10 Biggest Hospital Stories of 2011

2011 has not been a quiet year for healthcare. During the last 12 months, a number of provisions within the healthcare reform law went into effect, and proposed rules and guidance for several innovative programs created by the law were released, all while the nation’s courts heard cases arguing against the law’s constitutionality. How healthcare reform plays out in the coming year will certainly influence the future of the nation’s healthcare delivery system, and while health systems must strategically plan ahead, many remain greatly concerned with the present. Reimbursement pressures from public and private payors alike have created ongoing efforts to cut costs, and this year, a number of hospitals found they could not longer do it alone, selling their facilities to larger operators or merging with regional providers. While 2011 has been a tumultuous year, it’s also been an exciting one. Here is a look back at the biggest hospital-industry stories of the year.

1. Challenges to Patient Protection and Affordable Care Act heard in federal courts. Challenges to President Barack Obama’s healthcare reform law, formally known as the Patient Protection and Affordable Care Act, have been heard in federal courts across the country this year, with three cases proceeding to federal appeals courts as of this article’s writing. The effort is being led by Florida in a 26-state lawsuit that argues the healthcare reform law and its provisions, particularly the individual insurance mandate, are unconstitutional. Although one appeals court has ruled the insurance mandate is unconstitutional, President Obama expressed confidence that his hallmark legislation will stand in the Supreme Court. Because of the mixed rulings among the appeals courts, it is expected challenges to the reform law will make it all the way to high court, possibly by the end of the year.

In June, a three-judge panel in a Cincinnati federal court ruled 2 to 1 to uphold the PPACA, becoming the first appellate court to rule in favor of the constitutionality of the individual mandate. Then, a federal appeals court in Atlanta ruled in August that the insurance mandate provision of the healthcare reform law is unconstitutional. While the three-judge panel voted 2-1 that Congress cannot require all Americans to buy health insurance, the court ruled the rest of the healthcare law is constitutional. In early September, a federal appeals court in Virginia was the third federal court to hear a challenge to the healthcare reform law, this time filed by Virginia Attorney General Ken Cuccinelli. The appeals court ruled Mr. Cuccinelli cannot legally challenge the individual mandate because the provision does not impose any obligations on the state itself.

Soon after the Virginia court ruling, a judge in a Pennsylvania federal district court ruled the individual mandate unconstitutional and struck it, and two other provisions, from the healthcare reform law. Although not an appeals court ruling, this ruling marks the first time a judge has ruled other provisions, aside from the insurance mandate, unconstitutional. The other two mandates require insurance companies to cover everyone who wants to buy a policy and prohibit discriminating those with preexisting conditions. The judge argued that the three provisions work together and deemed them inseparable by law.

2. Debt ceiling deals leave Medicare, Medicaid funding in limbo. The country’s deficit reduction problem has been highly contentious this year, with political heads dueling over how exactly to close the country’s staggering $14.3 trillion debt. Although Congress has approved an increase to the country’s debt ceiling, the new debt reduction law has made healthcare programs, including Medicare and Medicaid, vulnerable to required cuts. Lawmakers, principally from the right, have suggested putting Medicare and Medicaid on the chopping block, spurring a firestorm of criticism and opposition from Democrats and the healthcare industry.

Just before the country’s Aug. 2 default deadline, Congress approved the Budget Control Act, under which the country’s debt ceiling would be raised by $2.1 trillon to $2.4 trillion in two stages. As part of the deal, a new special Congressional “supercommittee” would be formed to find at least $1.2 trillion in dollar-for-dollar savings to match the debt ceiling increase. If the committee fails to recommend the savings by the end of this year, as much as $1.2 trillion in automatic cuts would be enacted, including a 2 percent cut in Medicare payments to hospitals, physicians and other Medicare providers.

In September, President Obama submitted a proposal for deficit reduction to the deficit reduction committee, which includes $320 billion in savings across both Medicare and Medicaid programs. President Obama’s proposal would reduce the nation’s debt by approximately $3 trillion over the next 10 years. His plan features savings of $248 billion through Medicare, partly by reducing bad debt payment to 25 percent for all eligible providers over three years starting in 2013 and payment reductions to critical access hospitals. Medicaid savings include lower Medicaid disproportionate share allotments for hospitals. Worth noting, however, is that President Obama’s plan assumes the Medicare sustainable growth rate will remain intact, which is unlikely. If Congress acts before the end of the year to do away with the scheduled payment cuts under the SGR, additional savings may need to be identified.

3. Accountable care organization proposed regulations released. CMS released the proposed regulations for its Medicare Shared Savings Program, better known as the health reform-mandated program that creates Medicare ACOs, on March 31. The regulations were highly anticipated and were quickly dissected by healthcare providers, many of whom had a number of looming questions about how ACOs would function under the regulations. Designed to reduce healthcare costs by coordinating care, the program would allow ACOs that keep healthcare costs for an assigned beneficiary population below expected spending targets to share in the savings created (above the minimum savings rate, generally 2 percent). ACOs would need to have infrastructure in place to distribute the savings to participating entities, suggesting that less technologically advanced organizations may not be ready to participate in the program’s initial Jan. 1, 2012 launch.

Under the proposed rule, ACOs can choose from two risk models. Under the first, “one-sided,” risk model, an ACO that creates a savings of at least 2 percent would get 50 percent of the money above that threshold, but it would have no penalty if it spent more in the first and second year. Under the “two-sided” model, an ACO could receive 60 percent of the money above the threshold but also would be penalized if it led to higher costs. By the third year of the program, all ACOs would become responsible for losses. ACOs would be required to meet certain quality thresholds, and the regulations impose several governance and reporting requirements on the organizations.

After the regulations were released, many providers voiced concerns over the administrative burdens required of ACO participation. Cleveland Clinic President and CEO Delos “Toby” Cosgrove told CMS through a letter that the Clinic was “disappointed” with the proposed rule, saying it contained too many prescriptive and reporting requirements not directly related to outcomes. The letter also warned that retrospective assignment of beneficiaries to ACOs — which means beneficiaries are assigned after the performance period based on utilization data during that period — could make it difficult for providers to impact quality and costs. Donald W. Fisher, PhD, president of the American Medical Group Association, captured the concerns of many providers when he wrote in a letter to CMS, “It’s really hard to drive up quality and lower costs for patients when you don’t know who they are.” Intermountain Healthcare, Mayo Clinic and Geisinger Health System, all large integrated delivery networks poised for ACO participation, also said they were unlikely to participate, causing many to question the future of a program which was once thought to be a game changer in bending the healthcare cost curve.

In May, CMS released regulations for two more ACO models intended for more advanced organizations: the Pioneer ACO and the Advanced Payment ACO. The Pioneer ACO model was “designed to work in coordination with private payors,” according to CMS, while the Advance Payment ACO model “would provide additional upfront funding to providers to support the formation of new ACOs.” Only a few providers, such as the 13-hospital Mountain States Health Alliance and IntegraNet, a Houston-based physician network, had applied for the program by early fall. It appears the big detractors have yet to swayed.

While the future of the Medicare ACO program remains uncertain, it appears providers are not opposed to the inherent goals of an ACO. In fact, throughout the year a number of big providers announced ACO-like arrangements with private payors. Health systems also took much more kindly to CMS’ Bundled Payments for Care Improvement initiative, also created by the PPACA. CMS released a request for application on Aug. 22, and many found the program’s design to be fairly unambiguous while providing flexibility to providers. The initiative allows providers to participate in one or more of four models, which include both retrospective and prospective payment as well as both acute-care only, post-acute only and combined designs. It will be interesting to see if providers’ interest in the program results in filed applications, which aren’t due for models 2-4 until next year.

4. Evolving relationships between payors and providers. Two related but distinct trends emerged in 2011: insurers buying physician groups and insurers buying hospitals. In the past year, four of the five largest health insurers increased physician holdings, according to news reports.

In September, UnitedHealth Group struck a deal to acquire 2,300 physicians through its purchase of Monarch Healthcare — the largest medical group in California’s Orange County. Earlier in June, Indianapolis-based WellPoint acquired CareMore Health Group, a health plan operator based in Cerritos, Calif., that owns 26 clinics. With primary care physicians already in high demand, insurers could potentially wrest control of entire health systems in certain markets by influencing referrals.

A proposed deal between Pittsburgh-based insurer Highmark and West Penn Allegheny Health also stirred feathers in the industry. Under the proposed transaction, Highmark would buy the system for nearly $500 million and assume approximately $1 billion in liabilities. West Penn’s rival, University of Pittsburgh Medical Center, has since refused contracting with Highmark after learning of the acquisition to avoid subsidizing competition. UPMC and Highmark were already in the midst of a contract dispute, but news of the payor’s takeover of West Penn finally made UPMC want a “divorce” from Highmark, as UPMC CEO Jeffrey Romoff put it. Unlike payors and physicians, there has yet to be a formal transaction between a payor and a major hospital system, making this proposed deal one to keep an eye on throughout 2012.

Relationships between payors and providers took some other interesting turns in 2011, though short of mergers and acquisitions. Some payors publicly called out hospitals for providing what they deemed “high-cost care.” In January, Blue Cross Blue Shield of Massachusetts launched its Blue Cross Hospital Choice plan, which limits the use of 15 higher-cost hospitals. Under the plan, BCBS beneficiaries face extra charges if they go to “high-cost” hospitals like Brigham and Women’s Hospital, Massachusetts General Hospital and Dana Farber Cancer Institute.

Rather than being at the receiving end of the blame-game, other providers have taken a proactive approach in their relationships with payors. In September, Boston-based Steward Health Care partnered with Tufts Health Plan to launch an insurance plan. It will require consumers to use Steward-affiliated physicians and facilities for routine needs but is expected to cost 15 to 30 percent less than comparable commercial plans.

5. For-profit organizations ramp up acquisitions. For-profit, investor-owned organizations accounted for some of the biggest healthcare transactions in 2011. The deals followed two noteworthy deals at the end of 2010 that paved the way for significant for-profit M&A activity. Vanguard Health Systems bought eight-hospital Detroit Medical Center for $1.4 billion in Dec. 2010 while Cerberus Capital Management-backed Steward Health Care System scooped up Boston-based Caritas Christi Health Care for $895 million in Nov. 2010.

In Jan. 2011, Brentwood, Tenn.-based LifePoint Hospitals announced the formation of a unique joint venture with Durham, N.C.-based Duke University Health System. Also during the year, Steward purchased several more hospitals within Massachusetts, announced plans to go national and developed plans to work with non-profit Tufts Health Plan to create Steward Community Choice, a new insurance plan that requires consumers to use it for routine healthcare needs with Steward-affiliated physicians and facilities. Prime Healthcare Services began negotiations to buy failing Christ Hospital in Jersey City, N.J. And, Community Health Systems, based in Franklin, Tenn., announced its intent to acquire Scranton, Pa.-based Moses Taylor Health Care System, part of a large-scale hospital grab in Pennsylvania against non-profit Danville, Pa.- based Geisinger Health System.

6. Tenet repeatedly rejects CHS’ takeover bids. Dallas-based Tenet Healthcare’s rejection of a takeover bid from Franklin, Tenn.-based Community Health Systems and the ensuing lawsuits related to the deal gained a lot of attention from the hospital industry and investors during 2011. The nearly nine-month power struggle began in Nov. 2010 when CHS offered an unsolicited $3.3 billion bid for Tenet. CHS also said it would assume Tenet’s roughly $4 billion in debt, but Tenet rejected the offer as inadequate. In the following months, Tenet also rejected CHS’ all-cash offer of $6 per share and its “best and final offer” of $7.25 per share, saying the bids were too low.

To defend against CHS’ takeover attempts, Tenet adopted a “poison pill” device that specified if any person or firm bought more than 4.9 percent of Tenet’s shares without its board’s approval, all other shareholders who own less than that percentage of shares could buy additional shares at a bargain price. Tenet also removed annual meeting timing requirements from its bylaws, which allowed the company to delay its board meeting for 2011, during which all of Tenet’s 10 board members would be up for reelection. CHS had selected its own slate of 10 nominees for the Tenet board positions as it prepared to acquire the company. Following the failed deal, Tenet sued CHS for damages related to the costs of resisting the takeover bid.

Meanwhile, both Tenet and CHS faced lawsuits by shareholders, and Tenet sued CHS. Tenet was sued twice by shareholders for allegedly breaching its fiduciary obligations, first by rejecting CHS’ original $7.3 million offer and later by changing the company’s bylaws to prevent the CHS takeover. In April, Tenet accused CHS of systematically overbilling Medicare and unnecessarily converting emergency department visits, or observation stays, into inpatient admissions, a lawsuit that CHS called baseless. CHS shareholders filed suit against the hospital operator seeking to recoup stock losses, as CHS shares dropped 36 percent following the lawsuit. In June, CHS shareholders filed suit against the hospital operator again, alleging securities fraud and schemes by the company to artificially inflate stock prices. All cases are still pending.

Tenet’s shares also declined following its lawsuit against CHS, dropping 15 percent to $6.44 per share. In September, Tenet closed at $4.46 per share.

7. Non-profit hospitals established as active acquirers. While the merger and acquisition market has been most noticeably active for many for-profit healthcare entities, non-profit hospitals kept pace, providing several noteworthy partnerships and deals. Provena Health in Mokena, Ill., signed a deal to merge with Chicago-based Resurrection Health Care, and Novi, Mich.-based Trinity Health has been active in merging hospitals in western Michigan. However, none has been more highly publicized than the potential merger between University Hospital in Louisville, Louisville- based Jewish Hospital and St. Mary’s Healthcare and Lexington, Ky.-based St. Joseph Health System. Jewish Hospital and St. Joseph are both part of Denver-based Catholic Health Initiatives. The deal initially presented potential complications to the boundary between church and state by pairing an academic institution with a Catholic system. Recently, University of Louisville officials said there’s been too much attention focused on possible problems with the merger rather than its benefits. While the deal has not been finalized, it has sparked discussion over the importance of non-profit hospitals’ creativity in healthcare transactions.

As hospitals and physicians gear up for collaborative models outlined in the PPACA, non-profit health systems have also been involved in acquiring physician practices. Some of the significant transactions include the University of Pittsburgh Medical Center’s purchase of Erie (Pa.) Physicians Network; The Christ Hospital acquiring several surgical practices; St. Louis-based SSM Health Care acquiring oncology and orthopedic practices; and New Bern, N.C.-based CarolinaEast Health System acquiring East Carolina Internal Medicine based in Pollocksville, N.C., which employed more than 350 physicians and staff.

8. Physician employment continues to rise. This year, physicians increasingly sought employment by hospitals, and hospitals increased efforts to employ physicians. In fact, Irving Levin Associates reported a 200 percent increase in physician group mergers and acquisitions in the second quarter 2011 compared to the same period the year before. Furthermore, physician group M&A activity increased 50 percent from Q1 2011 to Q2 2011. An article, “Hospitals’ Race to Employ Physicians — The Logic Behind a Money-Losing Proposition,” published in The New England Journal of Medicine in May, reported that more than half of practicing U.S. physicians were employed by hospitals or integrated delivery systems. A study by Accenture in June estimated only 33 percent of physicians will remain independent by 2013.

This growing trend has significant implications for physician compensation, leadership structures in hospitals and models for the delivery of care. As physicians integrate with hospitals, many take on leadership roles and begin to play a larger role in the hospital’s decision-making.

Physicians’ motivations for hospital employment include a desire for greater stability, improved work-life balance and fewer administrative duties associated with running a practice. For some physicians, these benefits outweigh compensation concerns. A study by PricewaterhouseCoopers found that 17 percent of physicians said they would take a decrease in compensation in exchange for hospital employment.

Hospitals’ primary motivation for employing physicians is to increase market share and revenue, according to a study by the Center for Studying Health System Change. Other reasons for employing physicians include integrating care to prepare for accountable care organizations, patient-centered medical homes and other models under healthcare reform and creating greater efficiencies.

Two of the year’s notable transactions between hospitals and physician practices involved Lourdes Health System in Camden, N.J., and two cardiology groups. In January, Lourdes acquired Associated Cardiovascular Consultants, a 31-physician practice. In July, the health system acquired South Jersey Heart Group, which included 17 cardiologists and five offices. Another significant transaction was between Wilkes-Barre (Pa.) General Hospital and multispecialty practice Intermountain Medical Group in January. Wilkes-Barre General Hospital acquired the group, which was comprised of 52 physicians and nearly 30 locations, including a diagnostic imaging center, diagnostic lab, physician therapy center and sleep lab.

9. Increased scrutiny on hospitals’ taxexempt status. The year also brought several developments regarding non-profit hospitals’ taxexempt status. The PPACA placed several new requirements on tax-exempt hospitals, and guidance on one of the most notable new requirements — the community health needs assessment — was issued by the Internal Revenue Service in July. Hospitals must perform a needs assessment every three years and develop plans for addressing the needs or face a $50,000 fine. Other new regulations require hospitals to develop a written financial assistance policy and distribute it to patients; limit charges for uninsured and patients receiving financial assistance; and cease extraordinary debt collection practices. The new reporting requirements, which will be incorporated into hospitals’ IRS Form 990 Schedule H, are intended to allow Congress the opportunity to examine the data and interpret whether hospitals have provided an appropriate level of community benefit to maintain tax-exempt status. Currently, the IRS is simply assessing whether a hospital has met the new requirements on a binary basis (i.e., Did the hospital facility conduct a health needs assessment?). Thus, hospitals can, for the near future, protect their tax-exempt status by ensuring they can “check yes” on each of the reported measures. However, if Congress decides that community benefit levels are not equivalent to tax-exempt benefits, it could mandate minimum thresholds of community benefit, which would be a major threat to many hospitals’ tax statuses.

Hospitals should also plan for increased scrutiny on the state level, especially as many states face budget shortfalls and are looking for additional sources of revenue. Illinois caused a stir in the hospital industry in August when the state’s Department of Revenue denied property tax exemptions to three hospitals in the state: Northwestern Memorial’s Prentice Women’s Hospital in Chicago, Edward Hospital in Naperville and Decatur (Ill.) Memorial Hospital. Shortly thereafter, the Department announced plans to reexamine the tax-exempt status of 15 other hospitals in the state based on how much charity care they provide. The denials followed a 2010 ruling by the Illinois Supreme Court that upheld the revocation of Provena Covenant Medical Center’s tax-exempt status for providing too little charity care. In September, Illinois Gov. Pat Quinn halted the 15 investigations saying the Department should wait until the state legislature issues recommendations on charity care levels.

10. Increased fraud prosecution. With the Obama administration’s intense focus on fraud-fighting efforts, healthcare fraud prosecution has ballooned. Statistics released in August showed a 24 percent increase in fraud prosecutions in the first eight months of 2011 compared to the same time in fiscal year 2010. Convictions are also on the rise. There were already 24 trial convictions from the first eight months of 2011, while the entire year of 2010 saw only 23.

Along with these statistics reflecting increased prosecution, there were several record-setting breakthroughs for federal enforcement in 2011. In February, 111 physicians, nurses and other defendants nationwide were charged in the largest healthcare fraud takedown to date, executed by the Medicare Fraud Strike Force. The defendants were accused of schemes involving more than $225 million in false billing, along with kickbacks and money laundering. Soon after announcing the record-breaking takedown, the task force expanded their operations to two additional cities: Dallas and Chicago. And in September, a Miami man who pled guilty to a $205 million Medicare fraud scheme was sentenced to 50 years in prison — the longest sentence ever imposed in a Medicare Fraud Strike Force case. Lawrence Duran, the owner of American Therapeutic Corporation, billed Medicare for services that were not medically necessary from 2002-2010. Department of Justice officials said his sentence “reflects the reprehensibility” of his conduct.

In the past year, large, prominent hospitals and systems have also been involved in healthcare fraud lawsuits or settlements. In February, Catholic Healthcare West paid $9.1 million to settle allegations that seven of its hospitals had submitted fraudulent claims to Medicare. In April, Dartmouth- Hitchcock Medical Center in Lebanon, N.H., agreed to pay $2.2 million to settle allegations that it improperly billed various federal health programs from 2001-2007. Also in April, Louisville, Ky.-based Norton Healthcare paid the federal government nearly $783,000 to settle claims that it overbilled Medicare for certain services.

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