Growing Hospitals the Old-fashioned Way: Mergers and Acquisitions

Date Posted: January 19, 2011

January 19, 2011 - It happens all the time in business – mergers and acquisitions to achieve growth, improve the value of a company and ensure the future. Up until a few years ago, growth by merger or acquisition wasn’t really a strategy in the healthcare sector. It is now.

Todd Nelson, MBA
Todd Nelson, MBA, predicts we will see a consolidation of the hospital market through mergers and acquisitions.

“From a trend perspective, hospitals are going to look at more mergers and acquisitions – more of a consolidation of the hospital market,” said Todd Nelson, MBA, technical director with Hospital Financial Management Association (HFMA) and a former chief financial officer with 20 years of experience managing hospital finances.

Nelson said last year’s healthcare legislation is going to push more organizations to consolidate. “If they’re trying to manage to greater populations, they are going to look at who it makes sense to align with, whether that’s a local, regional or national partnership so that they can continue to provide that continuum of care.”

Deborah White, a market analyst with HealthLeaders InterStudy, a company that recently released an in-depth report on hospital merger and acquisition strategies, agreed. “Consolidation, merging, being acquired by larger health systems, is the most prominent trend.”

But White says there is another, related trend that bears watching, one that could also help transform healthcare. “There is an opportunity in 2012 for an accountable care organization (ACO) to share in a new Medicare option. Instead of fee for service, they have an opportunity to share in cost-savings.”

ACOs represent a dramatic change in Medicare policy according to the Centers for Medicare and Medicaid Services. Under the provision, providers take responsibility for quality and overall care of their Medicare patients, and Medicare shares the savings from improved quality, fewer hospitalizations, and the elimination of unnecessary costs with them.

Starting in 2012, the ACO model will be a nationwide option in Medicare fee-for-service (FFS). However, setting up an ACO before January of next year could present a challenge for hospitals that have not begun to change their operating models. But some systems are already poised to take advantage of Medicare’s new program. Topping White’s list? Advocate Healthcare in Chicago.

“Advocate is a market leader in Chicago. It’s already moved into this model. It has had an integrated plan for several years,” explained White. “It has agreed to and put protocols in place. It measures everything.”

Mark Shields, M.D., MBA
Mark C. Shields, M.D., MBA, explains that ACO’s can be a “win” for not only patients and insurers but hospitals and physicians too.

With 12 hospitals in its system, 6,000 physicians and more than 250 sites delivering care, White said Advocate also has, “...the economies of scale to be able to negotiate with insurance companies and get better deals from vendors...” two ways for this healthcare provider to cut costs while offering high quality care.

What did Advocate see almost a decade ago that made it become an ACO before ACOs were even part of the equation?

“The pressures on patients, employers, and governmental payers...the pressure would be enormous to deliver higher value – that means a cost effective system that has better quality and safety,” explained Mark C. Shields, M.D., MBA, the senior medical director with Advocate Physician Partners and the vice president of medical management at Advocate Health Care. “Those pressures had been clear for a long time and then, what the health system said is okay, given those pressures, how can we reconfigure the delivery system to answer those?”

Advocate’s answer began to take shape 8 years ago when it developed its strategic plan for the year 2020 – a plan that broadened its services to offer what’s now being called the “continuum of care” – services that range from birth to death. The plan also positioned Advocate to offer “... the patient -centered medical home,” according to White. “This approach can be part of an ACO. It’s a new way of organizing care, coordinating it, providing improved access.”

ACOs could be considered a win for patients and insurers. Shields said they can also be a win for hospitals and doctors. “To be successful in a market setting you have to be responsive to what the market needs and that’s patients, employers and insurance companies. But the only way it can work is to develop a design that also works for the providers of care. That’s what we have been working on.”

Now, it’s what the rest of the hospitals and healthcare systems are working on. “Whether you’re in home health, inpatient, a physician practice or at a skilled nursing facility, hospitals and health systems are looking at the whole continuum of care... to make sure care is managed throughout the entire continuum,” agreed Nelson.

And looking at the business of healthcare through that lens, said Nelson, means looking at, “...where they need to have arrangements, agreements, and opportunities to work with people to provide that care.” That, Nelson added, “...brings the focus for healthcare systems right back to mergers and acquisitions.”

And that’s a trend that most healthcare researchers say isn’t going to change anytime soon.