Shifts in health care financing prompt CoxHealth-CMH merger

CoxHealth this month signed a letter of intent to buy Citizens Memorial Healthcare in a deal valued at $120 million over seven years. It’s anticipated to close in mid-2017.

Mergers and acquisitions in the health care field tend to ebb and flow, and CoxHealth CEO Steve Edwards said the industry is in a period of high activity linked to what he called a tectonic shift in health care financing.

“Our biggest payer is the federal government, and they’re broke,” Edwards said. “They don’t even tend to realize they’re broke. And they make all the rules.”

Missouri has resisted Medicaid expansion and along with it some $2 billion in federal funding. Hospital executives say the providers are then pinched because other federal programs, including reimbursements for uninsured patient care, are being cut.

“The way the Affordable Care Act came out, it was assumed everyone would go on it. Because we are taxed, the money goes to Washington, D.C., and we should get it back. But our state said we don’t want it,” Edwards said. “The original Affordable Care Act said that we don’t need disproportionate share payments anymore because all of the hospitals will have expanded Medicaid. Well, the states that didn’t expand it, they are still cutting disproportionate shares. So, we are kind of hit twice.”

It’s been documented the financial shifting has hit the smaller and rural hospitals harder – most recently seen in the closure of Ozarks Community Hospital’s emergency room.

“In those states that have not expanded Medicaid, the rural hospitals tend to be struggling more,” Edwards said. “CMH is not – they’re doing great. They tend to be proactive.”

$50 million upfront
While Edwards said there are plenty of business reasons including improved contracting for supplies in the capital-intensive industry, hospital representatives indicate the move was bolstered by decades of trust and relationship between the two institutions.

“As you look at health care changes we know are going to happen down the road, it means cuts for us. You try to look for a partner who can help you be stronger as you meet all those requirements,” CMH Executive Director and CEO Donald Babb said.

Initially, CoxHealth is paying CMH $40 million and putting $10 million toward a new foundation.

Under terms of the deal, CMH would retain its name in a co-branded format with CoxHealth and Babb would keep his position. Representatives of the Bolivar health care system would have two seats on CoxHealth’s board.

CMH staff also would retain their positions and seniority.

“We have a significant number of employees with five, 10, 15, 25, or even 30 or more years of service. Our plan is to continue to add staff as we continue to expand services,” said Gary Fulbright, chief financial officer at CMH.

Edwards could not yet address how staff members might shift or become shared between the two systems.

“We have a letter of intent and the operational changes haven’t been worked out yet. There are some limitations about how much we can do operationally until we have actually merged,” he said.

Wes Scroggins, professor of management at Missouri State University, said mergers can often be chaotic and stressful to employees.

“This is probably a move to try to maintain those higher levels of job satisfaction that hopefully will lead to retention,” he said. “Turnover is a major cost, especially when you lose good employees.”

Risk and reward
Edwards sees the federal government driving hospitals to take on more risk.

“I think the numbers are by the year 2022, Medicare hospital payments – 80 percent of them are in some kind of incentive or risk contract, which is dramatically different than where we stand today,” he said.

So, he said, the cost of caring for an umbrella of people is lessened when all services are available to them. Preventative care is pivotal to the cost-effectiveness of the plan.
 
Edwards said while the changes are frustrating, he finds them necessary.

“We should change the financing. We should orient it more toward keeping people healthy than these sort of last-second saves.

It’s so much cheaper to manage someone’s cholesterol than to do bypass surgery on them,” he said.

Additionally, through ACA, the government will no longer pay under a fee-for-service model. For instance, in a surgery under Medicare, separate payments would go to the hospital, the anesthesiologist and the skilled nursing facility for rehabilitation.

Now, the government is shifting to bundle payment projects, where a lump sum is provided and the hospital distributes it. The intent is to save money.

Edwards said the government takes 2 percent off the top and if medical facilities save more, the government will share the savings. The system should create more collaborative efforts for patient care between hospitals, doctors and nursing homes, Edwards said.

The continued resistance of Medicaid expansion means emergency rooms are inundated with patients who could be seeing primary care physicians, which Edwards said slows assistance for patients suffering life-threatening illnesses and injuries. He also points to improved mental health services as key to the Medicaid plan and the health of communities given the inherent struggles with employment and insurance for untreated mental health patients.

“We are seeing this conversion of people who used to be cared for through the mental health system have now, through crime, et cetera, ended up in our jails. So, jails are full and predominantly full of people who have drug abuse and mental health issues,” Edwards said.

To help address community health, Edwards said the new foundation would commit $4 million back to the hospital and $1 million in scholarships for allied health care and other studies, with the remainder set aside for community health advancement initiatives.

CoxHealth is committing an additional $70 million over a seven-year period for capital projects and other needs.
 
“The time was right,” Edwards said.