Hospitals say state puts them between a rock and a hard place
The state has, in the past five years, increased the net taxes hospitals pay by close to $400 million while reducing Medicaid reimbursement rates for certain services. Hospital leaders say that financial strain adds to the factors pushing independent community hospitals to join larger health systems.
But at the same time, legislators concerned about the growth of large health systems have been pushing for new restrictions on changes in hospital ownership or reductions in the services hospitals provide. And Gov. Dannel P. Malloy last month issued an executive order that effectively placed a temporary moratorium on transactions involving the state’s two largest health systems, Hartford HealthCare and the Yale New Haven Health System, while a task force studies regulations related to health care services and facilities.
“It’s the proverbial rock and hard place, particularly for us as a small community hospital,” said Brian Mattiello, vice president for organizational development at Charlotte Hungerford Hospital in Torrington, which announced plans to explore an affiliation with Hartford HealthCare three hours before Malloy issued the executive order Feb. 25.
Charlotte Hungerford officials had viewed joining a larger system as a way to relieve some of the financial pressures the hospital faces. “Now there’s a moratorium there, and you turn and funding’s being cut heavily,” Mattiello said. “It’s a vice.”
“The state can’t have it both ways,” said William Stanley, vice president for development and community relations at New London’s Lawrence + Memorial Hospital, which is seeking to join the Yale New Haven Health System. “You can’t continue to cut hundreds of millions in Medicaid reimbursement, withhold federal payments to the hospitals that are supposed to come as a result of the hospital tax, and then expect there not to be any repercussions at the other end. It’s just mathematically impossible.”
“The irony is that the decisions on taxation and on funding that have come out of Hartford have put us in the position of wanting to affiliate,” Stanley added.
Officials at Day Kimball and Bristol hospitals – which remain independent after attempts to join larger systems failed – said the moratorium could hinder their options if they seek a partner to help weather financial challenges.
In proposing funding cuts and tax increases for hospitals over the past five years, the Malloy administration has argued that hospitals need to bring their costs down, that they spend too much on executive pay and have benefitted from the major expansion of Medicaid coverage for state residents since passage of the federal health law.
Legislators who proposed regulatory changes, meanwhile, have expressed worries that the growth of health systems that control multiple hospitals and physician practices could lead to reduced competition, monopoly-like power to command higher price from private insurers, and fewer choices for patients.
Most recently, the Malloy administration – facing a $266 million budget deficit this fiscal year – suspended about $140 million in state and federal payments to hospitals. Legislators from both parties have called on the administration to make the payments, which are intended to repay a portion of the $556.1 million hospitals pay the state in taxes and to fund a separate pool for small, independent hospitals. The Malloy administration has challenged legislators critical of the move to identify other budget cuts.
Bristol Hospital President and CEO Kurt Barwis said there’s still much to be determined – whether the payments will be made, and the outcome of the process created by the executive order.
But Barwis said the consequences of not making the payments and restricting the ability of hospitals to join larger systems – making one move that could destabilize hospital finances while taking away an option that could save a hospital – could have dire consequences.
“I don’t feel like we’ve crossed that line yet,” Barwis said. “I think if that actually occurs, it’s kind of like, ‘checkmate.’”
Malloy spokesman Chris McClure said the state must spend within its means, and pointed to the overall profitability of hospital systems in the state. “Funding for hospitals in Connecticut is significant,” he said.
During the one-year period ending Oct. 31, the state paid hospitals $2.2 billion for Medicaid and care for state employees and retirees, according to the administration. (Hospital officials say Medicaid pays less than the cost of care, meaning that treating more Medicaid patients actually increases their financial burden.)
McClure cited data showing hospital corporate systems took in $916.4 million more than they spent during the 2014 fiscal year, although hospital officials say that figure is misleading because it includes a nearly $300 million one-time asset transfer associated with a hospital acquisition and $179 million earned by UConn’s John Dempsey Hospital, which is not subject to the state tax.
As for the executive order, McClure said the task force would aim to, “among other things, bring transparency to an opaque merger process that is allowing large hospitals to expand their footprint in a way that increases costs and reduces care for consumers.” It will study the state’s rules for certificates of need, or CON, a form of approval hospitals must get to open certain facilities, acquire certain equipment, eliminate services or change ownership.
“Our goal is to do a top-to-bottom review of the CON process to ensure that services for consumers doesn’t suffer as a result of what seems increasingly to be consolidation of the marketplace,” he said.
Consolidation, and regulation, grow
The pace of hospital consolidation in Connecticut has accelerated in recent years. Hospital officials say there are many reasons: Larger organizations can generate economies of scale and pay for the staff and infrastructure needed for large-scale quality improvement efforts. Federal policies that aim to tie health care providers’ compensation to their ability to keep patients well, rather than simply treating those who get sick, are widely viewed as pushing the industry toward larger organizations with close ties to community doctors and other parts of the health care system.
While some small hospitals, including Griffin Hospital in Derby, have committed to achieving those things while remaining independent, others view a partnership with a bigger entity as key to their viability.
But critics warn that the result of consolidation could be monopoly-like power by a small number of health systems that can bargain for higher prices from private insurers.
Lawmakers have responded with multiple attempts to expand regulation over the growth of large hospital systems. Those include:
- A law passed last year that imposes restrictions on changes in hospital ownership that involve either a for-profit company or a large nonprofit health system, like the Yale New Haven Health System – which currently includes three hospitals – or Hartford HealthCare – which has five hospitals. The legislation came shortly after the national for-profit hospital chain Tenet Healthcare dropped its bid to acquire five Connecticut hospitals after what it deemed to be overly burdensome conditions likely to be imposed by the state regulator, the Office of Health Care Access.
- A legislative proposal this year that would require hospitals to obtain a certificate of need if they seek to reduce certain services. It was developed in response to concerns raised after Hartford HealthCare made cuts to services at Windham Hospital. Critics said the cuts undermine access to care in an underserved region and show the downsides of community hospitals being acquired by larger systems. Health system officials say the cuts were needed to ensure the survival of the financially struggling hospital. “Without Hartford HealthCare, Windham [Hospital] would have already been in bankruptcy,” said Dr. Rocco Orlando, the system’s senior vice president and chief medical officer.
- Malloy’s executive order prohibits the state Department of Public Health from making any final decisions before Jan. 15, 2017, on any CON application involving changes in hospital ownership that would lead to a health system with operating revenues that account for more than 20 percent of those of all hospital health systems in Connecticut. Both the Yale and Hartford systems exceed that threshold now.
In issuing the executive order, Malloy wrote that hospitals have been increasingly seeking to join larger corporate health care systems “for reasons other than significant financial distress.”
The order drew praise from critics of the proposed Yale-L+M deal, as well as some who have raised concerns about the pace of consolidation in the industry.
But hospital officials have said the order could reduce options for financially struggling hospitals, and subjects Connecticut-based health systems to different treatment than out-of-state companies.
Orlando noted that several Connecticut hospitals are now owned or seeking to be acquired by large national companies that are not subject to the moratorium.
“They really just looked at the Connecticut systems, and if they keep attacking Hartford and Yale, it’s going to be like losing the headquarters of our longstanding industrial and corporate giants, with folks from out of the state that are really controlling our health care system,” Orlando said.
And while Connecticut hospitals can’t physically move out of state, no matter who owns them, Orlando added, they could move back-office functions outside Connecticut – something he said Hartford HealthCare officials “utterly don’t want to do,” but that could become a consideration as the economics get tighter.
What the order means for smaller hospitals
Of Connecticut’s 28 general hospitals, six are currently both independent and not publicly seeking to join a larger system.
Day Kimball Hospital in Putnam had been in talks to join Hartford HealthCare last fall, but those fell apart. Spokeswoman Laura Dunn said the hospital has no immediate plans to join a larger organization, and isn’t directly affected by the executive order. “But certainly down the road, it certainly hinders our options,” she said.
Barwis, from Bristol Hospital, has mixed feelings on the executive order.
“On one side of the equation, I’m absolutely concerned that potentially an avenue of options for sustaining our mission could potentially be closed out as a result of this. But on the other hand, I also recognize the real concerns that these consolidations cause many people,” Barwis said.
Bristol was one of five Connecticut hospitals that had plans to be acquired by Tenet. Based on that experience, Barwis believes it can be helpful to streamline the approval process and provide clarity, including ensuring that there aren’t major differences in the types of questions each transaction faces.
“In that respect, I think refining the process is good,” Barwis said.
Angela Mattie, chair of the healthcare management and organizational leadership department at Quinnipiac University, said the executive order was within the governor’s authority.
“It’s not a bad thing to look at and see if we have some opportunities for improvement,” Mattie said.
But Mattie said that should be done with an understanding of the marketplace realities – which she said have made small community hospitals go the way of the dinosaur.
“Not every hospital can have the best cancer center or the best neurology center or the best orthopedic center. There’s no reason that we need executive staffs in two hospitals across the street from each other,” she said.
“The key is to make sure that we don’t make it so overregulated that we dissuade health care delivery models from growing and developing what will really add value to the health care system,” she said, adding that “value” means providing the highest quality at the lowest cost.
As for the state payments to hospitals, Mattie said the health care system needs to improve value – but said the cuts aren’t the best way to achieve it.
“Our health care costs are high. Our outcomes are not good,” Mattie said. “But this slash and burn technique for hospitals is not the most effective way to continue to produce value in the system.”
Pending deals moving forward
Senate Minority Leader Len Fasano, R-North Haven, has urged hospitals to challenge the executive order in court. It’s not that he’s a fan of the market’s current direction; Fasano has been one of the most vocal critics of health care consolidation in recent years. He said his concern was about the process: He questioned whether the order overstepped Malloy’s authority.
Are hospitals considering taking action?
“We’re reviewing all of the options,” including legal or legislative action, said Vin Petrini, a spokesman for the Yale New Haven Health System. Lawrence + Memorial spokesman Michael O’Farrell said the hospital is “continuing to look at all options in play” while proceeding with the paperwork for the application as normal.
The Office of Health Care Access is following its normal certificate of need procedures while studying the executive order’s impact on the process, said Maura Downes, a spokeswoman for the Department of Public Health, which includes OHCA.
Charlotte Hungerford is undertaking advocacy efforts to seek, for example, a repeal or exemption to the executive order or funding to help in the interim, Mattiello said. In the meantime, it plans to continue exploring the affiliation with Hartford HealthCare.
Charlotte Hungerford officials spent two years examining the options before deciding an affiliation with a large system would position it best for the future, Mattiello said, adding that it could, among other things, help with the growing challenge of recruiting and retaining doctors.
“It was not an easy decision. We’ve been 100 years an independent hospital. There’s a lot of points of pride associated with that,” he said. “But the health care landscape is changing.”
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