On March 22nd, Mission Health in Asheville, North Carolina announced its intention to sell its seven-hospital not-for-profit (NFP) health system to HCA Healthcare, the nation’s largest for-profit healthcare system. The parties expect to sign definitive sale agreements by mid-summer and finalize the transaction by year-end.
This is a landmark transaction. For the first time in recent history, a strong NFP health system is choosing to sell to a for-profit system rather than merge with another NFP health system.
Founded 130 years ago, Mission Health has annual revenues approaching $2 billion and is the region’s largest employer. The System accounts for almost a tenth of jobs in Buncombe and Madison counties. It generates $1.75 billion in economic activity for its 18-county service area.
Truven Health Analytics has recognized Mission as a top-15 health system 5 of the last 6 years. Business North Carolina recognized Mission Hospital as the state’s #1 best hospital in 2017 and 2018.
Mission Health is a large, powerful and deeply-respected organization within its Western North Carolina communities. Perhaps for these reasons, news of its pending sale has shocked the Asheville community. In an editorial following the announcement, the Asheville Citizen Times made the following observation,
“To say that Wednesday’s announcement that the two [health systems] planned to get together was a surprise would be an understatement. There has not been the slightest hint anything was afoot until Mission announced that its board had approved the deal unanimously.
Overall, the Citizen Times exhibits a neutral-to-negative opinion of the transaction. It questions whether HCA profits would detract from local health care delivery while opining they would “feel better” if Mission remained under local control.
The mission-profit debate will intensify as HCA and Mission undertake due diligence, finalize transaction terms and seek regulatory approval from North Carolina Attorney General. Disproportionately focusing on profits and ownership transfer, however, obscures whether the transaction advances the greater community’s health and wellness.
Local control and tax status are secondary considerations. Transaction approval should hinge on the merger’s overall community benefit to Asheville’s citizens, including HCA’s ability to deliver appropriate and cost-effective healthcare services.
Residual proceeds from the sale will flow into an independent, non-profit foundation. This new foundation will be among North Carolina’s largest with assets, in all like likelihood, exceeding $1 billion. It will invest tens of $millions annually to improve health in Western North Carolina. Mission Health describes this new foundation as “transformational.”
As a for-profit company, HCA must pay sales, property, income, excise and other applicable taxes. Early estimates suggest new property taxes will add roughly $7 million to the city of Asheville’s coffers. This represents a substantial 11% increase, the equivalent of adding 8,000 new homes valued at $200,000 apiece.
As part of the agreement, HCA and Mission will each invest $25 million to create an Asheville-based healthcare innovation fund. The new fund would support promising healthcare companies.
HCA’s acquisition of Mission Health is part of a broader, disruptive trend confronting established health companies as they position to compete in a post-reform marketplace that emphasizes transparency, outcomes, efficiency and consumerism.
Striving to be both “bigger” and “better” are hallmarks of multiple proposed mega-transactions. These include CVS’s acquisition of Aetna, the Advocate-Aurora merger, the proposed Amazon, Berkshire Hathaway, JP Morgan health company and Walmart’s potential acquisition of Humana.
In describing the timing and reasons for the proposed sale to HCA, Mission Health’s CEO Ron Paulus made the following observations:
- Until this year, he believed remaining independent was Mission Health’s best alternative. Payment pressure and the “chaos in Washington” changed his mind.
- Given this reality, now is the best time to shift ownership control to a larger, more stable operating platform – before the system experiences severe financial hardship.
- HCA’s scale and operating efficiency make it “one of the lowest, if not the, lowest-cost operators in the country.” For example, HCA makes a small margin on Medicare patients while Mission loses 4%-5% on the Medicare patients it serves.
- While there is naturally “grieving” for losing independence, he and the senior staff believe that current circumstances required a “radical” rather than an “incremental” solution.
Paulus’ observations echo those made by Ascension CEO Tony Tersigni made March 16th in a video broadcast to the company’s 165,000 employees. Citing the same cost and competitive pressures as Paulus, Tersigni signaled that the nation’s largest NFP health system would transition from a hospital-oriented provider to one more focused on outpatient care and telemedicine.
Tersigni described Ascension’s new strategic direction as a “dual transformation” with the following goals:
- Transform current healthcare delivery operations to meet the challenges presented by the rapidly changing environment;
- Safeguard a sustainable presence in its communities that responds to how people are accessing care; and
- Create new, transformational care delivery models for the future to extend the reach of our national health ministry.
In large measure, health systems operate today largely the way they have for the last 50 years: hospital-oriented; physician-centric; treatment-focused; and reimbursement driven. This business model is not sustainable.
Change is difficult in any disrupting industry, but it is particularly hard for health systems given their operating complexity and defensive strategic orientation. For NFP health systems accustomed to local control, current market pressures challenge organizational identity and missions.
Like Mission Health, it may be time for many NFP health systems to redefine their missions and consider for-profit conversion. Ultimately, organizational tax status is a tactical decision. True measures of health system performance relate to care access, care quality, operational efficiency, customer experience and community-wide health status.
On these measures, a reconstituted Mission Health delivers. Selling to HCA will enable Mission Health to contribute millions in local tax revenues, invest more in community health, operate more nimbly and innovate more strategically. The logic and evidence are clear. By selling to HCA, Mission Health is truly putting its mission first.
Mission Health’s Board Chair, Dr. John R. Ball, made this point persuasively during an interview with the Citizen Times’ editorial board,
The basic measure was what our mission is, which is to improve the health of people in Western North Carolina and the surrounding regions. That was the measure. Does any deal do that and do it better than we could independently down the line?
Healthcare works best when efficient organizations provide the greatest value to the most people. Health systems create value by delivering the right care at the right time in the right place at the right price. Transactions that advance holistic care delivery and community health should proceed. The alternative is simply un-American.