Teaching hospitals—the next wave of M&A?

AAMC: Affiliate or become extinct

Writing in Modern Healthcare this week, Bob Herman examines Banner Health's decision to acquire Arizona's only academic medical center (AMC)—and whether the move is indicative of a larger, Affordable Care Act-fueled (ACA) consolidation trend.

Like hospitals and doctors, there's a wave of pharma M&A too

AAMC: Affiliate, merge, or be acquired

As AMCs suffer from federal funding cuts for graduate medical education, some industry experts say the facilities could become "dinosaurs" if they do not adapt to post-ACA economic realities. Such centers "risk becoming high-priced, anachronistic institutions in a landscape of highly organized health systems," an advisory panel to the Association of American Medical Colleges (AAMC) reported earlier this year.

More than 400 med students did not get residencies

The panel advised AMCs to affiliate with larger health systems in some manner or "be prepared to shrink in isolation," when they are unable to share research through health information exchanges, experiment with new payment models, or partner with community hospitals.

"Increasing our clinical portfolio, both in terms of breadth and scale, is going to be critical to support the infrastructure costs to meet the missions," says AAMC panel member Cory Shaw, adding, "Most can't do that on our own."

Moreover, the number of Medicare-funded graduate residency slots has been frozen since 1996, and President Obama's proposed budget for fiscal year 2015 would cut another $14.6 billion from the graduate medical education funds through 2024. "How are we going to pay to educate (residents) and pay for that research?" says Debra Schwinn, dean of the University of Iowa's Carver College of Medicine, who also served on the AAMC panel.

Graduate medical education on the chopping block?

As AAMC predicted, the struggle has driven some AMCs to affiliate with other health systems:

  • In 2012, the University of Iowa Health Care created the University of Iowa Health Alliance with three other health systems—a partnership that now covers about two-thirds of all Iowans.
  • The University of Michigan Health System struck a similar deal with two local systems.
  • The University of Wisconsin Hospital and Clinics' parent system is collaborating with Milwaukee-based Aurora Health Care.
  • Northwestern Memorial HealthCare in Chicago has reached an agreement with nearby Cadence Health.

If you can't beat 'em, join 'em?

Marianne Udow-Phillips—director of not-for-profit Center for Healthcare Research & Transformation—adds that "academic medical centers generally run at a higher cost than many community-based (hospitals)—they need to be able to diversify and expand their offerings… [and] consumers are not as willing to stay at a particular institution" if the facility is not covered in their insurance coverage.

Full-fledged acquisitions, such as Banner's acquisition of the University of Arizona Health Network, are driven by a facility's need for capital, changing payer mix, and the desire to engage in population health management, according to Bob Valletta, director of PricewaterhouseCoopers' health care provider group.

NYT: How the 'wave' of hospital mergers will affect the market

Herman writes that access to capital was the major driver in the Arizona partnership—Banner will invest $500 million in the AMC over the next five years, including paying off debts and creating a $300 million endowment for clinical research. The 30-year deal "isn't a casual relationship," according to University of Arizona President Ann Weaver Hart.

And for Banner, the deal aligns the system with the prestige of the university—an attribute that will be useful in its long-term strategy to provide better coordinate care.

"We see capabilities that [the University] has and can deliver for the direction that Banner is going—into a population health management company," says Banner President and CEO Peter Fine (Herman, Modern Healthcare, 7/5 [subscription required]).

M&A—To What End? Five Characteristics of Intentional Strategy

We are in the midst of the most significant period of provider consolidation in the last 30 years.

The most successful M&A deals are focused on delivering a better product to patients and purchasers, rather than insulating the system from competition. Find out what separates these deals from the rest.


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Daily roundup: July 8, 2014

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