Making flanks something for the enemy to worry about: the Cleveland Clinic-Promedica deal and the emerging battle for northern Ohio

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Summary

  • Earlier this year, Catholic Health Partners, the largest provider in Ohio, signed two deals which put it on a competitive collision course with Cleveland Clinic
  • Cleveland Clinic has few options to further solidify its already strong position inside Cleveland, so it had to look elsewhere for a competitive response 
  • With a clinical affiliation with Promedica, Cleveland Clinic can competitively threaten Catholic Health Partners in Toledo / northwest Ohio
  • If Cleveland Clinic’s relationship with Promedica matures into a full affiliation, they could acquire Promedica’s Ohio insurance license, opening a whole new range of potential strategic pathways for Cleveland Clinic

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According to General George S. Patton, “some [..silly…] fool once said that flanks must be secured and, since then, […silly people…] all over the world have been going crazy guarding their flanks. We don’t want any of that in the Third Army. Flanks are something for the enemy to worry about, not us.” In our view, Cleveland Clinic has taken that advice to heart in its recent deal with ProMedica. [FYI, the ellipses remove some classic Patton color to preserve our PG rating]

Cleveland Clinic
Cleveland Clinic operates 1,300 beds in its own facilities and another 2,100 beds in affiliated, neighboring systems (such as Fairview, Hillcrest, and Lakewood). Altogether, the Cleveland Clinic system in Ohio sees 154K admissions, 420K ER visits and a staggering 5.6M outpatient visits. It has a long tradition of competing vs. its local rival, the University Hospitals system, using the usual tools of provider competition (capacity expansions both downtown and in the area, and strengthening tied with independent referring physicians) and with neither achieving any breakthrough advantage.

Cleveland Clinic is more than a northern Ohio provider, of course: it operates on the national stage and the vast majority of the 4.3M outpatient visits and most of the 53K admissions seen at Cleveland Clinic’s Ohio facilities (we estimate 25-35K admissions) come from outside the local market. Further, Cleveland Clinic has programs for collaborating with other systems, notably: affiliations with its Heart and Vascular Institute and its Quality Alliance. This Alliance, which couples care standardization with support in reimbursement negotiation, saw a vast expansion earlier this year when Cleveland Clinic signed a deal with Community Health Systems. This deal expanded the program 3-fold in physicians and beds and added 22 new states to where Cleveland Clinic’s has an affiliate presence. Further, if Community Health Systems closes the prospective deal with HMA, the Quality Alliance will be even larger.

Catholic Health Partners marches on Cleveland Clinic’s home market
All this activity at the national level may have prompted local competitors to wonder if Cleveland Clinic was properly minding the local Cuyahoga County store. Stepping up is Catholic Health Partners (CHP), based in Cincinnati. CHP is the largest system in Ohio with 24 hospitals, $3.6B in revenues and $120M in operating margin in Ohio and partially in Kentucky. It is building its own health plan (HealthSpan) which will sell individual and small group policies for Ohio starting in 2014. Until recently, it did not directly compete in Cleveland, but did nibble around the edges with a base of hospitals in Lorain (to the west of Cleveland) and in Youngtown (to the south of Cleveland) (see map: Cleveland Clinic in green, CHP in red).

Two deals CHP has made so far this year, however, suggest they are taking Cleveland Clinic on in the home turf:

Once (and if) finalized, these two deals should provide CHP with a platform to play for the Cleveland market’s 2.1M lives. Insurance will likely being the sharp point of the spear. CHP’s HealthSpan – bolstered by the Kaiser plans contracting and scale – is going after individual and small group, segments typically the most willing to make trade-offs between affordability and breath/brands in the network. A product which excludes Cleveland Clinic but is also highly affordable could get some real traction along the I-80/90 corridor running long Lake Erie’s southern shore.

Cleveland Clinic threatens CHP’s northwestern flank
There’s not much left in the local market for Cleveland Clinic to acquire or affiliate with to directly block the CHP competitive threat. Medical Mutual of Ohio already offers products focused just on Cleveland Clinic, so there is no new mirroring counter-move in insurance. Instead, Cleveland Clinic had to get CHP thinking about its flanks, something the Promedica deal seems well designed to do.

ProMedica (service areas colored orange on the map) is the most powerful integrated delivery system centered on Toledo and consisting of 1,700 physicians, 11 hospitals with about 1.6K hospital beds with 72K admissions. In 2011, the system earned $1.4B in revenues and $80M in operating income. Further, Promedica also has its own health plan with 180-190K lives (making it #9 or so in Ohio but very strong in its local market). [Note that ProMedica’s acquisition of St. Luke’s was challenged by the FTC and is still being litigated. Excluding this hospital and Promedica’s two facilities in Lenawee County, Michigan, the system has 1.2K beds and sees 55K admissions].

By launching exploration of clinical affiliation with Promedica (starting with the Quality Alliance), Cleveland Clinic is posing a major threat to CHP’s Mercy system. The Mercy Toledo system is well behind Promedica in size and performance, with 6 hospitals with ~900 beds and 39K admissions (on the map: locations are either in red where facilities are stand-alone or red-orange mix where Mercy competes vs. Promedica). None of these facilities are ranked either in Ohio or as high-performing in specialties. In contrast: while Promedica lacks stellar rankings (its flagship facility – the 600-bed Toledo Hospital – is ranked #22 in Ohio and high-performing in 6 specialties, its other facilities are unranked), a relationship with Cleveland Clinic can burnish the quality halo from a consumer point of view. The Quality Alliance relationship may also help Promedica’s reimbursement negotiations with Medical Mutual of Ohio, the #3 health plan in the state which is friendly with Cleveland Clinic and supportive of its approaches (see, for example, its support for Cleveland Clinic’s Community Physician Partnership).

The Quality Alliance relationship is, no doubt, just the first step as Promedica and Cleveland Clinic form a tighter bond. Bringing the two systems into closer affiliation could create a northern Ohio network much stronger than CHP’s (both from perspective of capacity and branding). It could also give Cleveland Clinic access to an Ohio insurance license. Such a move might cause some friction with Med Mutual (which offers insurance products focused on Cleveland Clinic) in the near and medium term, but would be consistent with the direction many providers are taking. And, who know? Given Med Mutual’s recent trimming of its Georgia, South Carolina and Indiana business (sold to United), maybe it will tie itself even closer to the Cleveland Clinic through a merger.

The (highly speculative) scenario of competing against a Cleveland Clinic coupled with Promedica and Med Mutual should certainly make CHP start worrying — not just about its flanks but also its core. And the prospect of Cleveland Clinic starting down the path of backward integrating into the health insurance business should give many other players — in Ohio and elsewhere — pause as well.