is not the first time this has happened, and it’s not clear that each of these transactions is a bad thing, despite the uncertainty that mergers create.

The original wave of healthcare reform in the 1990s, which fell short of a law that called for universal coverage, unleashed a care management crackdown and the rise of health maintenance organizations (HMOs). But as Capps explained, the squeeze on costs and limits on consumer choice created an “HMO backlash.” After a string of antitrust losses, the United States Department of Justice (DOJ) and the Federal Trade Commission stopped fighting hospital mergers until the modern reform era, starting around 2008.

Fear of hospital mergers is legitimate. As Capps explained, mergers happened so hospitals could regain the pricing leverage they had lost, and multiple studies have shown that costs crept back up again.

From 1995 to 2010, Capps said, for the most part insurers passed rising healthcare costs on to employers—who in turn passed more costs on to workers—with the result being depressed wages. Among small employers, there was a decline in the number companies offering coverage to workers. “You can only get less and pay more for so long before we saw a tipping point,” he said.

Thus, this new wave of reform involves a real effort to bring down the cost of care delivery itself, and that’s what promises to make the current wave of change innovative. While some of today’s experiments will fail, “The glass is more full if we see failure resulting in learning what not to do,” Capps said. “Then it’s not failure, it’s knowledge.”

The wave of reform under the Affordable Care Act (ACA) has seen a number of changes, including coverage expansion, Medicare reform, and accountable care organizations, both in the commercial sector and in Medicaid. There have been new business practices, such as reference pricing and value-based contracting. However, not all of the ventures need to work, Capps said—only some do.

“Some things are failing, and some are not,” Capps said. “There are lots of examples of people trying new things, and that’s what I think is interesting.”

While he’s not convinced healthcare has yet achieved the triple aim of better population health, improved patient experience, and lower costs, “There is more cause for optimism than in quite a while.”

Capps said the current wave of healthcare mergers is being propelled by different forces:

  • Younger physicians are less interested in running their own practices.
  • The revolution in health information technology calls for better economies of scale.
  • There are benefits to physician-hospital cooperation in an era of value-based reimbursement, and CMS is determined to stick with its goal of 50% reimbursement in Medicare by 2018.

Despite some apparent benefits, research thus far suggests mergers are once again driving up costs. Capps’ said his own working paper shows prices for service units for acquired physician practices are rising 13.7%.

Not all mergers are bad—a low-quality hospital can improve if taken over by a better system, for example. But Capps said, on the whole, “Competition is the referee or the filter that separates out the good from the bad.”

Activity on the Ground. New Jersey’s market has seen several high-profile mergers and new relationships, such as the RWJBarnabas transaction and the union of AtlantiCare and Geisinger, as well as the transaction in which Cooper University Health Care acquired a share of AmeriHealth New Jersey to create a branded health product.

Forming partnerships that stop short of full-blown mergers offer benefits without the limits of a transaction that isn’t easily unwound, Capps said.

During a panel discussion that followed Capps’ keynote address, Debra Fox, vice president of strategic planning and PMO of AtlantiCare, discussed the planning and benefits of the health system’s merger with Geisinger, one of the nation’s best-known vertically integrated health system and health plan combinations.

Fox said the Geisinger merger offered AtlantiCare a partner steeped in research and evidence-based models, a partner to help mitigate financial risks, and a community of specialists to tap, especially in genomics and precision medicine. Geisinger was interested in AtlantiCare’s more diverse patient base and highly educated workforce. Fox said there’s still work to be done to align physician compensation systems, which would allow AtlantiCare to fulfill that goal of sharing clinical expertise—but on the whole, AtlantiCare is pleased with outcome.

She said groups pursuing mergers should work hard on integrating leadership teams and fostering collegiality—and don’t underestimate how much time this takes. “In the end, it’s going to be the patient who is going to judge how beneficial the merger was between the 2 organizations,” she said.

Michael Ruiz de Somocurcio, vice president of the Regional Cancer Care Associates (RCCA) LLC, presented a model that allows oncologists to practice in community settings while offering an umbrella for things like electronic health records, palliative care, and support services. The specter of the Medicare Access and CHIP Reauthorization Act makes entities like RCCA extremely important for keeping the community specialist in business, to provide education and help with technology as physicians adapt to new payment models.

Just as mergers among health systems don’t happen without shared needs, the same is true among health plans, said Ward Sanders, president of the Association of Health Plans of New Jersey. He pointed to 4 motivators: (1) A complementary portfolio, (2) broader demographic reach, (3) the opportunity for efficiencies, and (4) the chance to reach a “critical mass” of members that can foster processes like value-based purchasing.

Like hospitals, health plans face their own set of pressures, Sanders said: while the ACA has brought many good things, compliance costs are enormous; plans face minimum lost ratio standards; provider consolidation puts pressure on plans; and pricing pressure created by everything from labor to drug costs has meant “the status quo is unacceptable.”

While the DOJ’s opposition to the megamergers of Aetna-Humana and Anthem-Cigna has received a lot of attention, the panelists expect the trend toward consolidation to continue.

“I don’t think we’ve seen the end of it,” AtlantiCare’s Fox said. The formats may change—there may be new models, more affiliations around specific innovations, she added, but, “I do think we’ll see some different relationships over the next 5 years.”

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