Last month Princeton Healthcare System announced it was looking to form a partnership with a larger hospital system. According to Barry Rabner, CEO of the hospital, impending changes in healthcare reimbursement are driving the hospital to seek to join forces with a larger provider.

Rabner says it has not yet been decided whether the partnership would be a merger or a lesser form of alliance, and that the hospital had not even looked at potential partners.

Many of the changes brought about by the Affordable Care Act, better known as Obamacare, were aimed at driving down the cost of care and improving its quality. Overall, there is a shift away from the old model of medicare reimbursement — a fee for a service — towards paying healthcare providers for good health outcomes.

“We are rapidly moving from a fee-for-service to alternative payment mechanisms based more on value than just on delivery of individual pieces of service,” Rabner said. “We are leaning towards responsibility for managing the health of populations, and for taking the financial risk in doing all of that.”

The New Jersey Hospital Association says the changes brought about by the Affordable Care Act, as well as general market forces, are compelling hospitals all over the state to merge or form other kinds of partnerships with other healthcare systems.

The ACA provides financial incentives for hospitals to switch to different models for providing healthcare, especially Accountable Care Organizations, Patient-Centered Medical Homes, and other integrated networks. Kerry Mc­Kean Kelly, vice president of communications for the New Jersey Hospital Association, says that one provision in particular — a penalty for re-admissions — is driving healthcare organizations to expand their networks well outside of the hospital doors to incorporate physicians, nursing homes, rehab centers, and anywhere else patients would receive care before or after a hospital visit.

“There is pressure under the ACA and under healthcare redesign to be more integrated,” Kelly said. “That means that healthcare isn’t just isolated on the hospital stay. It’s a continuum of care, taking care of the patient from an appointment in a doctor’s office, through a hospital stay during the most acute period, to where the patient might be recovering at home.”

If a hospital is financially penalized if one of these elements breaks down, it follows that the hospital would want to be in control of more of those institutions. Hence, the drive to create bigger networks.

“In that kind of climate, when you’re taking care of that individual in all types of settings, it’s helpful for a hospital to be in collaboration with other providers,” Kelly said. “Providers are looking for new partnerships and collaborations with the goal of providing more seamless care for their patients.”

Rabner said being responsible for a larger continuum of care was a good thing, but that it would require the hospital to make changes. “We imagine that partnering with a larger system would enable us to provide that kind of care,” he said. “It would be challenging to do it independently.”

In addition to the ACA, there are longstanding market forces that make a merger or partnership attractive for hospital systems. When negotiating with insurance companies, hospitals with larger numbers of patients have more bargaining power, and therefore can charge higher rates.

Many critics say that because of this, hospital mergers could lead to higher insurance premiums and costs for patients.

Princeton Healthcare System borrowed $350 million to build its new Route 1 campus, and last year used the money of the sale of its old Witherspoon Street campus to reduce that debt to $300 million. The debt is in the form of loans from four banks. Rabner says PHCS is also looking to refinance that debt because of lower interest rates, and the hospital’s solid record of repayment so far.

The hospital’s finances, after all expenses and revenue accounted for, have showed overall losses recently, showing a $19 million loss in 2013, shortly after the hospital move, according to IRS documents. The numbers have improved since then, and Rabner said that if projections for the rest of the year prove accurate, PHCS will break even, or will show a loss of about $1 million. That figure includes accounting for asset depreciation, tallied at $25 million in 2013, which is not a loss of cash. Rabner said by one measure — cash flow margin — the system was in the black by 15 percent in 2015.

“Debt is not driving our interest in looking at potential partners,” he says.

Rabner said the hospital would be transparent throughout the process of seeking a partner, and would keep the medical staff, employees, donors, and the press informed as it goes along. “Some people might suspect that we’re farther along than we’re describing, and we’re not,” he said. “This is where we are, this is why we’re doing it, and we expect to continue to keep everyone up to date.”

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