The healthcare news cycle opened with a bang on Monday when Tenet Healthcare announced a pair of deals that both create a footprint in European markets and poise the company to become the largest operator of ambulatory care providers in the country.
Under the terms of the first deal, the Dallas-based operator will assume majority control of United Surgical Partners International, an ambulatory surgery center operator also based in Dallas, for $425 million. The company will merge its short-stay surgery and imaging center assets with USPI and will take full ownership of the company within five years. In the second deal, worth $215 million in cash, Tenet will purchase Aspen Healthcare, a UK-based operator of four private acute-care hospitals, three ambulatory surgery centers and a cancer center, according to Modern Healthcare.
The two deals follow on the heels of what was a remarkable year for Tenet in 2014. The hospital operator reported a huge Q4 to end its best annual earnings in a decade, according to the company. The 2014 Q4 results saw net income up at $61 million, as opposed to 2013, which showed a $24-million loss. The company charted net operating revenue of $4.5 billion for the quarter, up from $3.9 billion in 2013.
A large part of those tremendous results can be attributed to old-fashioned market positioning, not significant acquisitions. Clint Hailey, Senior Vice President and Chief Managed Care Officer, calls the USPI deal "following the consumer"—something that tallies nicely with the company's organic philosophy towards growth.
"I'd characterize our strategy now as developing our ambulatory and services business, and further developing our core acute care business, but not through acquisitions alone," CEO Trevor Fetter told The Advisory Board. "That's a tool that's available to us, but we're much more interested in expanding and solidifying our geographic footprint through innovative partnerships with well-respected not-for-profit organizations."
Betting on ambulatory care
Hailey sees significant parallels between the cost-shifting that has helped foster the growth of the ambulatory care market to those that nurtured the rise of 401K plans. Although it took a long time for the newer 401K plans—which put fiscal control in the hands of the employees rather than their employers—to overtake the more established pension plans, they eventually became the dominant form of retirement plan. In that same vein, as private exchanges continue to blossom, healthcare decision-making will increasingly fall to the employee, not his employer.
"If the consumer is the decision-maker now, not the big employer, then what's the play there?" Hailey said.
"Becoming more retail is a piece of that."
More to the point for Tenet, however, the push into ambulatory care is not merely a matter of catering to a newly-choosy consumer of healthcare. It also makes sense from a portfolio-management standpoint.
"The more outpatient you own as a percentage of your portfolio of assets, the lower cost profile you have," Hailey said. The USPI deal "plays right into our key themes from a messaging standpoint around cost."
Leveraging joint partnerships to expand Tenet’s geographic footprint
The other, and perhaps equally significant piece of the careful positioning job Tenet is doing, is a series of joint partnerships with a variety of kinds of organizations. Also on Monday, the company announced a partnership with Baylor Scott & White Health that will allow the two providers to jointly own five north Texas hospitals. Baylor will become majority owner of the hospitals, four of which belong to Tenet currently.
Tenet has gotten a lot of press recently for its somewhat nontraditional partnerships with nonprofit organizations—Fetter told The Advisory Board that
"we want to be viewed by leading not-for-profits as their preferred partner when it comes to either services or ambulatory activities, or even hospital joint ventures"—but this is something that Hailey says isn't new.
"Before we bought Vanguard, when we had just 49 hospitals, several were joint ventured," Hailey said, referring to the 2013 acquisition that added 77 acute care hospitals and 173 outpatient centers to the company's portfolio. "It's not like we haven't had [joint partnerships] before. All of our ASCs we owned prior to Vanguard were joint-ventured as well. This is just a massive expansion of that."
Hailey draws a distinction between a variety of kinds of joint ventures, all of which have upsides—notably, expanding Tenet's geographic footprint and reaching a volume of covered lives—and challenges.
In Phoenix, AZ, for example, Tenet is part of an ACO formed by Dignity Health that gives the combined organization enough clout to be competitive against Banner Health's market share dominance (Tenet has about 10% market share, Dignity Health about 13%, according to Hailey). While there are positives to some of the internal competition that goes on in these kinds of arrangements, where two partners continue to own their own facilities, some of it can be a detrimental, Hailey says.
He offered a hypothetical scenario to illustrate unhealthy intra-ACO competition: A hospital organization buys half of an ACO with an already-formed physician network and faces resistance to integrating its own physicians into that network.
"Hypothetically, the two hospital organizations that joined the ACO are about equal size," Hailey said. "Why would one of them have only 20% of the total physician roster, and the other has 80%? The guys who have 80% don't want more of [the other organization's] docs. They want to funnel [lives] through their 80%. There's some resistance to expanding the physician network to make it more balanced."
Hailey also noted another form of joint venture that Tenet is engaging in—the joint-venturing of facilities, as in the pending Carondelet Health Network deal with Ascension and Dignity Health in Tuscon. While Hailey emphasized that as far as he knows, the company isn't contemplating further facility partnerships, he did remark that this kind of arrangement might be a way to assuage anti-competition concerns while still allowing providers to consolidate needed resources.
Overall, "I'm a proponent of joint ventures in terms of aligning incentives," Hailey said.
Improving managed care contracts
Another piece of Tenet’s ongoing, carefully-managed success—one which is directly Hailey's domain—is the improvement in its managed care contract terms. Improving those terms, Hailey says, is about using third-party data to determine how the company is positioned in new markets and closing gaps in terms and rates in established markets. While in some highly-competitive markets there's limited wiggle room for Tenet to negotiate, "in other markets there's a lot more disparity, so closing gaps on terms, on rates is the way you position yourself to compete."
"We don't aspire to be the highest cost in the markets we serve," Hailey said. "We have to be in a couple because we're the market leader, but we don't desire to be in the position where we set the price. We would prefer to be underneath. One of the key components of our value proposition is generally we're not the most expensive hospitals in the market that we operate in. We think there's some value in that with the health plans."
Hailey cites weaknesses in the Phoenix market as an example of an opportunity for improvement that the company seized.
"Our Phoenix hospitals are pretty low reimbursed," Hailey said. "So we've done some standardization and improvement and put them on the Tenet platforms from our contract standpoint. We have a much more sustainable position from a contracting standpoint in that market now."