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This article was originally published May 6, 2013.
By Evan Marczynski
The Bellingham Business Journal
After announcing a joint venture last summer to combine their operations in the Pacific Northwest and create a new regional health care system, leaders of PeaceHealth and Catholic Health Initiatives knew the negotiations would be complicated.
But nine months into a due diligence process before the partnership was expected to begin in July, talks were suspended as the organizations said they had hit an impasse over how to integrate their services.
The partnership was driven by a desire to cut costs, handle more financial risk in caring for Medicaid and Medicare patients and streamline operations as elements of federal health care reform took effect. But the scale of the deal presented too many complexities for either group to meet agreeable terms, executives from PeaceHealth and CHI, both of which are nonprofit Catholic health care systems, said.
“It is the fragmentation that lives within health care across all the providers that makes that so difficult,” Peter Adler, a senior vice president and chief strategist for PeaceHealth, said. “We need to keep working on that.”
With the health care industry anticipating significant change over the next decade, synergy among hospital operators is thought to be a key element in achieving more efficient service—and in the end, better outcomes for patients currently facing increasingly expensive health care bills. Yet at PeaceHealth, developing such strategic partnerships, at least on a grand scale, is proving difficult.
The integrated system would have combined seven CHI hospitals with nine belonging to PeaceHealth and would have included nearly 26,000 employees, about 950 doctors and a variety of other health care facilities and operations in Washington, Oregon and Alaska. It was expected to generate nearly $4 billion in annual revenue.
PeaceHealth operates St. Joseph Medical Center in Bellingham, which is Whatcom County’s only hospital, and is the area’s dominant health care provider. The organization is also the county’s largest employer, with more than 2,700 employees.
In suspending the discussions rather than ending them, PeaceHealth and CHI, an Englewood, Colo.-based provider that operates 55 hospitals in 17 states, left open the possibility of future partnership. Both will “remain actively engaged in exploring other opportunities to work together and strengthen their respective ministries in the Pacific Northwest,” according to a joint press release issued on April 3.
The negotiations stalled over disagreements on how the organizations would share a wide array of administrative services, Michael Romano, a CHI spokesperson, said via email.
One sticking point involved the integrated system’s combined purchasing power.
The agreement would have created a 50-50 joint venture between all of the facilities and services run by PeaceHealth and CHI’s operations in the Pacific Northwest—CHI runs the Franciscan Health System in Tacoma and has affiliations with two additional medical centers in the Puget Sound area.
Fearing the loss of bulk purchasing power from its facilities in the region—which make up about 20 percent of CHI’s total operations—CHI executives sought to take the lead purchasing role in the joint venture in order to protect supply prices at its other hospitals around the country. But an agreement with PeaceHealth in that regard could not be reached.
Both organizations also struggled to meld their information technology systems and their revenue cycles. Romano said neither group felt it could develop an integrated model that would provide desired benefits and serve the best interest of its physicians, employees and patients.
Adler said the negotiation process revealed that while PeaceHealth and CHI share similar values and care directives, the joint-venture presented more complications than either organization initially anticipated.
“We were unable to create a model within that framework that was simple enough that would end up delivering that level of integration and level of efficiencies and services,” Adler said. “[But] what we found in this process, among many things, is that PeaceHealth and CHI are very compatible organizations.”
The joint venture had its critics.
The American Civil Liberties Union in Washington state challenged the affiliation between PeaceHealth and CHI, expressing concern that the partnership between the religiously-affiliated organizations could restrict legal access to reproductive care, birth control and abortion services, and certain end-of-life care options.
Other detractors also feared that patients’ freedom of choice could suffer depending on how the two organizations aligned their adherence to the Ethical and Religious Directives for Catholic Health Care Services. CHI was perceived by some opponents of the joint venture as being more restrictive than PeaceHealth regarding reproductive and end-of-life services.
PeaceHealth spokesperson Jenny Ulum said religious values played no role in the decision to suspend joint venture talks. Adler said the same, adding that the bulk of the negotiations centered on business matters, not philosophical ones.
The partnership between PeaceHealth and CHI is stalled for now.
But Adler said PeaceHealth will continue seeking ways to integrate its health care financing and delivery systems.
While the developments with PeaceHealth and CHI provide a window into the complexities of major restructuring within the health care world, industry experts said the failure of the joint venture does not mean that such partnerships are impossible.
Larry Thompson, executive director of the nonprofit Whatcom Alliance for Health Advancement, said all signs in the industry point toward more integration, not less, among providers.
“I would by no means take it as a sign that these kinds of large consolidations are infeasible,” he said.
Thompson said PeaceHealth will likely have other opportunities to gain the size and scale it sought by combining with CHI, including forming partnerships and new operating agreements with smaller providers around the region.
PeaceHealth could also have the option of restructuring the facilities it already manages, said Thompson, who has spent more than three decades in the health care and medical world.
That might include creating a “hub and spoke” model where administrative functions are concentrated into larger regional facilities, which are placed at the center of networks surrounded by smaller medical offices, he added.