HFMA chief says new wave of healthcare deals driven by value

The healthcare industry is experiencing a seismic shift as hospitals and health systems realign. The demands of today's healthcare marketplace are spurring a new wave of acquisitions and affiliations among healthcare organizations. However, as consolidation ramps up, so does the debate about the merits of these mergers.

As a spotlight continues to shine on healthcare prices, speculation about links between market consolidation and prices abounds. Some fear that consolidation will create higher prices for consumers and result in less autonomy for physicians. They express concern that the healthcare landscape could become antithetical to healthy competition.

Others make the case that large, integrated providers will be able to offer higher-quality services, better coordinate care, reduce unnecessary duplication of services and cut costs. Proponents say that realignment will bring about better quality of care at lower prices.

One thing is clear: Providers who would pursue consolidation to gain market power and force higher payment rates—in an environment where price transparency expectations are growing by the day—are setting themselves up for failure. So far, research on the effects of consolidation on prices has been limited and inconclusive. The ultimate impact of the movement toward scale remains to be seen.

Not surprisingly, the industry is not waiting for research results. The market forces that drive consolidation are ongoing. The good news is that many provider organizations are affiliating for the right reasons, as we discovered in a series of interviews with industry experts and provider organizations that are actively pursuing such strategies.

The experts we interviewed identified—and the providers exemplified—a trend toward value-focused acquisition and affiliation strategies. These partnerships are designed to improve the quality or cost-effectiveness of care. They have the potential to deliver greater value to care purchasers. The organization's market share is still likely to improve—not because the newly larger entity is flexing its pricing muscle—but because it can demonstrate a superior value proposition. Such mergers stand a good chance of being well-received by the community and passing muster with antitrust regulators, who look for pro-competitive effects that outweigh any anticompetitive effects that could arise from increased size.

Value-focused affiliations have distinctive characteristics. Often, they take place between financial equals. Furthermore, they are typically not driven by a quest for adding acute inpatient capacity. As a result, other assets a hospital-based system can bring—such as affiliated physician networks, outpatient clinics, or a favorable market position and payer mix—might be equally or more important than the hospital itself. In this equation, financially troubled hospitals are becoming less attractive acquisition targets.

Healthcare Financial Management Association research has identified five key drivers of acquisition and affiliation strategies today:

• Improving operational efficiencies. For example, the formation of AllSpire Health Partners, a collaborative partnership representing 25 hospitals in New Jersey and Pennsylvania, came out of early discussions among CEOs of participating systems, each seeking a way to achieve economies of scale, yet remain independent.
• Creating clinically integrated care delivery networks. The objective in this case is to deliver convenient access to high-quality services at a competitive price, a package that can be marketed to health plans, employers and consumers.
• Accessing sufficient populations for population health management. Although it is still unclear what population size is needed, in most instances more is better.
• Developing new capabilities. There are times when buying organizational capabilities is more efficient than developing them in-house.
• Rationalizing service lines or assets. The “right care at the right time in the right place” has become a new mantra. Putting that into practice will require coordination to “right-size” the system in a way that maintains affordable access to care.

Clearly, the drivers of value-focused affiliations and acquisitions are diverse. In response, a wide range of acquisition and affiliation models have emerged. Few doubt that the forces transforming healthcare today will lead to further consolidation within the industry.

There is a significant difference, however, between consolidation that seeks only an increase in market power and an acquisition and affiliation strategy that seeks partners able to improve value to care purchasers.

It simply isn't in a provider's long-term interests to misuse scale by pricing or repricing services to the detriment of the communities it serves. In the end, organizations that base their acquisition and affiliation strategies on common sense, good judgment and value improvement—from a care purchaser's perspective—should prevail.