ECHN seeks to merge with for-profit entity

By Christian Mysliwiec - Staff Writer
Manchester - posted Thu., Jun. 27, 2013
ECHN President and CEO Peter Karl said that a letter of intent for acquisition by a for-profit entity could happen within three weeks. Photo courtesy of ECHN.
ECHN President and CEO Peter Karl said that a letter of intent for acquisition by a for-profit entity could happen within three weeks. Photo courtesy of ECHN.

ECHN, a non-profit healthcare network that serves 19 towns in eastern Connecticut and runs both Manchester Memorial Hospital and Rockville General Hospital, is in the process of merging with a for-profit healthcare network.

According to ECHN President and CEO Peter Karl, ECHN will enter into a non-binding letter of intent with a for-profit within the coming three weeks. After a three-month period, they will sign a definite agreement with the acquirer, in which the details of the merge will be fleshed out. Following this, they will seek to secure four approvals from state and federal agencies, a process that will take approximately 12 months.

ECHN has been exploring this route since January 2012, primarily as a response to changes in the way healthcare providers will be reimbursed due to the Affordable Care Act. For example, for every dollar ECHN spends on Medicare patients, they are reimbursed 95 cents; for Medicaid patients, 70 cents. Reimbursements from managed care, or major insurers, make up the difference, giving $1.25 for every dollar ECHN spends, Karl explained.

The concern facing healthcare providers is that when the ACA changes come into play in 2014 and every citizen will be insured, the implementation of health insurance exchanges could greatly reduce the amount healthcare providers are reimbursed. The expectation, Karl said, is that some managed care customers will move into health insurance exchange groups, which will reimburse at a rate comparable to Medicare or Medicaid.

Currently, Medicare accounts for roughly half of all patient reimbursements at ECHN, and Medicaid patients make up 10 percent. The remaining 40 are managed care patients. When ACA goes into effect, that 40 percent will fracture into 30 percent reimbursed by managed care, and 10 percent reimbursed through health insurance exchanges.

“That delta right there is a significant shift in reimbursement that I can't make up any other way except by taking expenses out of the organization,” said Karl.

Manchester Memorial and Rockville General join hospitals across the nation facing this change. These institutions are adapting by merging and entering into acquisition in an effort to increase scale, and thus purchase at a lower cost, and to consolidate services – particularly overhead – and centralize locations in an attempt to keep costs down.

ECHN finds itself needing to follow suit – if the reimbursement rates drops as Karl expects, ECHN will have to drop its operational costs by 15 to 20 percent.

Non-profits typically carry high debt and have large pension liabilities, said Karl. ECHN is no exception. Of its $325 million total revenue in 2012, only $3.7 million, or 1.2 percent, was profit. The network carries $100 million in debt, and must pay $13 million annually into its $75 million pension liability.

As a result, there is little left to reinvest into the institution. ECHN wants to update its operation rooms and information technology system, as well as putting in private rooms for patient safety. Such renovations carry a $100 million price tag.

For these reasons, a sale to a for-profit, with its access to capital, is highly advantageous to ECHN. “For-profits are able to raise money to extend capital and absorb pensions,” Karl said. A potential merge would also create a boon to the town: as a for-profit, the network would pay income taxes on its buildings.

Karl clearly believes the merge will be in the network's – and community's – best interest. But if some are apprehensive of the acquisition by a for-profit, Karl states that “the alternative isn't good.”

“If I told my employees and the board that we were going to do this on our own, we would be taking a risk that would be so far out there that it could bring this organization to its knees, and therefore the community would suffer,” Karl said. “Going forward with a for-profit, we will be able to reinvest in this organization and to keep more of the community east of the river cared for locally.”

Non-profits courting acquisition by for-profits is not without precedent in Connecticut. Both Waterbury Hospital and Bristol Hospital have signed letters of intent with Vanguard Health Systems. Sharon Hospital has signed on with a for-profit, and St. Mary's Hospital in Waterbury is in talks with a for-profit, as well, said Karl.

The large-scale merges are part of a dramatic shift in the healthcare industry. “You're going to start seeing mega-systems,” said Karl.

The structural shift is a result of financial changes. Instead of the traditional fee-for-service system of reimbursement, hospitals will shift to bundled payments, or economic risk systems, where a certain amount will be reimbursed per patient per month. The reimbursement will be fixed no matter the length or amount of time the healthcare provider treats the patient. This will lead to the rise of “population health,” where it's more efficient for healthcare providers to meet the needs of large communities.

“What you want is a very large health system that covers a very large part of the market, which is not just statewide, but regionally or nationally,” Karl said. Estimates predicate that the 5,000 hospital systems in the country will merge to become part of 10 to 15 mega-enterprises in the next five years.

Karl has been a part of ECHN for nine years, and hopes to retain a role in the new company. If he does, he will report to both the Board of Trustees and a regional president. However, there is a chance he will not be a part of the network once it is acquired. “Fifty percent of CEOs who are acquired by other organizations lose their jobs,” he said.

While limited in what he can disclose at this point, Karl said that Vanguard Health Systems and LHP Hospital Group, Inc. are potential acquirers. Dennis McConville, senior vice president of planning, marketing and communications, said that it is possible for a non-profit entity and for-profit entity to join together into a new corporation to acquire ECHN.

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