Oregon broke new ground last week with the announcement that Legacy Health System, a private healthcare provider, would “merge” with the state-sponsored Oregon Health & Science University. While the term “merger” has a softer tone, make no mistake: this is an acquisition. Mergers are generally characterized as the joining of two entities to form a new organization, a new name, and a new governance structure. In this proposal, OHSU will be the surviving entity and will continue to be governed by its board of trustees.
In my previous career, hundreds of mergers and acquisitions crossed my desk. As a financial regulatory agency, our role in approval or disapproval was based solely on the safety and soundness of the transaction as it pertained to any negative impact on the federal insurance fund. In this instance, as a state entity, the insurance backstop for OHSU is ultimately the Oregon taxpayer.
Legacy Health lost a staggering $172 million dollars in the last fiscal year. It has been desperately trying to sell off assets or close facilities to promote consolidation, but the latter has been met with intense political pushback from local and state legislators. This spring the rating firm Moody’s downgraded Legacy’s debt outlook from stable to negative.
“An additional factor behind the negative outlook is our expectation that Legacy will fail its quarterly debt service coverage test on several bank agreements for the next couple of quarters.”
Moody’s, April 2023
OHSU has a solid balance sheet in its investment portfolio, but rating agencies are still increasingly cautious. On June 22 of this year, S&P Global maintained OHSU’s AA- rating but revised its outlook from stable to negative, citing OHSU’s ambitious capital strategy.
While OHSU has entered into partnerships with private entities before, a total acquisition of a large private business is an historic action. There is also a jurisdictional question. Legacy Health owns a large hospital, Legacy Salmon Creek Medical Center, in the state of Washington. It is like the state sponsored workers compensation fund, SAIF, buying its private competitor Liberty Northwest Insurance. Or how about the Oregon Lottery buying DraftKings?
The terms of the acquisition are vague and merit careful analysis. Will Legacy’s 14,000 employees now become state employees? Will they all be eligible for PERS, the state pension system, or will they remain in their current pension plan? In either case, OHSU will assume responsibility for the liabilities of existing pension funds. Many pension funds, like PERS, have significant underfunded liabilities. What is the status of Legacy’s pension fund?
Then there is the State Tort Claims Act. The Legislature extended special legal protections to OHSU by capping its exposure to costly lawsuits. Will that special treatment now be extended to the large expansion of Legacy’s providers? The extension could also help slow the rising cost of malpractice insurance to more providers, although that is likely not to be caused for a celebratory cocktail reception by Oregon’s trial lawyers.
Of course, there is also the concern of the contentious golden parachute. Mergers and acquisitions are almost always heralded as reducing redundancies and improving efficiency. Many Legacy executives may no longer find there is a need for their services. What will be the cost of securing their smiles and kind words at a future ribbon cutting? If OHSU can buy, could they later sell all or parts of its new collection?
And what consequences does this have for the competitive landscape of healthcare in Oregon? State and national hospital associations consistently tout these mergers as improving the quality of care and reducing costs. However, recent studies by Rand and Harvard conclude that most hospital mergers fail to improve quality and actually increase costs. If completed, this acquisition will create the largest hospital system in Portland and further expand OHSU’s already powerful political influence on state health policy.
As a publicly subsidized entity, OHSU will need to be more specific on WHY this acquisition will be in the larger public interest and HOW it will lower the total cost of care and improve quality in light of mounting evidence that consolidation often does neither. In fact, getting bigger often means more market leverage to demand higher reimbursement from payers.
On the flip side, there may be benefits. An influx of new PERS members could add immediate liquidity to the pension system to help meet cash flow needs required to meet monthly benefits to existing retirees.
Then there is the Intergovernmental Transfer Agreement which allows OHSU to transfer federal Medicaid dollars to the state to leverage (for a fee) even more federal matching dollars into the state’s healthcare system. Those dollars would likely increase.
A larger question is whether the Oregon Health Authority, which must give approval to any agreement, can actually conduct an arms-length analysis when the arms of OHA and OHSU are so tightly entwined.
Recent history serves as an example. Three years ago, at the onset of the COVID pandemic, then-Governor Kate Brown borrowed an OHSU executive to lead the state’s vaccination program. This spring, OHSU generously loaned another of its executives to help run OHA while Governor Tina Kotek searched for a new permanent director. Oh, and also: The OHSU Board of Trustees is appointed by the governor. It’s hard to see OHSU and OHA as anything more than two layers of the same cake.
The Oregon Health Authority is regularly criticized by health care providers for costing them millions of dollars each year due to reams of redundant reports and data routinely requested by various OHA divisions, which apparently don’t communicate with each other. Forgive the indifference of providers across the state when they are told to calm down, thinking that OHA will thoroughly critique the redundancies and efficiencies of the proposed consolidation.
Ultimately, it is not in the public interest to allow a major healthcare provider to become insolvent. The risk to patient access and care, as well as the potential economic impact on the region, demand a proactive solution. This is perhaps the best outcome. Any procurement must not only be transparent but also be conducted with a thorough inventory of the Legacy Fleet’s cargo before this state vessel sets sail and begins the unloading process.