Skip to main content

Are Hospital and Health System Mergers Falling Out of Favor?

 |  By Philip Betbeze  
   February 20, 2015

It might not seem so, but in fact, they are. Many of the advantages of a merger are now available through strategic partnerships, while disadvantages seem minimal by comparison.

Traditional mergers and acquisitions have been effective tools for cost reduction, taking aim at reducing duplication, achieving economies of scale, and (notwithstanding denials by those involved in such deals) a tool to achieve better negotiating strength. Despite the difficulty of merging cultures, overcoming regulatory or legislative hurdles, or the time and effort needed to complete the transaction, M&A can still be highly effective.

In the newly released HealthLeaders Media Intelligence Report, "The M&A and Partnership Mega-Trend," 44% of respondents said their most recent deal was either a merger (10%) or an acquisition (34%). Close behind, however, was the 38% who said they pursued "a contractual relationship, but not M&A."

Mergers and acquisitions are no longer seen as a tool to solve all scale or market share issues. In fact, when one refers to healthcare consolidation, traditional M&A is no longer necessary.

Matthew Heywood, the president and CEO of Aspirus Inc., parent of Aspirus Wausau (WI) Hospital and Aspirus Network, helps illuminate the distinction.

"The old-school mindset is that if I have huge market share and I'm the only hospital in the community, we can control our price," he says. "But that's changed. The market wants to know they can go to one place and get their [continuum of] services."

For Aspirus, that meant an alliance with several other organizations, effectively covering the entire state, in a partnership he likes to call a "super-ACO."

For him, providing one-stop shopping for healthcare purchasers is the ideal, and whether you achieve that end with a full merger or something else contractual is immaterial. In fact, it could be effectively argued that mergers take so long and involve so much integration that the partnership model in most cases is a preferable first step, even if later a merger or acquisition is on the table.

The "super-ACO," called AboutHealth, includes seven independent health systems: Bellin Health in Green Bay, ThedaCare in Appleton, Gundersen Health System in La Crosse, UW Health in Madison, Aurora Health in Milwaukee, ProHealth in Waukesha, and Aspirus in Wausau.

"The question is how to get tied into a network so you're part of that one-stop shopping," Heywood says. "If you're a major employer … you don't have to go to us individually, you've got the state covered in one contract."

Another recent report on M&A activity in healthcare singles out the hospital sector for the largest drop in merger activity between 2013 and 2014.

"The largest drops in deal volume from the YTD 2013 to the YTD 2014 periods were experienced in the Hospital (-58%), Behavioral Care (-43%), and Home Health (-13%) sectors," says PricewaterhouseCoopers' "Q3 2014 US Health Services Deals Insights" report, released in November.

"Looking more deeply into the continued decline in the hospital sector's deal volume, we note one primary driver of this trend as the surge in non-traditional M&A structures that are excluded from our analysis," PwC's report says. "These structures include alliance based transactions such as joint ventures and other forms of market based partnering."

So despite the drop in M&A activity, consolidation continues to progress rapidly in healthcare services. But by forging creative partnerships instead of merging assets, hospitals and health systems are harvesting consolidation opportunities without the expense and uncertain progress of a traditional merger or acquisition. Many who are trying these new partnerships see them as a way to achieve most of the positives of a merger with few of the negatives.

The PwC report does conclude that as these nontraditional deal structures mature, "we do see them as precursors to ultimate M&A deals in the future after the parties align interests and become more familiar with each other."

Maybe. I'm not so sure. Why couldn't these partnerships become more or less permanent structures?

I could see such partnerships as a potentially more permanent state of affairs in an environment where mergers can be blocked by legislative or regulatory hurdles—which is what recently happened with Tenet's foray into Connecticut—and lengthened by complex business arrangements. They're further risky because the Federal Trade Commission, despite the seeming encouragement of M&A in the Patient Protection and Affordable Care Act, is taking a jaundiced eye at full mergers in its efforts to ensure competition isn't infringed in any given market.

It's not unusual anymore to have to unwind already-completed mergers, as just happened with St. Luke's Health System's deal with Saltzer Medical Group in Nampa, Idaho. On the other hand, partnerships, even partnerships where all is merged other than assets, seem to be viewed by a very different and more permissive prism.

Maybe it's because they're so new, and each one so different. In either case, partnerships are proving to be a quicker and perhaps more substantive way to find a resolution to often vexing financial and operational challenges.

A cautionary note for leaders, however. The integration work needed to make a merger or acquisition work is widely recognized. But that effort is no less important with a nontraditional alliance. With an affiliation or operating agreement, it's clear that hard work outside the financial realm will be necessary to make the partnership work.

Philip Betbeze is the senior leadership editor at HealthLeaders.

Tagged Under:


Get the latest on healthcare leadership in your inbox.