Almost 150 years ago, the leaders of the Massachusetts Eye and Ear Infirmary faced a difficult prospect. The hospital was treating more and more patients, but it was still losing money.
“The unhappy thought was voiced that the Infirmary might not survive, that its burdens were too heavy, its revenues too small and uncertain,” according to a 1984 history of the institution. Hospital leaders took steps to shore up their finances and weathered the challenges.
Today, Mass. Eye and Ear is confronting a similar crisis. After years of financial losses, despite growing patient numbers, hospital leaders say they can no longer go it alone. They want to become part of a larger system, and they’ve chosen Partners HealthCare, the most dominant health care provider in Massachusetts, with which they already share close ties.
Mass. Eye and Ear has carved out a niche for treating ailments of the eyes, ears, nose, and throat, but it needs the financial support and broader patient base that come with being part of a larger organization, executives say. Eye and ear hospitals in other cities have already made similar moves.
“This is about our future,” John Fernandez, Mass. Eye and Ear’s chief executive, said in an interview from his office in the hospital tower overlooking the Charles River. “It’s not about Partners’ market share; it’s about Mass. Eye and Ear’s future and to ensure we can keep doing what we do.”
Public attention around the planned acquisition has focused on how the expansion of Partners, a high-priced health system, would affect insurers and consumers. The state Health Policy Commission said this month that the deal could add as much as $61 million a year to annual health spending by allowing Partners to negotiate higher insurance reimbursements for Mass. Eye and Ear’s services.
Mass. Eye and Ear’s leaders, however, want to put the focus on their institution and the challenges it faces in a swiftly changing health care market that favors large providers over small specialty hospitals.
Founded in 1824, Mass. Eye and Ear is small compared to other Boston hospitals. But beyond its signature building in Boston, Mass. Eye and Ear has expanded to 17 other locations in Massachusetts and one in Rhode Island, hosting 300,000 patient visits a year and treating problems ranging from common cataracts to complicated head and neck cancers.
Only the most complex patients stay the night in the hospital’s 41 patient beds. Its doctors perform about 90 surgeries a day.
As an academic medical center, the Harvard-affiliated hospital also studies treatments for blindness and hearing loss, and it trains young doctors in its only two specialties: ophthalmology (eyes) and otolaryngology (ear, nose, and throat).
In an effort led by its board chairman, Boston Celtics co-owner Wycliffe “Wyc” Grousbeck, Mass. Eye and Ear has raised $161 million in donations in six years, mostly for research programs.
But while the hospital collected nearly $183 million in revenue from patient services in fiscal 2016, it had an operating loss of more than $12 million. This followed losses in the previous four years. The bond rating firm S&P Global Ratings revised its outlook on the hospital this year from stable to negative — a sign that Mass. Eye and Ear’s rating could be downgraded, making it more difficult to borrow money.
As financial losses continued over the past several years, board members and executives discussed their options.
“The answer was we’ve got to join an integrated delivery system, and the most logical one was Partners,” Fernandez said.
In March 2015, he approached Partners’ new chief executive, Dr. David Torchiana, about the idea of an acquisition. Negotiations began slowly. In January 2017, the organizations announced an agreement to merge, pending regulatory approvals.
Mass. Eye and Ear already provides ophthalmology and otolaryngology services for Partners’ largest hospital, Massachusetts General Hospital. The two sit next to each other; their buildings are connected. And many Mass. Eye and Ear physicians are part of Mass. General’s physicians group, which negotiates contracts with insurers.
But Fernandez — who worked at a Partners hospital, Brigham and Women’s, before taking the top job at Mass. Eye and Ear more than a decade ago — said a full takeover is necessary.
Mass. Eye and Ear leaders argued that through an acquisition, the hospital would have access to Partners’ cash and borrowing power to fund capital projects, and it would be able to streamline some administrative work, such as the management of its endowment.
They said the deal would allow them to pool with Partners to buy medical supplies at lower costs, and offer physicians greater support for information technology and quality reporting.
Another advantage: the potential for higher payments for medical services.
Mass. Eye and Ear is paid at lower rates than other Massachusetts hospitals, and it is too small to be able to persuade insurers to boost those payments, said Dr. Sunil Eappen, the chief medical officer and chief of anesthesiology.
“We’re providing higher quality, we get paid so much less, and we have no power in the marketplace to negotiate that,” Eappen said. “We will not be able to survive and continue our mission . . . unless we can generate the revenues to keep that mission going.”
Robert Mechanic, senior fellow at Brandeis University, said higher rates would help stabilize the hospital’s finances.
“I think the Health Policy Commission is right that costs are going to go up, because they would be doing equivalent volumes of business, but they would be paid higher rates for it,” Mechanic said. “The trade-off is: How do you deal with a financially struggling institution that probably needs to have its rates increased?”
Partners and Mass. Eye and Ear expect to cut their own costs through the transaction, but the Health Policy Commission noted that they have not pledged to pass savings on to consumers.
Mass. Eye and Ear officials said there’s no way for them to make that kind of a promise because most of their payments come from insurers — not consumers — and insurers set their own premiums.
Executives also said that if prices do rise, it won’t be as much as the commission predicted. All Massachusetts health care providers are required to keep their spending growth to less than 3.6 percent a year, and that requirement is scheduled to get tougher in 2018.
Partners officials said the acquisition would allow the company to better manage the care of an aging population with growing demand for vision and hearing services.
“We know that with Mass. Eye and Ear as a member hospital, we can most effectively redesign the delivery eye and ENT services within and across Partners,” Peter K. Markell, Partners’ chief financial officer, told state officials this fall.
Hospitals across the country have been seeking new mergers to stay competitive. The health care industry is shifting toward payment models that encourage providers to curb costs and improve patients’ health, a trend that has spurred new deals — including at other specialty hospitals.
New York Eye and Ear Infirmary, for example, joined a larger health system in 1999; that organization became part of the Mount Sinai Health System in 2013.
Mass. Eye and Ear and Partners have until Dec. 1 to respond to the Health Policy Commission’s critical findings. The commission — which doesn’t have the power to block a transaction — will finalize its report and decide whether to recommend a review by the attorney general and the Department of Public Health, which have greater regulatory powers.
Despite the commission’s concerns, the deal so far hasn’t generated the kind of public opposition that sprang up a few years ago when Partners sought to acquire South Shore Hospital in Weymouth and Hallmark Health System of Medford. (Partners eventually dropped both deals in the face of opposition on costs and market power.)
“Mass. Eye and Ear’s financial challenges aren’t contrived; they’re real,” said Ellen Lutch Bender, a Newton-based health care consultant. “They wouldn’t be pursuing this strategy if there were other options for them.”