Merger of Two Hospitals Could Increase Quality, But Also Concentrate Power

Andrew Kitchenman | October 17, 2014 | Health Care
Analysts see potential for gains from new giant, but say regulatory review is in order

John K. Lloyd and Robert C. Garrett, co-CEOs of Hackensack Meridian Health
If the end of traditional hospitals concentrating services within their walls wasn’t apparent before yesterday, the proposed merger of Hackensack University Health Network and Meridian Health made it clear.

Not only would the new Hackensack Meridian Health include as many as 11 acute-care hospitals, but also it would include doctors’ offices, rehabilitation centers, skilled nursing, and assisted-living facilities.

While Meridian President and CEO John K. Lloyd highlighted the value of combining the systems’ specialists — a typical benefit of merging hospitals — Hackensack President and CEO Robert C. Garrett noted the benefit of joining with the strong continuum of care offered by Meridian, in which patients receive all of their healthcare, from flu shots to major surgery to nursing care, within the same system.

“This we will start to really develop a comprehensive program to keep the residents of New Jersey well and to prevent disease and illness wherever possible,” Garrett said. “We will try to bend the cost curve by delivering as efficient healthcare as is possible,” referring to a nationwide need to reduce the upward trajectory of healthcare costs.

Lloyd noted that both systems were among a limited number nationally to receive payments from the federal government for saving money through their Medicare Accountable Care Organizations, which are intended to improve patient care and lower costs.

While the executives highlighted the potential benefits to patients from sharing resources and best practices, healthcare analysts noted that there are also drawbacks to such large mergers. By concentrating market power, large systems are in a stronger position to require insurers to pay more for services, which could raise insurance premiums and out-of-pocket costs.

That’s why the proposal will be receiving regulatory scrutiny, including a potential review by the Federal Trade Commission.

Both Garrett and Lloyd — who plan to share the president and CEO titles for two-and-a-half years before Garrett takes over — expressed confidence that patients would benefit from the new system and that it would receive regulatory approval.

Merger trend continues

The deal follows decades of consolidation among New Jersey hospitals, a trend that doesn’t appear to be ending anytime soon. The proposed merger would be largest in state history and would create the largest healthcare system in the state, stretching from southern Ocean County to near the New York State border in Bergen County. It also could accurately be called a merger of equals, since each organization would provide roughly half of its combined $3.44 billion in revenue. The future headquarters hasn’t been determined.

Sujoy Chakravarty, an assistant research professor at the Rutgers Center for State Health Policy, said that such mergers raise concerns about the market power of the new system.

“There is no doubt that this level of market consolidation among hospitals would lead to what is considered a decrease in competition,” with insurers pressured to pay higher reimbursements, Chakravarty said, adding that he isn’t in position to judge the individual markets served by the systems.

Chakravarty also said that mergers have led to services being eliminated from some hospitals as they are consolidated into other locations.

“I don’t think these changes occur immediately, but in the longer term do hospitals reconfigure services?” Chakravarty said, adding that it would raise questions about whether patients would continue to have access.

Chakravarty noted that the concerns about competition aren’t as acute as they would be if the two systems directly served the same geographic area. But he added that even with the systems distance from each other, patients frequently travel to visit specialists, so the impact on reducing competition for their services must be considered.

Chakravarty added that while the 2010 Affordable Care Act requires hospitals to better coordinate their care, it doesn’t require them to share ownership.

Lloyd said both systems are committed to their communities.

“Some people forget because we’re so large, that we’re fundamentally not-for-profit organizations and our mission … is to serve all those in need in the various communities we serve,” he said.

Chakravarty cautioned that the merger of two nonprofit chains isn’t necessarily more beneficial than mergers between for-profit hospitals, with economic analyses showing that both types of mergers provide the same upward pressure on prices.

Insurance industry representative Wardell Sanders also expressed caution about the announcement.

“Provider and hospital consolidation are often sold as measures to increase ‘efficiency,’ but ironically they often result in higher prices for employers and individuals as efficiencies can be overshadowed by higher charges that larger health care systems often leverage in negotiations,” said Sanders, president of insurance trade group the New Jersey Association of Health Plans.

But Linda Schwimmer, vice president of the New Jersey Health Care Quality Institute, said the merger also opens opportunities for increasing the quality of care offered to patients.

“They’re both high-quality fairly integrated systems to begin with and it can only enhance that from a quality perspective,” Schwimmer said. “There certainly are other competitors in the region — in particular in North Jersey — but this is a formidable alliance.”

Schwimmer added that the merger would increase the pressure on independent community hospitals to merge with larger systems. Both government health programs and insurers are increasingly interested in programs like ACOs. Larger systems are in a stronger position to use their many specialists and their access to patients’ health data to manage individual care.

In addition, larger systems are in a stronger position to pay for and participate in health information exchanges that share patient data. Garrett said yesterday that the two systems would ultimately move to sharing the same electronic health record system.

“Unless you’re part of a larger system, it’s really hard in this environment to continue on your own,” Schwimmer said. “I wouldn’t be surprised if we wind up with five or six regional systems” within five years.

While hospital executives said the merger would allow the new system to save money by combining some costs, Lloyd was noncommittal about whether the merger would lead to layoffs.

“We both have pretty good histories of not having reductions in our workforce,” he said, adding that it would be premature to say whether there would be cuts.

Lloyd said there was “plenty of other competition” in the region his hospitals serve and that his organization has been focused on lowering costs while improving quality.

Garrett said he would welcome a regulatory review of the merger, adding that it
“will be a significant benefit to the state of New Jersey.”

One program that will continue is the Medicare Advantage insurance program that Meridian offers in partnership with Pennsylvania-based Geisinger Health. Lloyd said the number of people in the program is expected to grow from 4,500 now to 6,000 in the next few months. Garrett said Hackensack is rolling out its own Medicare Advantage offering with Aetna in eight counties.

Hackensack’s hospitals include: Hackensack University Medical Center, HackensackUMC Pascack Valley in Westwood, HackensackUMC Mountainside in Glen Ridge, and the recently announced addition of Palisades Medical Center.

Meridian includes Jersey Shore University Medical Center in Neptune, Ocean Medical Center in Brick, Riverview Medical Center in Red Bank, Southern Ocean Medical Center in Manahawkin, and Bayshore Community Hospital in Holmdel. In addition, the chain recently announced its intention to add Raritan Bay Medical Center, which has hospitals in Old Bridge and Perth Amboy.