The two largest health care providers in Santa Barbara are in talks to merge just weeks after the city’s only free clinic system said it may shut down, potentially marking the emergence of a dominant market player with unprecedented power in price negotiations with private insurers and the government.

Sansum Clinic and Cottage Health System said June 18 that they are exploring options to combine the two organizations, which each employ thousands of people and see tens of thousands of patients a year.
The deal would combine Cottage Health System’s three hospitals — in Santa Barbara, Goleta and Santa Ynez — and Sansum’s 23 ambulatory sites, which provide primary care and specialized out-patient care.

The planned deal could cap off a dramatic consolidation in the health care industry in Santa Barbara. Last year, Sansum merged with the Cancer Center of Santa Barbara. More recently, Santa Barbara Neighborhood Clinics, the primary provider of care to low-income residents without health insurance, said it is struggling to keep its doors open and could shut down as early as July 1.

When the Affordable Care Act takes effect next year, individuals and small business in the Santa Barbara area would have the option to buy plans from Blue Shield, Anthem and Kaiser Permanente from Covered California, the state insurance exchange. If the Neighborhood Clinics collapse and the Sansum-Cottage deal succeeds, it would leave only one dominant provider that all three insurers would need to negotiate prices with.

The leaders at Sansum and Cottage stressed that continuity of care, one of the mandates of health care reform, would be the primary benefit to patients.

“We need to really consider the backdrop of health care in general,” Sansum CEO Kurt Ransohoff told the Business Times. “With the Affordable Care Act, there are changes going to come to the health care landscape.”
Financial terms of the proposed merger were not disclosed. Both groups would continue to operate under their current names, Ransohoff said.

“Further improvements in quality, outcome, and affordability will require formal collaboration among physicians and hospitals,” Cottage Health System CEO and President Ron Werft said in a statement. “As health care reform takes hold, we are taking the necessary steps to meet the needs of patients in our communities. Sansum Clinic has the mission, infrastructure and track record to play an essential role in meeting these demands.”

Low-income clinic in peril

Meanwhile, the Neighborhood Clinics, which currently serve the area’s un- and under-insured, held an emergency press conference on May 22, saying it would have to shut down by the end of July if it couldn’t find at least $1.5 million in funding.

The clinics, which see about 17,000 patients per year, currently run a $200,000 deficit per month. Most funding comes from donations, which can be volatile. The group has retained a health care consulting firm to help it draw up a business plan to guide its finances going forward.

“I’m confident that with the help of the community and foundation support, they’ll get their fiscal house in order and they will still be an integral part of what’s going to happen in this town,” Hutton Parker Foundation President Tom Parker told the Business Times. Parker has been assisting SBNC indirectly, while Cottage has underwritten the cost of the group’s business plan consultation.

“The merger is just something that needed to happen between Sansum and Cottage, no doubt,” Parker said. “To the same tune, we also have to realize that the Neighborhood Clinics are an integral part of the community. We, as a community, along with Cottage need to reach out to them to keep them open.”

Consolidation trend

Health care experts expect consolidation among providers to be a trend that continues under the Affordable Care Act.

“These kinds of mergers and partnerships are happening all over the state,” said Jan Emerson-Shea, a spokeswoman for the California Hospital Association. “They’re not uncommon and they’re very much driven by the Affordable Care Act.

There are financial incentives and financial penalties —  for  hospitals and clinics and other providers — that call for them to work more closely together.”

Some deals “are formal mergers, some are less formal affiliations or partnerships,” she said. “It’s an attempt to really streamline the delivery of health care and reduce duplication.”

Although hospital mergers are overseen by the Federal Trade Commission, which deals with antitrust issues, the federal government has indicated it would like to see more partnerships between providers, Emerson-Shea said.

Many aspects of the proposed merger, including regulatory and antitrust, still need to be worked out, Ransohoff told the Business Times. “A lot of these are details that we still need to look at,” he said.
The organizations are performing due diligence on the transaction until Oct. 1.

It is unclear whether the collapse of the Neighborhood Clinics and a Sansum-Cottage merger would result in market concentration problems.

But antitrust laws and the Affordable Care Act are set to collide. The health law calls for streamlined “accountable care organizations” that will aim to let fewer patients slip through the cracks and develop serious, and expensive, conditions.

Even though there have been more than 300 hospital mergers since 2007, the FTC has intervened in only a handful, Maureen K. Ohlhausen, one of the commissioners, said in March at a speech to the National Policy Forum for America’s Health Insurance Plans.

“Hopefully, this will not be taken as express support for further financial consolidation by providers,” Ohlhausen told the audience in prepared remarks. “Enforcement agencies  like the FTC will have to evaluate any such arrangements carefully, so as to mitigate the possible adverse effects of potential increases in provider market power, to prevent tacit pricing coordination, and to minimize the risk of outright collusion.”

Major employers

Sansum had 1,040 employees as of April, according to Business Times records, and Cottage had about 2,600 employees between its three hospitals. Ransohoff said Cottage’s work force figures have climbed and are now closer to the 3,200-employee range.

If the two organizations combined and no jobs were affected, its roughly 4,200-employee headcount would put the organization in a position to rival UC Santa Barbara as the second-largest employer in Santa Barbara County.

Access to capital

Both Cottage and Sansum are nonprofit groups, although Sansum is what’s called a 1206 medical foundation under the California Health & Safety Code.

Ransohoff said that makes Sansum an anomaly. Most  such medical foundations are already affiliated with a hospital. The only other 1206 health care organization that also operated independently was Facey Medical Foundation in Mission Hills. That group formed an affiliation with Los Angeles-based Providence Health & Services last year. “That left us as the only independent [foundation],” Ransohoff said.

Under the terms of the proposed deal, Sansum would serve as the medical foundation to the nonprofit Cottage Health System. The hospital would become the “corporate member” of Sansum Clinic, bringing the enterprise into the hospital’s system, according to a statement, and would “assure the availability of capital needed to expand health care services for the community through the work of Sansum Clinic and its affiliated physicians.”

Sansum plans to build a new cancer center, after combining last year with the Cancer Center of Santa Barbara.

The Cottage deal would provide better access to capital for the cancer center project, Ransohoff said.