By Rose Hoban

In a surprise to many people in the Piedmont Triad, Greensboro-based Cone Health announced its intent to merge with Norfolk, VA-based Sentara Healthcare early Wednesday morning.

The move would create one large organization with a total of 17 hospitals – 11 Sentara hospitals in Virginia and one in Elizabeth City, N.C., and five Cone Health hospitals in the area surrounding Greensboro.

The resulting organization would have a combined $11 billion in assets, with Sentara bringing about $8.7 billion in assets to the table (as per their audited 2019 statement) to Cone Health’s $2.8 billion in total assets (as per their September 2019 audited statement).

“We are not being bought,” said Cone Health CEO Terry Akin in an interview with NC Health News Wednesday afternoon. “We are merging, we are merging our assets into one organization, in which there will be shared governance.”

Sentara CEO Howard Kern is slated to become the CEO of the new organization and the overall corporation’s headquarters would move to Norfolk, while Akin would remain in Greensboro overseeing the Cone system. Akin was quick to reassure that Greensboro would retain a significant corporate presence and that there would be Cone board members on the overall combined board.

“A lot of specific details are yet to be worked out, but we expect to have significant appointees from our organization to sit on the combined corporate board of trustees, we expect to have leadership role or roles on the board, and on committees,” Akin said. “And we will also have a local regional board here for the North Carolina division.”

The merger comes as hospital consolidation is picking up the pace in North Carolina, with last year’s acquisition of Asheville’s Mission Hospital by Nashville-based giant HCA Healthcare and the recently announced merger of New Hanover Regional Medical Center with Novant.

“This continues the national trend toward consolidation of healthcare systems,” wrote health economist Mark Holmes from UNC Chapel Hill’s Sheps Center for Health Services Research. “In this case, we have two significant systems centers on mid-sized metropolitan areas, with the combined size of the two being considerable.”

New insurer in town

In addition to the economies of scale often touted during corporate mergers, Sentara brings with it an insurance arm, the Optima Health Plan, which covers nearly 900,000 people in Virginia and has a Medicaid managed care division.

On the insurance side, the merger will sweep in Cone’s Medicare Advantage plan (known as Health Team Advantage) into Optima, facilitating the entry of a nearly million-member insurer into the North Carolina market.

Such an insurer would not be able to compete statewide with Blue Cross Blue Shield, North Carolina’s dominant insurance provider, as it takes time to build and contract with provider networks across an entire state. But the plan could well compete in the Triad area.

“Competition is good,” said Greensboro Democrat Rep. Pricey Harrison who learned about the merger Wednesday morning in a phone call from Cone Health leadership. “That wouldn’t be a bad outcome.”

“It will give us the opportunity to do some interesting things to align incentives to have the provision of health care and the payment for that healthcare for those who choose one of our insurance options,” Akin argued. “It will integrate those two and allow us to align incentives and hopefully maximize value to individuals and businesses.”

UNC’s Holmes pointed out that mergers can be good or bad for consumers in terms of pricing, service availability, quality of care and efficiency.

“We will have to wait and see how it plays out in this case,” he said.

Akin was quick to point out that both organizations have been deeply involved in the transition to value-based health care, the idea that doctors, hospitals and other providers should get paid not just for doing tests and procedures and seeing patients, but get paid based on whether all that activity produces a better health outcome for patients.

“A lot of people talk about it, but we’ve been all in on it,” Akin said.

The system has a well-regarded accountable care organization which has received federal “shared savings” payouts from the Centers for Medicare and Medicaid Services. The accountable care organization Triad Healthcare Network was chosen by federal regulators to participate in CMS’s Next Generation Accountable Care Organization initiative in 2017.

Triad Healthcare Network received $6.2 million from CMS for its value-based care work in 2018 (data for 2019 were not yet available on the federal website).

Synchronicity

Akin maintained that what’s driving the merger was a similarity of approach between the two systems, that and the economies of scale and expertise that the two companies can share.

“There was no urge to merge on our part, there was no sense that we have to do anything right now,” he said. “Along with everyone, I think we’ve been open to partnerships.

“As we got serious 18 months to two years ago about really exploring options that are out there. And narrowed our options and it became, it became apparent that there was just so much similarity and complementarity between Sentara and Cone Health.”

Sen. Gladys Robinson (D-Greensboro) said she got a call early Wednesday from Akin telling her about the merger and he assured her that it would “improve the ability to care for people at the lower income levels and folks on Medicaid.”

“If the merger improves the care model, that’s significant to us,” she said. “If we begin to see negative effects, I’ll be the first person out there.”

As with other hospital mergers, this deal will draw scrutiny from the Federal Trade Commission which does not look kindly on mergers between competitors that consolidate a given market too much. Research has shown that hospital consolidation in individual markets can result in higher prices for consumers because providers bring more leverage to negotiations with insurance companies.

Akin said that lack of geographical overlap should make FTC approval an easier hurdle to overcome.

“Our hope is that we can get through the due diligence and regulatory review fairly smoothly and because of the geographic separation and distinctiveness of our markets, not get into a protracted FTC or other regulatory review,” he said.

COVID slowed merger

The COVID crisis has not been kind to the hospital industry. That wave of initial cases overtook both organizations and work on a merger that had begun about 18 months ago ground to a halt in the spring.

Even before COVID ate at their bottom lines in the second quarter (neither organization has filed Q2 results with federal regulators), each organization did not do as well in the first quarter of 2020 as in the prior year. Cone’s operating margin was down to 1.7 percent from the same quarter of 2019, when the margin was 2.4 percent, and Cone earned $7 million less than it did in that same time frame last year.

Sentara actually operated in the red in the first quarter of 2020, with significantly increased medical claims expense in its insurance portfolio than it had in the same quarter of 2019.

Then, most hospitals lost money when government entities ordered them to cease doing elective surgeries such as knee and hip replacements as the pandemic swept across the U.S.

“Let’s just say March, April, May, back when we had canceled elective procedures, that made for some really tough going financially,” Akin said. “I don’t know if across those three months we were actually in the red. We were certainly far short of our planned and budgeted income numbers.”

He said Cone was back up to about 90 or 95 percent of pre-COVID operating levels.

“People have taken steps to really be careful with the finances,” he said. “I am hopeful that when we get to the end of our fiscal year all told, we will finish relatively well.”