Deals Boom in Health Industry -- WSJ

By Anna Wilde Mathews and Melanie EvansFeaturesDow Jones Newswires

Managed-care firms aim to wring out costs by backing treatment outside hospitals

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 20, 2017).

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A recent burst of deal-making among health-care companies is set to accelerate the shift in how and where Americans get medical care -- away from hospitals and toward clinics, doctors' offices, surgery centers and even drugstores.

Potential mergers disclosed since early December involve companies with more than $550 billion in cumulative revenue, a sign of how much of the industry is caught up in efforts to reshape the landscape.

Tuesday, Humana Inc. and two private-equity firms confirmed they plan to acquire Kindred Healthcare Inc. in a deal valued at around $810 million, or $4.1 billion including debt; they plan to split the health-care company in two, hiving off its long-term care and rehabilitation hospitals from its other business.

The same day, Tenet Healthcare Corp. announced it is exploring a sale of its health-care business-services arm, Conifer Health Solutions, amid pressure in its core hospital unit.

"The industry is going through a version of upheaval," said Kindred Chief Executive Benjamin A. Breier. "Providers across the country are trying to figure out what their place in the world is going to be."...We think this transaction really puts us on very solid footing to meet those challenges in the future."

The moves underscore the shift in power as health-care companies look to drive down costs and change how and where patients get care.

Managed-care companies such as Humana, which will have an ownership stake in Kindred's home-care and hospice unit but not in its facilities, are plunging deeper into the business of delivering health care outside hospital walls. They are seeking to squeeze out costs by speeding up the decline in hospital use, which is already under way.

CVS Health Corp., with its roughly $79 billion acquisition of Aetna Inc., wants patients to stay out of emergency rooms and do more at revamped, upgraded drugstores. UnitedHealth Group Inc.'s $4.9 billion purchase of DaVita Inc.'s doctor group is part of a plunge into owning physician practices, clinics and outpatient surgery centers.

The trend puts hospital companies on the defensive. Some are bulking up to form ever-larger players: Nonprofits Ascension and Providence St. Joseph Health are in talks to create the biggest hospital owner in the U.S., while Dignity Health and Catholic Health Initiatives announced they are forming their own new nonprofit hospital giant.

Hospital systems seek heft to cut costs and do battle with managed-care firms over their future role and payment rates. Meanwhile they continue to invest in their own outpatient settings, looking to capture more of the patients their main facilities may lose.

At the same time, some hospital owners need to shore up their finances, as is the case with Kindred, which is weighed down by debt. Tenet also has a heavy debt load, in part from a 2013 acquisition of a rival hospital firm.

On the hospital side, "they're basically increasing their leverage" in negotiations with insurers by forming ever-larger systems, said Glenn Steele, former CEO of Geisinger Health System, a large integrated hospital and health-plan operator. "If they get big enough, they have to be part of any care-giving network," he said, because it is difficult for insurers to line up enough medical providers without them.

The insurer deals "are getting some of the payers closer to care givers...trying to jump over the acute care and go to where a lot of care will be given," Mr. Steele said.

Hospitals have been suffering a slow bleed for years. U.S. hospitalizations began to drop around 2009, partly tied to the effects of the economy's downturn, and were reversed for a time by the expansion of insurance under the Affordable Care Act. Admissions increased in 2014 and 2015.

But hospitalizations again declined last year, U.S. Census Bureau estimates show. Despite an aging population, with baby boomers rapidly hitting Medicare age, the number of hospital discharges dropped by 0.6%, or 229,000.

The squeeze shows no signs of letting up. Tenet officials lowered the company's earnings outlook range as it entered the second half of 2017, in part because of weaker-than-expected hospital volume.

Hospitals have responded by rapidly expanding outside their facilities, investing in outpatient surgery centers, occupational-health clinics and urgent-care centers. "They want to get more involved in where the action is," said Kathleen Carey, a professor in the Boston University School of Public Health.

Other factors behind the shift away from in-hospital care include evolving medical practice and technology that enable more procedures and other care to be done on an outpatient basis. Insurers and employers have sought to advance the trend, including with health-plan designs and rules that try to prod consumers away from hospitals.

"Right care, right place, right time, for the right reason, at the right cost," said Sheryl Skolnick, an analyst at Mizuho Securities. "High-cost inpatient facilities are the loser, oftentimes, in that scenario."

Shifts in federal health-care approaches also play a role. Kindred has been challenged by Medicare payment policies that hurt its long-term-care hospitals. More broadly, a rising share of Medicaid and Medicare beneficiaries are now enrolled with a managed-care company, rather than getting their coverage directly from the government: About a third of eligible Medicare beneficiaries are in Medicare Advantage plans offered by companies such as UnitedHealth and Humana.

That's giving insurers greater influence as they aim to move care away from hospitals and hold down cost. Thanks partly to technology, "it's moving into the outpatient setting," said Michael F. Neidorff, chief executive of Centene Corp., a major Medicaid managed-care company. Using data analysis and other tools, his company aims to "prospectively identify disease states before they become an issue."

Companies like UnitedHealth and Humana are going further, investing in health-care providers.Even before the DaVita deal, UnitedHealth's Optum health-services arm had medical groups in 30 markets, and a health-care provider presence in 60 Humana said it would initially own 40% of Kindred's home-health and hospice business, which has annual revenue of approximately $2.5 billion. Kindred is the biggest U.S. home-health operator. Humana already owns some home-care providers.

"We believe that care in the home is a vital element of improving the health of seniors living with chronic conditions, allowing them to receive services in the comfort of their home, with less time in more-costly institutional settings," said Humana CEO Bruce Broussard in a statement.

Write to Anna Wilde Mathews at anna.mathews@wsj.com and Melanie Evans at Melanie.Evans@wsj.com

(END) Dow Jones Newswires

December 20, 2017 02:47 ET (07:47 GMT)