What's driving hospital deals? The bottom line

When Allina Hospitals & Clinics acknowledged earlier this month that it was in merger discussions with Aspen Medical Group, it sparked a flurry of speculation across the Twin Cities health care community about the future of independent, outpatient care.

Is consolidation a trend? Why? Is it good or bad?

Some lips were sealed because of deal negotiations, but for those who were talking, the answers were: Yes, for financial reasons, and it depends on whom you ask.

In theory, consolidation provides patients with seamless care from their doctor's exam room to the hospital's operating room.

But the economics behind the mergers of clinics and hospitals plays a significant role too. Gobbling up independent clinics provides a hospital system with a potentially bigger pipeline of inpatient customers. It also diversifies the hospital's revenue base as more and more surgeries are done on an outpatient basis.

Physician groups give up some of their independence when they become part of a large hospital network, but they also gain access to resources that they may have lacked, particularly in an era of expensive electronic medical records and the need to constantly support and upgrade those systems.

Insurers are wary

But insurers, who ultimately pay for most of the care in both the clinic and the hospital, are wary of large consolidation because it reduces competition in the marketplace and can dilute the insurer's ability to control pricing.

"The bottom line is that consolidation brings higher reimbursement rates for the larger groups," said Julie Brunner, executive director of the Minnesota Council of Health Plans. "In an era when efforts are being made to control rising costs, this is going in the wrong direction."

Stephen Parente, who researches health care economics at the University of Minnesota's Carlson School of Management, says that consolidation is a national trend and reflects "horizontal integration" of health care.

But also driving the merger movement are unknowns about the future of Medicare in a cost-conscious Congress, he said.

"Where Medicare goes, private insurers usually follow," Parente said. "If you enter a period of austerity, you want as much assured revenue as you can."

Benefits consultant David Delahanty of Watson Wyatt Worldwide said shorter and shorter hospital stays make it good business for hospitals to partner with stand-alone clinics.

"The percent of inpatient care is decreasing and more care is being provided in an outpatient setting," Bloomington-based Delahanty said. "If you diversify, you direct more revenue to professional services than to bricks and mortar."

Minneapolis-based Allina and Aspen, of St. Paul, declined to comment last week on their merger discussions. Previously, the two organizations simply acknowledged the existence of talks and said a decision would be made by the end of this year. Allina has 11 hospitals and 40 stand-alone clinic locations. Aspen has eight clinic locations.

Size helps with rising costs

Health care observers in the Twin Cities say more mergers are at least in the discussion stage but the major players aren't talking.

For physicians and health care systems, costs are rising and size becomes important to achieving economies of scale. Also, insurers and patients want new information on quality and performance, and that takes time and staff. There's also the steep cost of building electronic medical record systems.

"The costs of these information systems are very expensive for smaller groups," said Dick Howard, vice president of business development for Fairview Health Services.

And physician recruitment becomes an issue for smaller clinics. Larger health systems generally can provide richer compensation packages.

"Most doctors when they graduate from medical school have $130,000 in debt. They have to find an employer where reimbursement is enough to pay off that loan," said Dr. Loie Lenarz, Fairview's chief clinical officer. "The math doesn't work anymore [for small practice groups]."

There are back-room issues at play as well in the consolidation trend. Clinics need office managers, administrators and support staff to handle the billing, order the supplies and keep the place clean. Merging with a larger operator makes that burden easier.

"Doctors are good at making people feel better," Delahanty said. "Running a business is a whole different story."

David Phelps • 612-673-7269

David Phelps • dphelps@startribune.com