Rising costs, changing payments driving hospital mergers

Mergers seen as way to control rising costs; Size matters in quest for new patients, too

Beth Israel Deaconess Medical Center and Lahey Health are discussing a possible merger.Steven Senne/Associated Press

In the ever-changing world of health care, at least this remains constant: Hospitals want to get bigger.

The ongoing merger talks between Beth Israel Deaconess Medical Center of Boston and Lahey Health of Burlington are just the latest example of the bigger-is-better strategy health care executives are pursuing.

Like their rivals at Partners HealthCare, Tufts Medical Center, and elsewhere, executives at these two health systems believe building a larger health system is the best way to compete for patients across Eastern Massachusetts, according to people with knowledge of the talks.

The Globe reported the negotiations on its website Wednesday.

The backdrop for these merger discussions is health care costs that are accelerating, according to data released by state agencies over the past week. Spending on health care in Massachusetts jumped nearly 5 percent last year, double the rate of increase in 2013 and triple the rate of inflation.

These trends are contributing to the motivation to merge as federal and state laws pressure health care providers to bring costs under control, and new payment systems reward providers for sticking to budgets while improving care. These developments have only added to hospitals' urgency to find efficiencies through mergers, analysts said.

"You need to have numbers to make changes and have them make a big impact," said Lawrence W. Vernaglia, a health care lawyer at the Boston firm Foley & Lardner LLP. "You need expensive toys to do [it] right — analytics, technology, care teams, telemedicine — a whole arsenal of cool health care tricks, and they can't be done by small organizations with small numbers of patients."

Nationally, mergers and acquisitions in the health services industry jumped more than 16 percent from 2013 to 2014, according to researchers at PricewaterhouseCoopers LLP, the New York accounting and consulting firm. Additionally, agreements that fall short of formal mergers, such as joint ventures and clinical partnerships, are on the rise.

Most of Massachusetts' large health systems have done deals — or, at least, sought them out — in recent years. Partners, the state's largest network of doctors and hospitals, tried to add South Shore Hospital in Weymouth and Hallmark Health System's two hospitals in Medford and Melrose last year; it later dropped the South Shore bid and put the Hallmark transaction on hold after a judge rejected a deal that would have allowed the acquisitions.

Tufts Medical Center and Lowell General Hospital created a new parent company last year with the goal of attracting additional providers to their network. Tufts and Boston Medical Center also explored a merger, but those talks fell apart this year over differences in culture and mission.

Lahey and Beth Israel Deaconess, now discussing a potential merger of their own, are also expanding their networks. Lahey added Winchester Hospital last year, while Beth Israel Deaconess acquired Jordan Hospital in Plymouth.

The drive to gain and manage large populations of patients is coupled with the national push to new payment systems that reward doctors and hospitals for keeping costs down and patients healthy. It's a divergence from the traditional fee-for-service model of medicine that pays doctors and hospitals more money for doing more services, tests, and procedures.

Alternative payment models still are not the norm, but they are gaining traction in Massachusetts, according to figures state officials released this week. They represented 38 percent of commercial health insurance payments in 2014, up from 34 percent the year before.

Many industry officials and analysts say large networks that offer a range of services from preventive care to specialized hospital care are the best way to manage patient care and costs, and succeed under these new payment systems. But Robert J. Town, a professor at the Wharton School in Philadelphia, said getting bigger through mergers is also a way to increase market clout so health systems can negotiate higher payments from insurers.

If that's the case, Town said, "then these mergers are going to be bad for consumers."

Most hospitals in Massachusetts were profitable last year, but challenges for them loom, said Lynn Nicholas, president of the Massachusetts Hospital Association. They must control expenses to meet a state benchmark of keeping annual health spending growth to 3.6 percent — even while costs, such as those for prescription drugs, continue rising.

"Hospitals are making the decisions they're making today for what they think the health care landscape is going to look like in five to 10 years," Nicholas said. "It's kind of like Wayne Gretzky's skating to where the puck's going to be."