Merger of BJC and Saint Luke's will likely raise hospital prices in Missouri, analysts say [St. Louis Post-Dispatch]

Jun. 26—ST. LOUIS — The planned merger of BJC HealthCare and Kansas City-based Saint Luke's Health System could be the biggest deal for the St. Louis region's largest employer and its 30,000 workers since the 1993 combination of Barnes-Jewish Inc. and Christian Health Services created the BJC system.

And the tie-up could reverberate well beyond BJC's $3.3 billion payroll to the paychecks of workers across the state.

A review of the hospitals' financials indicate the merger of the two tax-exempt health care chains would create a clear market leader in Missouri. BJC is the largest St. Louis health system, with 40% of the market's patient discharges and $6.3 billion in total revenue. Saint Luke's is the No. 2 Kansas City system, with nearly 20% market share in the state's second-largest metropolitan area.

"That gives them huge leverage in terms of negotiating power with the insurers," Ryan Barker, an independent health care policy consultant based in St. Louis and former director of health policy at the Missouri Foundation for Health, said shortly after the deal was announced on May 31. "That's what I always worry about with consolidation is the impact on pricing."

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Health care experts say the deal, announced May 31 and expected to close later this year, is likely a play to give the combined system greater leverage in its negotiations with employers and insurers in Missouri. Those health care payers will have more incentive to agree to hospital price demands in order to keep both the St. Louis and Kansas City systems in their networks.

"It continues to be the case that the hospitals are trying to gain the upper hand on the insurers," said John Romley, a professor at the University of Southern California who studies health policy and economics. "That was true 10 years ago. That's true today."

And health economists say there is clear evidence that hospital mergers lead to higher prices, which trickle down to consumers.

"Insurers facing higher provider prices increase their premiums to employers," Martin Gaynor, a leading health economist at Carnegie Mellon University, testified in 2021 during a U.S. Senate committee hearing. "Employers then pass those increased premiums on to their workers, either in the form of lower wages (or smaller wage increases) or reduced benefits."

Antitrust regulators have largely focused on hospital mergers or acquisitions within metropolitan areas. The BJC and Saint Luke's combination is the latest in a trend of health systems reaching beyond their core markets for new assets.

"The fact that these are cross-market mergers I think will help them when it comes to the scrutiny that will be coming their way," Romley said.

But, while limited, other research is beginning to point to the same upward cost impacts from cross-market mergers. A 2019 paper published in the Rand Journal of Economics authored by leading health economists found that cross-market mergers within a single state can lead to hospital service price increases of 7% to 9%.

Tim Greaney, a professor at University of California Law, San Francisco, who studies antitrust issues in health care, said the idea is that if the two, merging systems have a common insurer, the hospital systems end up with more leverage in negotiations, because the insurer may not be able to afford losing one of the system's major hospitals from its network.

There have been a few cases based on this "cross-market theory," Greaney said, but it hasn't been widely litigated. And antitrust regulators' ability to prove cost impacts in any specific case involves "just tons of investigation and fact-finding."

The ultimate impact of the merger "kind of depends on what the competition does" said Louise Probst, executive director of the St. Louis Area Business Health Coalition, which represents many of the area's largest employers in negotiations with health care providers. Other competing hospitals might see the need to link up with larger systems in response.

"If it goes unchecked we're gonna have a handful of large health systems that deliver care all across the United States," Probst said.

While the literature doesn't indicate much if any consumer cost-savings from mergers, Probst said the St. Louis region's hospitals have at least begun to talk about cost inflation with employers. New federal rules are finally requiring hospitals to publish service prices in an attempt to shed some light an opaque market, and Probst said St. Louis hospitals this year for the first time agreed to voluntary cost increase targets of 5% in 2023.

It's a first step, she said. But it's one that would be much harder if senior leadership lived in Minneapolis, Chicago or Boston.

"The silver lining is it was two in-state health systems and not out-of-state," Probst said. "We can still get in a room with them. They still live in our community."

'Rough couple of years'

The hospitals aren't saying anything beyond their press release announcing the merger. The announcement said both systems will maintain their distinct brands and operate from dual headquarters in each market. Richard Liekweg, president and CEO of BJC, will serve as CEO of the integrated health system, and the initial board chair of the integrated system will come from Saint Luke's.

BJC and Saint Luke's both declined to comment about the deal or the drivers behind it. Asked about academic consensus that hospital mergers raise prices, a BJC spokeswoman pointed to a statement from the American Hospital Association given to the U.S. Senate's Finance Committee earlier this month.

In it, the trade group argued that mergers help hospitals manage "extraordinary financial pressures" in recent years, and that they can reduce costs and increase quality. Testimony from the group to Congress in 2021 argued the country's few large health insurance companies pocket the savings the hospitals manage to wring from mergers.

Financial reports from BJC and Saint Luke's indicate they, like other hospitals, have indeed taken a hit to their profits. (Both are nonprofit organizations, but they, like other nonprofit hospital systems, typically take in millions of dollars more in revenue than they spend providing care and pay their executives multimillion-dollar benefit packages).

After missing out on lucrative surgeries patients deferred during the pandemic, the health systems emerged from COVID-19 to the fast-rising wages and supply costs of an inflationary market.

"It's been a rough couple of years," Barker, the local health consultant, said. "The hospitals have been in the red and they're looking for anything to sort of bring them up in terms of revenue and efficiencies."

At BJC, while operating revenues increased by $293 million in 2022, it barely was able to keep up with rising expenses and reported an operating income of just $25 million on the year compared to $153 million in 2021. After more than $100 million in investment losses and write-downs of other assets, it reported a total loss of $170 million last year, compared to a gain of $779 million in 2021.

However, its financials for the first quarter of 2023 show it swinging back to profitability. Revenues jumped $239 million compared to the first three months of 2022, while expenses rose only $133 million. Operating income swung from a $46 million loss last year to a $60 million gain. Combined with other income from investments, BJC reported $181 million in net income last quarter, versus a $91 million loss in the same period in 2022.

'A long engagement'

Saint Luke's also recorded a less lucrative year, with operating income falling from $147 million in 2021 to just $7 million last year. Combined with investment losses and pension costs, it recorded a net loss of $114 million in 2022, versus a gain of $252 million last year. In the first quarter, operating income fell below $1 million, compared to a $7 million gain in the same three months last year. Investment gains pushed total income for the quarter up to $32 million compared to a $5 million loss last year.

Saint Luke's was historically the leading hospital system in the Kansas City area. But about 25 years ago, it began to face increasing competition from the University of Kansas Medical Center, which has become the largest hospital in the region, said John Leifer, a Kansas City-based health care consultant and former senior vice president of strategic planning and chief marketing officer at Saint Luke's.

"Saint Luke's was always king of the hill," Leifer said. "Then KU woke up, got its act together and became an extremely formidable competitor. And I think Saint Luke's needs something that begins to shift the momentum once more in its direction as a preeminent provider in this marketplace."

Saint Luke's faces steep competition with KU for cancer care, Leifer said, and BJC's highly-rated cancer treatment center, Siteman, does not have as large of a foothold in the Kansas City market as other premier treatment options such as those offered by the Mayo Clinic in Rochester, Minnesota, and MD Anderson Cancer Center in Houston.

"Siteman's brand is not as strong as it could be in the Kansas City market," Leifer said.

The two systems have already been working together for over a decade in the BJC Collaborative, formed in 2012, which facilitates cost savings through group purchasing and also shares best practices on care. Leifer said the systems obviously saw some benefit in combining.

"They've had more than 10 years to test this hypothesis," Leifer said. "It was a very long engagement and now they're getting married."

Annika Merrilees of the Post-Dispatch contributed to this report.

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