Wednesday, September 11, 2013

The winner's curse

As we look across the US and see large academic medical centers acquire community hospitals, we have to wonder whether they will someday regret their deals as they experience what's called "the winner's curse."  Here's the definition from Wikipedia:

The winner's curse is a phenomenon that may occur in common value auctions with incomplete information. In short, the winner's curse says that in such an auction, the winner will tend to overpay. The winner may overpay or be "cursed" in one of two ways: 1) the winning bid exceeds the value of the auctioned asset such that the winner is worse off in absolute terms; or 2) the value of the asset is less than the bidder anticipated, so the bidder may still have a net gain but will be worse off than anticipated.

How does this relate to the health care world? Well, let's say you are a community hospital in a locality that is strategically important for two or more competing academic medical centers who are doing their best to assemble properties to create Accountable Care Organizations. (Recall that the ACOs want scale to create a larger risk pool to deal with the introduction of risk-based payment regimes from insurers and government payers.  They also want to own medical facilities to treat patients across the spectrum of care. Finally, of course, they want a bigger guaranteed referral base to feed the beast, the academic medical center itself.)

If you are the normal community hospital, your earnings for many years have been substandard, and you have slowly been decapitalizing your plant and facilities.  You just can't earn enough of a margin to cover depreciation based on original cost, much less renew and replace capital equipment at its current price.  You also have trouble recruiting and retaining the best doctors to serve your patients because you cannot offer salaries that compete with those paid in the big city, just a few miles away.. You are, in short, looking for a sugar daddy to acquire you and be a source of capital and also cover your risk in those new risk-based contracts.

You let it be know that you are up for adoption, and the bidding war begins among the region's academic medical centers.  Since these are all non-profit organizations, there is not a "price" that gets paid from one party to another, but there are commitments that must be made to win the auction.  The mother ship must promise to invest a certain number of dollars in renewal and replacement of buildings and equipment; it becomes the guarantor of your outstanding debt and takes on the obligations of your retirement system; it promises to help with recruitment and retention of local primary care and specialty doctors; and it must permit you to have representation on the governing board of the ACO.  Your community hospital board of trustees sits in the catbird seat as the big players around town come a-courting.  The big hospitals may even bid against themselves to make a stronger case, fearful that the other guys are doing the same.

The acquisition is made. A lot of time and effort is devoted to clinical integration, business systems integration, and governance integration.  So much so that the administration of the academic medical center neglects the kind of process improvements that are necessary to increase quality, safety, and efficiency in the mother ship.

After a while the folks in the city come to realize that their acquisition is not a profit center.  It is a cost center.  Since this takes a few years, by then the CEO who negotiated the deal is off to another job, but the board of trustees remains, wondering how their new CEO is going to solve the problem of a steadily growing erosion of earnings.

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