Casey NolanThe consolidation of physician practices within hospital systems is gaining momentum as the care delivery system continues to shift from independent islands of care to interdependent physician-hospital care coordination. Clearly, this revolutionary change is largely driven by the Affordable Care Act (ACA), with its emphasis on improving cost and quality of care, along with today’s healthcare market pressures. To lay the foundation of what is required for successful integration, however, it is important to take a closer look at what is driving consolidation and the success factors on which it depends.


Of all the barriers and risks to successful consolidation, cultural issues constitute the biggest hurdle. Health systems face the challenge of needing to reconfigure and redeploy their physical assets to better align with community needs and new business models. A transaction is unlikely to return value if there was a lack of due diligence in assessing cultural factors, determining fit, and evaluating strategic compatibility. Physicians should not be only the targets of consolidation; they should be partners in the process. Physicians should see a demonstrable “value proposition” from consolidation that results in cost savings, revenue enhancement, and quality improvement. 

Drivers and Success Factors

The drivers of the current consolidation wave define the potential advantages for physician-hospital affiliation. All payers—from insurers to companies, to individual healthcare consumers—are creating reimbursement pressures at the very time that physicians face increased capital needs such as electronic health records and regulatory compliance. Meanwhile, capital is far more costly for a smaller physician practice than for a larger health system. Add the need for size and scale to gain greater efficiencies, and the expense of complying with the ACA and other regulatory initiatives, and the motivation from the physician side is obvious. 

Achieving economies of scale—and skill—are key reasons to consolidate, as these are now more important means to drive waste and costs out of the delivery system at more than an incremental basis. Given the decreases expected in reimbursement, providers must strive to reduce utilization and waste by an order of magnitude (think in terms of 30 to 40 percent) while implementing a patient-centric strategy to improve clinical quality.

New Rules

In this rapidly changing environment, many of the traditional “rules of the road” no longer apply. The consolidation process in many health systems has evolved to become more structured and disciplined in its planning and execution, including the identification of potential barriers or problems, like compensation plans and information technology lifecycles. It is important to note that any consolidation represents a profound change for traditionally independent physicians and they will likely experience periods of confusion, anger, and even remorse. 

The key to successful integration is continual communication, providing the physicians with the data, showing them the variations in care and outcomes for unconsolidated services, and demonstrating the savings and quality improvement that can come from alignment. An effectively aligned, performance-based, physician-hospital organizational structure will emphasize shared vision, goals, and quality initiatives to overcome the conflicts over autonomy, entitlement, and unclear expectations that mark a culturally misaligned organization. This level of integration builds upon, yet transcends vertical integration (i.e., combining services that are different but part of the same product) to embrace alignment among all key players and create a common viewpoint and objective across the enterprise.

Kevin C. "Casey" Nolan is a managing director, Navigant Healthcare, Washington, D.C. 

Publication Date: Wednesday, June 05, 2013