Medical mergers in Minnesota are on the rise

The steady drumbeat of health care mergers is getting louder as more hospitals, clinics, insurers and even pharmacies are banding together, all promising that bigger groups will provide better value.

In Minnesota, a series of mergers is pumping up hospital and clinic systems that already dominate the top of the Star Tribune's annual survey of the state's largest nonprofit groups.

Across the country, deals emerged just this month that would create three of the largest nonprofit hospital groups in the country — including two with more than twice the annual revenue of Minnesota's famed Mayo Clinic, which ranks No. 2 among the state's nonprofits.

Among for-profits, pharmacy giant CVS proposed this month a megamerger with Aetna, one of the biggest health insurers in the country. Minnetonka-based UnitedHealth Group, which operates the nation's largest health insurer, announced this year big deals to buy both surgery centers and medical clinics.

Nonprofit hospitals say mergers are helping create coordinated health care systems that can more efficiently care for large groups of patients, but the deals also provide market power that could let health systems extract higher prices for their services.

"We need this consolidation, in some sense, to give the systems the scope and the scale to be able to do that re-engineering of care," said Caroline ­Carlin, a health economist at the University of Minnesota. "But that's a long-term payback, and the short-term implication is higher prices because of increases in market power."

The Star Tribune's Nonprofit 100 list for 2017 represents a swan song for the St. Paul-based HealthEast system (No. 10), as well as Grand Itasca Clinic and Hospital (No. 53), both of which are now part of Minneapolis-based Fairview Health Services (No. 6).

A large clinic system in Willmar is affiliating with St. Cloud-based CentraCare Health (No. 9), while North Memorial Health Care (No. 12) this year acquired one of the last independent primary care groups with multiple locations in the Twin Cities. Next year, a merger will add the town hospital in Hutchinson to the health system at Bloomington-based HealthPartners (No. 4).

The consolidation push is not unique to Minnesota.

Kaufman Hall, an Illinois-based consulting group, says the number of hospital and health system partnership transactions across the country this year exceeds last year's tally of 102 completed deals and is on track to be the busiest year ever. Whereas there were four mergers last year among organizations with $1 billion or more in revenue, Kaufman Hall says, eight transactions of that size including the Fairview-HealthEast deal had been announced by the end of September.

Last week, the Wall Street Journal reported that the Ascension and Providence St. Joseph Health systems are in talks to create a nonprofit that would be the largest hospital owner in the country, with $44.8 billion in annual revenue. The hospital in the southeast Minnesota town of Wabasha is affiliated with St. Louis-based Ascension.

Also this month, Colorado-based Catholic Health Initiatives and California-based Dignity Health announced a merger to create a health system that spans 28 states, including the hospital in the northern Minnesota town of Baudette. In fiscal 2017, the two groups collectively posted about $28 billion in revenue.

At the beginning of December, Advocate Health Care and Aurora Health Care announced merger plans to create the 10th largest integrated nonprofit health care system in the country. With operations concentrated in Illinois and Wisconsin, the new health system's annual revenue would be in the ballpark of Mayo Clinic's 2016 revenue of about $11 billion.

Hospitals and clinics are getting bigger to build care systems that can better operate under new contracts from the government and insurers that pay based on the value health care systems provide for groups of patients, rather than discrete fees for each service provided, said Matt Anderson, a senior vice president at the Minnesota Hospital Association. To create systems that can handle these new "fee-for-value" contracts, hospitals and clinics need electronic health records that can make care more efficient, he said, by helping eliminate duplication and standardizing care.

Bigger systems are better able to handle these technology costs, he said, as well as the new contracts that put hospitals and clinics at financial risk when patients need costly interventions. The current "fee-for-service" payment arrangements provide revenue to health systems in those cases.

Consolidation means that health systems can develop "centers of excellence" in treating certain conditions, Anderson said, because they have a large enough volume of patients to develop expertise. With that skill, doctors in large systems might be better positioned to help patients avoid costly complications that can force expensive return visits to hospitals. "All of those forces ... push toward consolidation, not away from consolidation," Anderson said. "All the reforms you're seeing across the spectrum are aimed at delivering higher quality at less total cost."

Wary doctors argue that clinics in large health systems have an unfair advantage in negotiating prices with insurers. Many physicians have been frustrated by how electronic medical records have changed the way they interact with patients — even as they cite the need for the systems in their decisions to embark on mergers.

A subset of physicians always will stay independent, but the majority will probably see a benefit from big systems and their big medical record systems when caring for large groups of patients, said Dr. George Schoephoerster, president of the Minnesota Medical Association.

"With a large organization, you can get enough [data] that it can help to push you in a more cost-effective or value-driven way," he said. "So, you get ­better quality for the cost that you spend."

In Minnesota, health care merger mania started among insurers in the early 1990s and was quickly followed by the creation of large systems that combine hospitals and clinics, said Kip Sullivan, a board member at Health Care for All Minnesota, an advocacy group pushing for universal health care. Despite all the promises of efficiency, Sullivan argues that consolidation has made health care in the state more expensive than in other parts of the country.

"Now the empires are even bigger and more complicated and more difficult to manage wisely," Sullivan said.

In 2016, the proposed acquisition of a large primary care group in St. Cloud by Centra­Care generated regulatory scrutiny. The Federal Trade Commission ultimately found the merger was "presumptively anticompetitive" because CentraCare would control more than half of the physician market in certain categories, yet cleared the deal saying the acquired practice was failing financially.

The concern with mergers is that they might hurt competition and drive up both prices and overall health care costs, said Brent Fulton, a researcher at the University of California-Berkeley. He published a September study showing that 90 percent of metropolitan areas in 2016 were highly concentrated for hospitals, 65 percent for specialty physicians, 39 percent for primary care physicians and 57 percent for insurers.

"The issue is that prices are increasing because they can exercise their market power," Fulton said. "Cost may be going down if they're realizing economies of scale and better coordinating care, but the consumer isn't necessarily reaping the full benefit."

Research shows that while small health care groups realize some economies of scale via mergers, "you don't have to get very big before you run out of that benefit," said Carlin, the U health economist. Mergers that link hospitals and clinics have the potential for re-engineering care to boost efficiency, Carlin said.

Carlin and colleagues at the U looked at three large clinics in the Twin Cities that merged into two large health systems in 2007. They found that four years after the acquisition, average physician-priced indexes in the acquired clinic systems were 32 to 47 percent higher than expected in the absence of acquisitions. Prices also rose at the legacy clinics at the large health systems.

Even so, Carlin said she thinks the mergers between hospitals and clinics in the Twin Cities have been a good thing overall and will provide more benefits as more insurers pay for value rather than service volume. While a lot of the recent merger activity in Minnesota has involved clinics and hospitals, Carlin said insurers across the country have been bulking up to gain leverage, too.

"Over the past decade, we've seen an arms race of consolidation in the health care and insurance industries," Carlin said via e-mail, "as they both seek market share to provide power in negotiations."

Christopher Snowbeck • 612-673-4744

Twitter: @chrissnowbeck