On Monday, Oregon Health and Science University and Legacy Health announced they are mutually walking away from an effort to combine the two healthcare organizations. The merger was first announced last August, when OHSU agreed to acquire 8 hospitals, $3 billion in assets and promised a whopping $1 billion in upgrades to Legacy facilities. The merger garnered scrutiny from a citizen review committee and public comments have reflected opposition to the deal. Amelia Templeton is OPB’s Healthcare reporter and has been following this story. She joins with the latest.
Note: The following transcript was transcribed digitally and validated for accuracy, readability and formatting by an OPB volunteer.
Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. Back in 2023, two of Oregon’s largest hospital systems announced they wanted to merge. Oregon Health and Science University (OHSU) and Legacy Health said that they would be stronger together. The proposal got a lot of pushback over the last year-and-a-half, but as the Portland Business Journal recently reported, OHSU spent about $16 million in its effort to gain approval. The Oregon Health Authority was expected to release its final decision soon, but that’s no longer necessary. On Monday, OHSU and Legacy called the whole thing off, saying that the proposed merger was over because of “the evolving operating environment.”
Amelia Templeton is OPB’s health reporter. She’s been covering the story for a while now, and she joins us to talk about this latest twist. Welcome back.
Amelia Templeton: Thanks. Happy to be here.
Miller: I want to start with some tape from the interim president of OHSU, Steve Stadum. He was on Think Out Loud in February, so just three months ago. I asked him why he thought the merger was necessary. This was part of his answer.
Steve Stadum [recording]: In my mind, it’s necessary so that we can deal with tremendous wait times in Oregon, particularly in Portland, which is twice the nation’s average, while improving health equity and outcomes for patients. The status quo is not working, Dave. It’s really clear to everybody, I assume to you as well. And what we’re doing here is combining the best academic medicine, capabilities and deep expertise, along with a very good community health system, bringing those together. We have lots of collaborations already with Legacy, and this will just take that to a different level.
Miller: So that was just three months ago. What were the specific arguments for how this proposed merger would lead to those better outcomes for Oregonians?
Templeton: OHSU is really over capacity, completely full, especially in the emergency department. The sort of flip side of that is they have a lot of expertise in bed management. They’re good at running at close to 100% capacity. And I think they believed that if they could apply that system to all of Legacy’s beds, they could generate some excess capacity, they could see more patients between the two systems overall and make more money in specialty care, reduce waits.
There’s also an interesting argument for some parts of the system that scaling up would be really good. Take the children’s hospitals. There aren’t that many kids in Oregon and there are even fewer kids who need, say, a cardiac pediatric specialist. So if you combine those two systems, maybe those doctors are seeing higher volume, they’re getting better at what they do, it’s more efficient overall.
But I think the core argument was really Legacy needs a bailout, and if it’s not OHSU, the only other plausible buyers are out of state for-profit players. And that’s not something Oregon has embraced.
Miller: What kind of pushback was there?
Templeton: Tremendous pushback, almost right off the bat. I think the central issue was how large of a market share OHSU and Legacy would have had combined. This would have created the largest health system in the state. They would have had an effective monopoly over some types of specialty care. And we would have gone from four options – Kaiser, Legacy, OHSU and Providence – to three in the Portland area.
Miller: Who was supporting the merger then besides the leadership of the two hospital systems?
Templeton: The most important support came from healthcare worker unions. OHSU had offered pretty generous terms to win their support. They’d signed a deal that would have probably meant base pay increases for Legacy’s union employees, plus no layoffs for a year after the deal closed, and then very generous severance pay for anyone laid off in the second year. There was also some other staff between the two institutions that supported it. And I would say kind of lukewarm support to neutrality from other healthcare systems in the area, who just didn’t see a lot of other good options.
Miller: From what I’ve read, just two regulators at the state level could have nixed this merger: the Healthcare Market Oversight Unit and a branch of the Oregon Department of Justice. Do you have any sense as to where they were leaning? If the merger hadn’t been canceled, what regulators were going to say in just a few weeks?
Templeton: I don’t know. They have yet to block a merger like this outright, although they have imposed conditions on a lot of other transactions. This is a relatively new program.
But the deal did face one significant blow during this review process. There was a community review board, a group of volunteers who did a really deep, thorough examination of the transaction. Their job was to look at the impact on access to care and cost of care for ordinary Oregonians. And they came out opposed to the deal. They said they were concerned that prices would increase more if the transaction went through than if it didn’t and that would translate into higher premiums or out of pocket costs for people on commercial insurance.
Now, OHA wasn’t necessarily bound by that decision, but it was certainly part of the bigger picture.
Miller: So all this is the background. Then on Monday, we got a brief statement from Steve Stadum – the interim president of OHSU who was on our show three months ago – absolutely in support, publicly at least, in this merger. He said that they had changed course after “careful consideration of the evolving operating environment.” Legacy’s leader talked about a “mutual decision to terminate the proposed combination.” Neither hospital got into specifics, which leaves us in the realm of conjecture.
So first of all, how did the operating environment evolve?
Templeton: Yeah, I think we can talk about what we know. So, you have to start with OHSU’s financial performance. Last year, OHSU laid several hundred people off, didn’t fill hundreds more open positions. That was after they had lost about $100 million on their operations that year. Their goal had been to get closer to a balanced budget in the current fiscal year and instead their most recent financial reporting, just in the last month, showed they were looking at another $100 million shortfall, even after going through those painful layoffs.
And then in addition, OHSU’s credit rating was downgraded by the big three ratings agencies. And you have to remember, this merger was not projected to make money for anybody in the short-term. It would have been a number of years before they projected being able to turn a profit and it would have tied both entities’ hands with the labor agreements that had been signed.
Miller: Meaning that layoffs of nurses, which is a huge cost, OHSU couldn’t have done that because to get union approval, they had said we won’t lay anybody off for a year. So that was off the table in terms of ways to save some money.
What else do you think might have led to this decision?
Templeton: They’ve said circumstances have changed. What’s changed? Well, one of the biggest changes was the election in November. Funding that OHSU has relied on for decades that’s been a strength of their financial picture is suddenly in question. They get hundreds of millions of dollars in grants from the National Institutes of Health. President Trump is seeking to cut NIH grants at the national level by about a third. And then on top of that, we also have Republicans in Congress who’ve proposed steep cuts to Medicaid. So I think that’s a huge change, just the overall uncertainty of future federal support.
Miller: I’ve been a little bit confused by how potential cuts to Medicaid could be playing into this. We should say we don’t know if those cuts will happen, we don’t know what form they would take if they do. Just in the last 24 hours, Speaker Mike Johnson has said, “no, I don’t support some of the methods of cutting hundreds of millions of dollars from the system” that more hardline Republicans in his caucus have been talking about. So there’s huge uncertainty.
But it does seem clear that if some version of major Medicaid cuts happen, they would affect both a merged OHSU/Legacy system and the existing unmerged ones. So how do you think the possibility of these cuts affected the merger?
Templeton: Oh, it’s such an interesting question. It’s also, like you said, like a mess to try to untangle.
Here’s what I can tell you: Medicaid is at the heart of why some people thought this merger might have worked financially. And it’s because OHSU sits in a really unusual place. Every other hospital in the state pays some version of a provider tax. OHSU does not. Instead, because OHSU is a quasi-government agency, they do this thing called an intergovernmental transfer, where they give the state money that the state can use to qualify for matching dollars for Medicaid, one government agency to another, basically. That means the state can actually draw down more Medicaid dollars off of OHSU than the other hospitals. And what I’ve been told is that, as a result, OHSU also gets better Medicaid reimbursement rates than any other comparable hospital.
Miller: Which is a big deal if a third or so of Oregonians get healthcare through Medicaid.
Templeton: Absolutely, and half of kids. And, if all of a sudden OHSU’s footprint expanded, in theory that might have meant that Oregon could have used this system to actually draw down even more federal Medicaid dollars. And one benefit to Legacy would have been becoming part of this system, maybe capturing some of those higher reimbursement rates.
So, I don’t know for sure how that played into this whole thing. But I think the degree of uncertainty over what Medicaid will look like over what new federal regulations there might be, it’s certainly a question.
Miller: Were you surprised by the announcement on Monday?
Templeton: Not entirely. There was a proposed transaction involving CareOregon, one of the big Medicaid insurers in the state, that got a lot of pushback during the review process. And those entities ended up withdrawing their proposed merger before the state had a chance to decide on it. So it struck me as kind of similar to that.
Miller: When they were trying to sell this merger not that long ago, what did the two hospital systems say they would do if the merger didn’t happen?
Templeton: Well, Legacy executives have given some pretty clear on-the-record public answers to that at a hearing back in March. They said, first of all, they would try to continue their cost containment. That could mean selling unused real estate, that could mean cutting some services that aren’t bringing in enough revenue. And they also said they would immediately lobby the state for better Medicaid reimbursement rates, especially for Randall Children’s Hospital.
In the longer term, they said in a couple of years if the situation hasn’t improved significantly, they will be looking for another potential buyer.
Miller: So this merger is off. But just yesterday we talked with the president of the Hospital Association of Oregon about their dire report about the financial situation that all the state’s hospitals are facing. And one of the points that was raised in that report is that we could see hospital closures or consolidations. Not this particular consolidation now, but what’s already happening?
Templeton: Yeah, we are seeing lots of versions of this. Providence, huge player in the Northwest and here locally, is trying to spin off their home health and hospice division; that transaction is under review. We had Saint Alphonsus in Baker City close an ICU, and their labor and delivery. PeaceHealth in Eugene, closing the emergency department. Bay Area Hospital, one of the largest on the South Coast, is trying to partner with or be sold to a private equity-backed health system from out of state. So I think we will continue to see these kinds of changes.
The executive at Bay Area Hospital essentially said to me, “look, if we want smaller hospitals to survive, if we don’t believe in consolidation, if you want competition, we need to look at the state of regulation in Oregon currently and figure out a way to make it easier for smaller hospitals to stay in business.”
Miller: Amelia, thanks very much.
Templeton: You’re welcome.
Miller: Amelia Templeton reports on health and healthcare for OPB. She joined us to talk about the end of the proposed merger between OHSU and Legacy Health.
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