Editor's note: This is the full version of a story published in the Jan. 30, 2012, print edition of Modern Healthcare.

As the healthcare industry undergoes structural changes, some hospital and system executives are finding the most efficient way to change with it is to join with a larger or better-funded partner through a sale, realignment or joint venture.

Consequently, merger-and-acquisition activity among hospitals and systems continued its upswing in 2011, with the number of M&A deals being announced or completed rising 3.4% to 92 transactions from 89 in the 2010 tally, according to Modern Healthcare's 18th annual M&A report. The number of hospitals involved in M&A deals fell 6.6% to 212 hospitals in 2011 from 227 in the previous year's tally, in part because of fewer large multistate deals.

The rise in the number of deals in 2011 was driven by the evolution of the country's healthcare model, industry experts say. Expectations are that healthcare reimbursement from public and private payers is going to either fall or rise less quickly than it has in the past, creating revenue pressures for providers.

At the same time, governmental agencies and payers are pushing for improvements in care through such things as value-based purchasing programs, medical homes and accountable care organizations, raising hospitals' costs. And the implementation and meaningful use of electronic health-record systems cost money that can be borne more easily by larger organizations until anticipated benefits kick in.

“People are saying, ‘We just can't do this alone any more,' ” says Dave Frank, a partner and head of the healthcare assurances services group for accounting and consulting firm Crowe Horwath. There are compelling reasons for hospitals to combine with others—reasons that are not likely to go away anytime soon, Frank says.

Community and regional hospitals might decide that they want to affiliate with a larger system that has an existing strategy for dealing with the changes enveloping the industry and a brand to sell it, he says. With the hospital industry starting to transition out of a fee-for-service model, hospital executives are asking if they have the people and resources to manage that change.

“You can't really do that as a stand-alone hospital,” Frank says.

Indeed, data from the American Hospital Association shows the number of hospitals that are not part of a system falling about 5.7% during the three years ended 2010. The number of community hospitals not in a system stood at 2,167 in 2007 and had fallen to 2,044 by 2010, according to the AHA's 2012 Statistical Guide.

And AHA was getting enough requests from members for a 1980s-era set of guidelines on handling a hospital sale that it decided to publish a modern version, which it did this month with the assistance of its outside counsel, Jones Day, says Melinda Hatton, senior vice president and general counsel for AHA. The centerpiece of the report is a due-diligence checklist that executives and trustees should find very useful, Hatton says.

She notes that AHA also is considering an in-depth look at M&A activity, to try to get a handle on what kind of deals are being done and what the transactions might mean for the industry. “Each merger and acquisition has its own dynamic and issues,” Hatton says.

A variety of deals took place in 2011, including a deal in which a not-for-profit payer proposed to buy a not-for-profit system—Pittsburgh-based Highmark's proposal to buy five-hospital West Penn Allegheny Health System, Pittsburgh—and purchases by a joint venture between an academic medical center partnered with a for-profit chain, Duke University Health System, Durham, N.C., and LifePoint Hospitals, Brentwood, Tenn.

Industry experts say that innovation in deal structuring will continue in 2012, including more of a presence from payers, which will remain as potential buyers of hospitals and other providers.

“Highmark's proposed acquisition of West Penn Allegheny is not a one-off,” says David Cyganowski, managing director at Kaufman, Hall & Associates. More transactions are going to occur using nonstandard approaches, such as not-for-profit Ascension Health's partnership with private-equity firm Oak Hill Capital Partners, Cyganowski says.

St. Louis-based Ascension and Oak Hill, Stamford, Conn., last year formed a jointly owned, independent health system called Ascension Health Care Network that will specialize in acquiring Catholic hospitals that need capital but don't want to compromise their longstanding Catholic identities to get it (Feb. 21, 2011, p. 6).

Much of the recent activity is also being driven by the realization by hospital and system executives that the current model for providing acute care is changing drastically. Most of our country has been based on the not-for-profit hospital model, in which care is centered around a big box, the hospital, says Deryck Palmer, partner at law firm Pillsbury Winthrop Shaw Pittman, New York.

“Only now are we seeing that model being questioned,” Palmer says.

In addition, many community and big-city hospitals are in poor financial shape and larger organizations—for-profit companies in particular—have the access to capital to buy them and improve their finances, he says. For-profit Steward Health Care System, Boston, continued on a Massachusetts buying spree in 2011, buying four hospitals after forming through the purchase of six-hospital Caritas Christi Health Care in 2010.

And the Chicago area saw a lot of action, with three systems—Ascension Health, for-profit Community Health Systems, Franklin, Tenn., and not-for-profit Trinity Health, Novi, Mich.—doing deals in a region where they don't already have a major presence. Also, two mostly Chicago-centered systems—Provena Health, Mokena, Ill., and Resurrection Health Care, Chicago, with a total of 14 hospitals—merged in 2011. Vanguard Health Systems, Nashville, also had agreed to buy a hospital in the Chicago area in 2010, but that transaction fell apart in 2011.

The chart doesn't include deals that were agreed to in 2011 but were canceled or rejected by regulators, such as a complicated proposed merger in Kentucky of two affiliates of Catholic Health Initiatives, Englewood, Colo., and University of Louisville Hospital, a deal that was blocked by the governor (Jan. 9, p. 10).

The list was compiled based on available information collected by Modern Healthcare reporters regarding hospital M&A agreements for the calendar year. If a deal was agreed to and closed during the year it was counted once, and if a deal agreed to in 2011 was known to have closed in 2012, it was listed as closed. The list includes acute-care, long-term acute-care, free-standing rehabilitation and psychiatric hospitals.