Five possible explanations for MultiCare’s investment in PSW

MultiCare’s recent “minority membership investment” in Physicians of Southwest Washington (PSW) continues MultiCare’s march of expansion. This follows its major acquisition in Spokane of the two CHS hospitals there, Deaconess and Valley, along with the Rockwood Clinic.

PSW is one of the two remaining IPAs of significance following the managed care infrastructure creation of the 1990’s.  (Northwest Physicians Network is the other.) In the last few decades, PSW has been primarily focused on providing claims payment services for Thurston and Lewis County physicians that had delegated risk contracts with Medicare plans.  PSW was a founding member of the Medicare Advantage plan Puget Sound Health Partners, now known as Soundpath Health.

That MultiCare has made this investment in Thurston County managed care infrastructure is somewhat afield of its current footprint.  Normally, that might raise some concerns.

That said, the Spokane-area acquisitions were even farther afield than Thurston County.  Yet, that move seems to make sense as part of a broader expansion strategy, one that seems to be playing out relatively smoothly there.

Dr. Chris Kodama is a very smart, savvy operator in the managed care space and leads MultiCare’s Connected Care managed care infrastructure.  In recent comments in an edition of “What They’re Watching,” Kodama cited the importance to try to build collaborations where they may not have made sense before.

“…the willingness to take the calculated leaps of faith necessary to establish trusting relationships with perhaps unconventional partners that either we hadn’t considered before because it just wasn’t in our previous thinking relevant, or maybe there were competitive market forces at play that might have made that more difficult.”

So, putting this PSW acquisition in a broader strategic context raises some interesting questions about where MultiCare may be heading, and all of them seem to point potentially to some creative thinking at the Tacoma-based hospital system.

 

1.  This gets MultiCare additional managed care infrastructure

If the future is one of greater value based payment models, then acquiring the infrastructure to manage those contracts makes sense.  It’s actually much harder to build that people might think, particularly if one is used to working in the provider space.

A secret of the value based payment world is that while those contracts are difficult and costly, there isn’t a great deal of money there on the upside.  Real upside from value based payment models comes when you can also manage the infrastructure to pay the claims.  In other words, having the money in a VBP contract to also pay the claims for services provided under the VBP contract means there is much greater skin in the game for the provider. It also means losses can be amortized across a broader revenue stream, one that includes the large administrative payment to cover claims costs.

This is also true with credentialing, customer service, marketing, and other administrative services that can be delegated.

For MultiCare to have real success in managed care, it needs to get upstream not just on risk but on the administrative infrastructure that allows it to coordinate and pay for those services.

It already has some infrastructure through MultiCare Connected Care.  This acquisition supplements that.

 

2.  This could help with PEBB contracts

MultiCare is an active participant in the Puget Sound High Value Network, a network of providers that serve, among others, the Washington State Health Care Authority’s public employee contract.

Because so many state employees are based in Olympia, the footprint of PSW’s physician community aligns well with the PEBB beneficiaries there.  Having a geographic footprint in Thurston County is really critical to the success of the PEBB contract.

This connection between MultiCare and PSW physicians – rather than PSW itself – could create a higher value, more tightly coordinated referral stream between the Thurston County physicians and the Pierce County hospital.

 

3.  Maybe this is, in part, about Providence?

MultiCare and Providence are now direct competitors in the Spokane area.  The pressures in that market are mixed.  On the one hand, the market for hospital services is certainly a zero-sum game for both MultiCare and Providence.  If one wins market share, the other loses.  On the other hand, the geographic expansion of the market is huge.

The next big city after Spokane heading eastward is Minneapolis.  So, the patient catchment area there is huge, enough for both systems, some argue.

Nevertheless, the competition there is increasing in intensity.

In theory, a closer arrangement between PSW and MultiCare could result in complex referrals directed away from Olympia-area hospitals, like Providence St. Peter, and to MultiCare in Tacoma.  That erosion of market share for hospital services at Prov St. Peter could be part of an overall strategy to focus on Providence in Washington State.

While it seems unlikely to me that a significant number of referrals will be diverted as a result of this transaction, it does seem plausible that MultiCare is increasingly focusing on responding to the size of competitors like Providence.  So, perhaps there is something to this idea about a response to Prov, but it doesn’t seem too compelling on its face.

 

4.  Maybe this is, in part, about United-Optum?

United-Optum certainly has a significant footprint in the south Puget Sound.  Optum runs the behavioral health organization (BHO) in Pierce County, meaning they are funded by the state to manage moderate to severe mental health benefits in Medicaid.

United has strong enrollment in Pierce County on the Apple Health side of Medicaid for traditional physical health services, with the second highest plan market share there, according to the HCA.

United stands to gain even more market share there with the recent acquisition by Optum of Northwest Physicians Network (NPN) as part of its deal with DaVita.  It will give it a stronger footprint there, particularly as financially integrated managed care (FIMC) comes to Pierce County in 2019.  As United continues to gain leverage in Pierce County, in theory it could give it a position to pick and choose its hospital partner in the two-system county.  Perhaps it’s concerned that NPN will, through NPN’s managed care infrastructure, divert patient referrals away from MultiCare.  MultiCare is strongly aligned with Molina in Pierce County.

Perhaps more appropriately this could be seen as a defensive play against Optum.  As Optum buys up provider groups, this might be an effort by MultiCare to try to secure its southern flank.

United-Optum is certainly on the move in Pierce County.  But, like the Providence notion above, I’m not sure this is a compelling enough reason for MultiCare to invest in PSW, a full county away from its home turf.

 

5.  I think Legacy Health in Portland is the perfect M&A partner for MultiCare.  Maybe this is, in part, about a merger there?

I’ve highlighted this before: I think these two organizations are perfect dance partners together.  They should be talking about merging for a host of reasons.

Both Legacy and MultiCare need some additional scale to be able to continue to weather the turbulence of health care.  Both are trying to enter the managed care space, an effort Legacy has made great steps in doing.  Both systems have a children’s hospital, are roughly the same size, and both operate in markets that are complementary yet not competitive (important for anti-trust reason).

Legacy’s northernmost hospital is at Salmon Creek, just north of Vancouver, Washington, in Clark County.  PSW’s southern most reach is in Lewis County.  While not immediately adjacent, the two systems are practically knocking on one another’s door.  (Wouldn’t “Lewis and Clark Health System” be a good, new brand for a new Washington-Oregon system?)

So, it’s possible this begins to build a geographic bridge for a future partnership between the two organizations.

However, if that were a compelling reason, wouldn’t that mean MultiCare would also be looking for a “geographic bridge” to Spokane?  The notion seems futile on its face.

As above, this idea may have some merit, but on its own does not appear to be a compelling case for a MultiCare investment.

 

Bottom line

Having run through a few possibly explanations for this investment, it seems the most meaningful strategic context for MultiCare’s investment in PSW is its interest in developing its managed care infrastructure.  Other considerations might have some interest or merit, but on their own don’t seem to be compelling.

If that’s the case, this means MultiCare is amplifying its move towards value based contracting where many other systems are withdrawing (or trying to).  That will further cement MultiCare’s dynamism in the Washington State market, and perhaps give it even more tools to change the way care is delivered and financed in Washington State.