Summa Health System trimmed about $20 million in expenses in 2011 and expects to cut another $56 million this year as it prepares for the future under federal health-care reform.
But the results of the health system’s ongoing efforts to boost efficiency and reduce costs during the next decade might be just the start of sweeping changes to come.
Recently, Summit County’s largest employer announced it is seeking a larger, “like-minded” nonprofit health system to become its minority owner.
By the end of the year, Summa should either pick a potential partner or opt to go it alone, President and Chief Executive Thomas J. Strauss said during a recent interview.
Either way, he said, the health group is prepared to move forward in the face of an expected shift away from a payment system that rewards quantity rather than quality.
“We can survive and we can thrive on our own,” he said recently in his office at Akron City Hospital, the health system’s flagship facility.
“But if we’re going to be transformational,” he said, “maybe it’s the right time to explore a partnership.”
Looking at suitors
Strauss declined to identify any suitors. He also would not say whether Summa is narrowing its focus to the region or state or broadening its options nationwide.
However, some industry experts say it makes the most sense for a deal to involve a hospital system in the same region or a contiguous market that wants to expand.
“What would make sense would be somebody in that market geographically,” said Jim LeBuhn, a senior director with Fitch Ratings who follows Summa and the health-care industry.
Summa has a strong 58 percent market share in the Akron area, according to Fitch Ratings.
Though Summa is Akron’s largest hospital system with nearly $1.5 billion in revenue last year, it’s considerably smaller than the health-care giants to the north in Cleveland.
Cleveland Clinic health system had total operating revenue of $5.8 billion last year, while University Hospitals in Cleveland generated $2.2 billion, according to the organizations’ annual reports.
“Summa is in a position where they’re big enough to really have an impact on their region but they’re also not that big where they have unlimited resources,” said Thomas S. Campanella, director of the health-care M.B.A. program at Baldwin-Wallace University in Berea.
Summa already has a growing relationship with UH, which has been contracting with Summa’s Apex Benefits Services since January to administer employee health benefits.
Both Cleveland hospital systems declined to comment about Summa’s ongoing search for a partner.
Campanella said he wouldn’t rule out a health system that’s trying to expand from Toledo, Columbus or another area in the state.
“I think Summa would be an attractive partner for lots of different players, not just Cleveland Clinic or UH,” he said.
Steve Monroe, editor of Health Care M&A Monthly, a national newsletter that tracks mergers and acquisitions in the health-care industry, said it’s unusual for nonprofit hospitals to buy a minority stake in another hospital, rather than an outright merger.
“Summa may have a hard time, unless there’s another entity in the state that wants to be even bigger,” he said.
Bridging the gap
Summa’s leadership decided to explore its options for an affiliation from a position of strength, not out of necessity, Strauss said.
Last year, the health system launched a plan “to enhance our performance over the next 10 years by somewhere around a billion dollars,” Strauss said.
The strategy helps “bridge the gap” as federal programs and private insurers shift from a traditional fee-for-service system that pays hospitals and doctors for procedures, treatments and hospital stays to a new system that provides incentives to keep people healthy, Strauss said.
Hospitals could struggle financially if they don’t get paid as much for patients who still require hospital stays during the transition, he said. Summa estimates changes from federal health-care reform could cost it anywhere from $19 million to $90 million in revenues annually.
In response, Summa reduced planned expenses by $20 million last year — about $1 million more than the goal for the initial year, Strauss said. Roughly $5.3 million of the savings came from Medicare and Medicaid payments for adopting electronic health records.
The long-term plan includes such things as consolidating services, negotiating better contracts with vendors and changing the way the health system buys supplies.
For example, Summa expects to save $575,000 during the next five years by standardizing equipment in its laboratories across the health system, spokesman Mike Bernstein said. Summa also is saving several hundred thousand dollars by running some tests at specific labs, rather than at multiple sites throughout the system.
The initiative “keeps us stable moving between two worlds,” Strauss said.
And in fact, Summa’s bond rating recently was affirmed at BBB+ — an investment-grade rating — with a stable outlook by Fitch Ratings, which praised the health system’s ongoing efforts to boost financial performance.
Driven by strategy
“We don’t feel Summa is in a position in which they are driven to do this by a financial need,” Adam Kates, a director with Fitch Ratings who follows Summa, said of the ongoing partnership talks.
While previous industry deals typically involved a financially troubled hospital seeking a lifeline, talks today often take place between stable health systems such as Summa that are trying to plan for the future, Fitch’s LeBuhn said.
“More recently, what we’ve been seeing is a higher level of mergers, acquisitions and alignments that are being driven by strategy,” he said.
Hospitals are looking to improve patient outcomes, as well as share services over a larger revenue base, diversify their service area and leverage better payments from managed-care companies, he said.
Summa’s insurance arm, SummaCare, and its experience assuming financial risk for managing the health of a population should be attractive to partners that are looking to navigate industry changes, Kates said.
The health system has had many interested suitors over the years for SummaCare, which has 230,000 enrollees and generates about a third of Summa’s revenues, Strauss said.
Summa also is getting interest from potential partners because it has established an “accountable care organization,” Strauss said. The industry trend brings together doctors, hospitals and other providers to coordinate patient care and then share any savings achieved.
Whatever happens, Strauss said, leadership wants to move quickly so the ongoing talks aren’t a continued distraction for the health system and its employees.
“At the end of the day, we might do nothing,” Strauss said. “And that’s OK.”
Cheryl Powell can be reached at 330-996-3902 or email@example.com. Follow Powell on Twitter at twitter.com/abjcherylpowell.