Big hospital systems are more powerful than ever. They're ready to capitalize on it.
Big hospital systems are more powerful than ever. They're ready to capitalize on it.
Hospitals as for-profit data brokers.
A few quick editorial notes.
This newsletter assumes that hospital consolidation is bad—something I feel pretty strongly about. But you might notice that I don’t really explain my position. That’s because I’m planning another newsletter about hospital consolidation specifically, tied to a forthcoming article.
Second: I want to start having informal conversations on topics like those I cover in my newsletter on Clubhouse. If you would be interested in listening (or speaking!!), reply to this email or follow me @oliviawebb on Clubhouse. If you need an invite, I have a few, just let me know.
The COVID-19 pandemic, no surprise, helped some hospital systems and hurt others.
Because smaller, more rural hospitals tend to have less cash on hand and rely more on outpatient and elective procedures, COVID-19 hit their finances hard. Larger hospital systems came out on top; a combination of government money and the overflow of inpatients (particularly for hospitals that relied less on outpatient procedures prior to the pandemic) kept them firmly in the black.
The recent announcement that several large hospital systems will be teaming up to sell patient data under the aegis of a new company called Truveta emphasizes how powerful some of these systems have gotten, and the ways that they can (and will) capitalize on their dominance.
Hospital acquisition strategy
Even before the pandemic began, large hospital systems were rapidly consolidating territory, although the strategy behind those acquisitions has changed over time.
I’ve noticed four distinct phases of hospital acquisition strategy, although these are subject to interpretation. It’s also worth noting that a lot of these big, bold strategic choices are driven by the more professionalized hospital chains (sometimes partially owned by private equity)—there are a lot of smaller, community hospitals that don’t necessarily have a strategy for 💥 total health system dominance 💥.
Acquiring other hospitals
In the 1990s and 2000s, big hospital systems prioritized buying (smaller, usually rural) hospitals as a growth strategy. As Eileen Appelbaum and Rosemary Batt have written, Tenet Health and HCA epitomized this approach.
But Tenet in particular learned that simply acquiring hospitals is not a viable path. Many of the acquired facilities were struggling before being purchased, and Tenet was not able to suddenly “efficiency” them into profitability. As a result, Tenet chose to divest or shutter many of the acquired hospitals to protect its bottom line.
The result for patient communities, of course, was that their community hospital was acquired…only to be shut down. Last summer, I wrote about a DC hospital that had been acquired and shut down for lack of profitability—when the hospital shuttered, residents of the surrounding (largely minority) community were forced to commute to one of DC’s remaining hospitals, which are mostly located in wealthier areas of the city. In short: the strategy of acquiring as many hospitals as possible proved to be a blunt mechanism not terribly good for large systems’ bottom lines (and, obviously, horrific for many communities).
The strategy of acquiring hospitals isn’t gone—Lifepoint seems to still be pursuing this model, mostly in rural areas—but it’s lost favorability in light of newer strategies.
Acquiring physician practices
For months, the Gist Weekly newsletter has quoted strategic planners at hospitals who express interest in acquiring small physician practices, particularly now that many practices have been weakened by COVID-19’s effect on elective care. In just one example, quoting a strategic planner from a Gist Weekly last summer: “[g]iven how hard independent practices have been hit, especially primary care, it seemed like a good time to strategically grow the group.”
Whether a deluge of independent providers choose (or are forced into) acquisitions remains to be seen; companies like Aledade are actively trying to provide alternatives. But enough practices have been acquired that, even pre-COVID, employed physicians outnumbered independent physicians for the first time in history.
Acquiring ambulatory surgical centers (ASCs)
This is the most recent iteration of hospital acquisition strategy that I’ve noticed.
Ambulatory surgical centers (ASCs) are outpatient surgery centers that primarily do simple procedures for low-acuity patients; think colonoscopies and cataract surgeries. They’re appealing to surgeons because they provide a way to do surgery and remain independent of a hospital, and they’re appealing to patients because surgery at an ASC is usually cheaper than surgery at a hospital, even for the same procedure.
Owning ASCs are appealing to hospitals for more complex reasons. From an Avanza Healthcare Strategies report (note: the survey was completed before COVID-19):
Of course, hospitals owning ASCs has the potential to do away with a lot of the upside for providers (independence) and patients (cost-effectiveness), so it remains to be seen if this trend continues.
Capitalizing on dominance 👇
For the biggest hospital systems, simply acquiring new pieces of a vertical health system is no longer enough. Instead, these hospitals are turning to elaborate joint ventures.
New joint ventures
The smartest systems aren’t just acquiring to acquire—they know that there are limited efficiencies to be found in huge health systems. Instead, they’re capitalizing on their dominance and working with other large systems to launch joint ventures.
Civica Rx, a health system collaborative to produce generic drugs, and the recently announced Truveta, Inc, a collaborative to sell patient data, are both in this category.
Civica Rx
Between these two health system ventures, I have more sympathy for Civica Rx: the venture is not-for-profit, the generic drug chain is broken, and Civica is taking on a lot of the risk itself, rather than pushing the risk off to patients.
💊 Briefly, the problem Civica is trying to solve: generic drugs are generally too low-priced for pharmaceutical companies to see much profit in generic drug production, a dynamic worsened by the downward pressure that group purchasing organizations (GPOs) have on manufacturers (a dynamic called monopsony).
As a result, manufacturers seek out the cheapest labor and supplies possible, meaning that generic drugs are produced kind of shoddily and often overseas, using workers who aren’t fairly compensated and don’t have adequate protections.
The pricing dynamics also mean that GPOs/manufacturers have limited incentive to ensure the quality or availability of their drugs; generic drugs can easily fall into shortage, and as Katherine Eban reported in her 2019 book Bottle of Lies, these drugs can have spotty effectiveness.
Civica Rx is a collaboration, formed in 2018, between health systems Catholic Health Initiatives, HCA Healthcare, Intermountain Healthcare, Mayo Clinic, and more. The goal is to contract for cheaper drug manufacturing within the U.S., circumvent a lot of the market dynamics mentioned above that impinge on generic access, and produce a cheaper, higher quality supply. The collaboration is already in motion; in January 2021, Civica announced a contract with Phlow Corp. to build a sterile injectables plant in Virginia.
The cynical interpretation, of course, is that Civica Rx has the potential to become a generic drug cartel, with cheap and readily accessible generics only available to the participant hospitals (which could, of course, drive up costs), although so far they’ve committed to offering the same price to every hospital.
But some kind of more direct contracting is needed in generic drugs, and Civica Rx may be a good solution, in lieu of or alongside government action to correct broken drug markets.
Truveta, Inc.
The announcement of the Truveta venture, on the other hand, really convinced me that hospital systems are flexing their muscle. What a bold decision! On the heels of the COVID-19 pandemic, when many hospitals struggled to provide their staff with basic PPE, they are now announcing to the world that they have an enormous set of personal data and that they’re selling it for a profit.
Truveta is a venture between Providence, CommonSpirit, Advocate Aurora, Trinity, Tenet and other hospitals. These hospitals are so large and cover so much U.S. territory that the data they intend to sell encompasses around 13% of clinical care provided in the U.S., across 40 states. That’s…remarkable.
Quoting again from the Gist Weekly newsletter (2/12/21):
Like Civica, an earlier health system collaboration around pharmaceutical manufacturing, Truveta’s launch signals that large national and regional systems are waking up to the value of scale they’ve amassed over time, moving beyond pricing leverage to capture other benefits from the size of their clinical operations—and exploring non-merger partnerships to create value from collaboration.
Selling health data for profit, it’s important to note, is a common method for health care companies to support themselves. The data is anonymized; typically, there’s a built-in acknowledgement that a health care service, like a symptom tracker, is free because the data is being sold on the backend.
And there are companies that do this really well. Ciitizen, for example, offers high-quality medical record technology to cancer patients, while aggregating their data for cancer researchers. This arrangement has both (1) an explicit upside for the patient, and (2) an explicit call-to-action that the data sales will help future oncology patients. The sale of data, in other words, is clearly communicated upfront, with a clearly communicated mission, and patients get access to Ciitizen’s medical record technology in return.
But when 13% of all clinical interactions in the U.S. are hoovered up by just a few hospital systems and sold, I…have more questions. Will patients be able to opt out? Will they even know that their data is floating around out there? Many of these patients will have no option but have their data enter this system—and it’s unclear what Truveta’s protections on it will be.
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All of this is not to say that there isn’t external value in medical data; on the contrary, Truveta has value to the broader health care industry because the health care data flows in the U.S. are so messy.
You can see this in how challenging it is to get comprehensive COVID hospitalization and vaccination numbers, even for federal officials. In fact, the best data, especially early on, came from journalists and volunteer-driven entities like the COVID Tracking Project—the CDC simply couldn’t pull together that data for the first months of the pandemic. And again, patient data is routinely bought and sold, often without patients knowing it.
But there’s something squirmy about a bunch of hospitals—most of which are nonprofit and therefore get special tax breaks—monetizing the data from their patients, who have no choice but to seek care at that hospital. They could at least offer to lower prices by a few percentage points for patients willing to share their data.
Conclusion
I expect announcements of joint ventures like Civica and Truveta to increase in frequency. And I expect the outcomes of such ventures to the broader patient community to be a mixed bag.
The best case scenario for Civica, for example, is that hospitals have a new outlet to manufacture cheap, high-quality drugs; that it’s a nonprofit venture that bends the cost curve for patients and the whole system. The best case scenario for Truveta is…a bunch of hospitals make money selling data, and patients maybe know that it’s happening.
As hospitals continue to grow and consolidate—and unless the FTC or state regulators decide that the biggest health systems have too much power—we’re entering a new world of health care, one controlled by just a few entities that can make nearly unilateral decisions about costs, access, data-sharing.