The need to reduce costs, improve care coordination, and prepare for population health management is spurring a new wave of acquisitions and affiliations among healthcare organizations.

Traditional acquisition activity—in which a weaker system, typically seeking capital investment, is acquired by a stronger system—continues in the healthcare industry. However, new HFMA Value Project research, described in the sidebar below, reveals that many arrangements are being driven more by value-focused strategy than by financial need.

Value-focused acquisitions and affiliations typically are driven by organizations' desires to add new capabilities, achieve economies of scale, enrich data on clinical outcomes, and/or widen access to services, according to the HFMA research. (See the exhibit below.) Such models range from the full merger of two organizations into a single, combined entity to looser collaborative models in which organizations partner on certain initiatives but maintain their independence to pursue other opportunities individually or in collaboration with other organizations. Today, organizations are looking both "horizontally" (e.g., hospital to hospital) and "vertically" (e.g., health system to health plan) for partners—and some are pursuing multiple models simultaneously, depending on their needs and the opportunities in their market.

Determining the Right Path for Partnership

Acquisition and affiliation strategies designed to improve the quality or cost-effectiveness of care have the potential to deliver improved value to care purchasers and demonstrate an organization's superior value proposition in a competitive marketplace. Therefore, they are likely to be well-received and to improve an organization's market share.

In contrast, although consolidation efforts that are focused primarily on gaining market dominance may boost market share in the short run, such efforts also are more likely to attract unfavorable scrutiny—from employers, health plans, competitors, the media, and, potentially, state and federal antitrust authorities.

Determining whether to pursue an acquisition or affiliation opportunity and, if so, which model to pursue should begin with an honest assessment of an organization's current position and anticipated future needs.

Internally, if there is a firm commitment to maintaining local ownership, an organization can consider looser collaborative models in which the parties maintain their independence while continuing to assess whether this strategy will best serve long-term organizational needs.

Externally, cultural fit is critical when considering potential partners. It is important to have frank discussions about what each partner hopes to get out of a relationship, what each one would bring to it, and any potential challenges in reaching shared goals that would need to be addressed before an affiliation agreement is finalized.

Horizontal Combinations

Although integration through a merger is the most common type of horizontal transaction, some organizations have pursued models that achieve extensive integration without a full merger. For example, Froedtert Health and the Medical College of Wisconsin created a system in which they maintain separate boards but use an internal joint management structure. This combination of an academic medical center with a regional health system provides opportunities to shift care, moving lower-acuity procedures to Froedtert's community hospitals and freeing capacity to treat higher-acuity cases at the academic medical center.

Research findings showed that many acquiring organizations are not interested in adding acute inpatient capacity, especially in markets that are already overbedded. Often, in an acquisition of a hospital-based system, the acquiring organization is less interested in the hospital itself than in other assets the system can bring—such as affiliated physician networks, outpatient clinics, or a favorable market position and payer mix. Financially troubled hospitals, in particular, are becoming less-attractive acquisition targets.

Experts also believe that the distinction between not-for-profit and for-profit status has become less important in the context of affiliation or acquisition. "For-profit systems have become more experienced with recognizing and accommodating needs of not-for-profit partners, while larger not-for-profit health systems have become more business-focused and centralized in their decision making," says Kit Kamholz, managing director at Kaufman Hall, who was interviewed for the report.

Exhibit 1

Special Feature_Exhibit 1

Vertical Combinations

Whereas horizontal combinations involve similar organizations, vertical combinations bring together organizations that supply different components of a service or product within an industry. In health care, a vertical combination might include a multispecialty clinic and a hospital, or a health system and a health plan.

For example, the acquisition of Dean Health, a large, multispecialty physician group based in central Wisconsin, by St. Louis-based SSM Health Care solidified a longstanding relationship between the organizations while enabling the vertical integration of Dean Health's physician practice management and health plan management capabilities. "Acquiring Dean Health has given SSM the capabilities needed to transform to an integrated, value-based organization," says Gaurov Dayal, MD, president of healthcare delivery, finance, and integration for SSM Health Care. "The value of this acquisition will ultimately lie in our ability to continue to lower the total cost of care and improve clinical outcomes. We are very confident in accomplishing both of these objectives as an integrated organization."

Multisystem Collaborative Models

Collaborative models—in which hospitals or health systems come together to work on operational or clinical initiatives while maintaining their independence—have recently emerged in several markets. Examples include the BJC Collaborative in Missouri and Illinois, the Granite Health Network in New Hampshire, Stratus Healthcare in central and south Georgia, Integrated Health Network of Wisconsin, and AllSpire Health Partners in New Jersey and Pennsylvania.

Many of the new collaborative partnerships being formed today are focusing their attention initially on group purchasing activity, back-office functions, sharing of operational and clinical best practices, and development of accountable care structures for risk sharing in managed care activities. Not yet on the agenda for these organizations are decisions on which services should be provided by which partner (which could raise antitrust concerns regarding market allocation), control over clinical decision making, and an integrated financial bottom line for the partnership.

Other Acquisition and Affiliation Options

Nearly half of the respondents to a recent survey of HFMA's senior financial executive members are pursuing an alternative form of acquisition and affiliation activity, as shown in the exhibit below. Along with vertical integration and collaborative partnership models, these alternatives include joint ventures and operating agreements, management service agreements, and numerous other options. Hospitals and health systems also are looking at a wide field of potential partners.

"We are seeing new types of companies emerge out of the more creative arrangements," says Jullia Quazi, managing director, BMO Capital Markets. "There is more strategic diversity in the business models than ever before."

For example, Dignity Health is taking advantage of its headquarters location in the San Francisco Bay area to explore affiliations through equity investments with new healthcare technology startup companies, reflecting the system's focus on innovative and diversified business lines. Investments in these companies serve several purposes: A health system offers sites for piloting new technologies with patients; some of the technologies Dignity Health has invested in could significantly reduce the cost of certain services; and, of course, if the technology is successful and finds a wide market, Dignity Health could realize a strong return on its equity investment.

Legal and Regulatory Issues

The primary legal and regulatory issues affecting acquisition and affiliation strategy concern antitrust law. The position of the Federal Trade Commission (FTC) and Department of Justice (DOJ)—the agencies that enforce federal antitrust law—is consistent with a value-focused acquisition and affiliation strategy. Acquisitions or affiliations intended to produce pro-competitive effects—including improvements in quality, cost efficiency, or access to care—are less likely to be challenged if these effects outweigh any potential anti-competitive outcomes (for example, a more dominant position in the market resulting from the acquisition or affiliation activity).

Although the FTC and DOJ have defined "safety zones" for many types of acquisition and affiliation activity, antitrust analysis is highly fact-specific.a The following are among the considerations that organizations should keep in mind as they seek to determine whether antitrust concerns might arise.

Change of ownership or control. In horizontal integrations, is a change of ownership or control involved? If so, the activity could constitute a merger that requires premerger notification to the enforcement agencies. Such mergers are less likely to attract substantial antitrust scrutiny if the hospital being acquired operates in a separate geography and market from the acquiring organization and its subsidiaries or affiliates, or if the merger will not significantly increase providers' market share or the concentration of providers in a given market.

Effect of the combination on horizontal competition. In vertical integrations (e.g., a health system's acquisition of large physician practices), will the integration reduce horizontal competition among medical groups in a market? Chances of attracting FTC attention increase considerably if there is horizontal market overlap between acquired practices or if it appears that a dominant system is "buying up" physician practices in a market.

Authenticity of clinical integration. In joint ventures designed to create clinically integrated organizations, is the clinical integration program real? In other words, does the program include authentic initiatives, actually undertaken and requiring the active involvement of all network participants? The organization should be able to demonstrate that the venture's initiatives are designed to achieve likely improvements in healthcare quality and efficiency. A single, unified data platform and set of protocols for the various partners is critical to a joint venture's success. Another consideration is whether joint contracting with a health plan is necessary to achieve the targeted efficiencies of the clinical integration program.

Exhibit 2

Special Feature_Exhibit 2

Partners should seek the advice of experienced counsel whenever they suspect antitrust concerns may apply. But the general rule is relatively simple: If the goal of acquisition or affiliation activity is truly to create value for patients and other care purchasers, the activity is far less likely to run afoul of legal and other regulatory concerns.


Few doubt that the forces transforming health care today will lead to further consolidation within the industry. There is a significant difference, however, between seeking partners only to gain an increase in market power and seeking partners to achieve the cost efficiencies, improvements in clinical quality, and access that care purchasers both need and demand. By pursuing the latter acquisition and affiliation strategy, organizations will be best-positioned to compete in their markets and win market share by offering patients, employers, and other purchasers a superior value proposition.


a. Statements of Antitrust Enforcement Policy in Health Care, U.S. Department of Justice and Federal Trade Commission, August 1996.


About the Value Project Report

The findings in this report are based on quantitative and qualitative research. A survey was sent to a random selection of HFMA's senior financial executive members in October 2013. Half the respondents represented stand-alone hospitals and the other half represented systems (20 percent at the system headquarters level and 30 percent at the system facility level). A total of 145 responses were received.

Site visits were made and interviews were conducted with the following hospitals and health systems:

  • AllSpire Health Partners member organizations
  • Dignity Health
  • Froedtert Health
  • HealthPartners
  • NewYork-Presbyterian Hospital
  • North Shore-LIJ Health System
  • SSM Health Care

Interviews also were conducted with strategic consultants, finance executives, and legal and regulatory experts.

It should be noted that conversations with Federal Trade Commission staff related to federal antitrust law reflect their personal opinions. Nothing in this report should be construed as reflecting official agency policy or guidance.

Publication Date: Friday, August 01, 2014

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