Academic medical center M&A buoyed by federal antitrust gap

Academic medical centers are acquiring community hospitals, sometimes while benefiting from a gap in federal antitrust law.

Alabama, California, Pennsylvania and Virginia have seen academic medical centers expand, and analysts expect merger and acquisition activity to continue.

Related: More academic partnerships to come, despite financial hurdles

Community hospitals help these centers reach more patients, keep care closer to patients’ homes, grow research and clinical training opportunities and free up space for complex care at their flagship hospitals, academic health system executives said. Broadening their hospital network also improves an academic system's standing with commercial insurers during contract negotiations.

Some acquisitions may not have been completed without the immunity certain academic medical centers have from federal antitrust law, analysts said. The exemption can help keep struggling hospitals open, but it puts the oversight onus on state agencies that generally don't have as many resources as the Federal Trade Commission or Justice Department, health economists said.

The exemption under what's known as the state action doctrine can allow subdivisions of some states, such as public hospital districts and certain academic medical centers, to skirt formal FTC or DOJ interventions if transactions are sanctioned by state policy and actively supervised by those states. This applies to what the FTC would deem anticompetitive transactions. Certificate of Public Advantage laws would have a similar effect, but those are tied to private healthcare entities.

Oversight immunity may simplify transactions as it removes the looming threat of FTC intervention and the requirement to submit federal merger notification filings, healthcare M&A advisers said. While antitrust immunity doesn’t drive state-affiliated health systems’ merger and acquisition activity, it may expedite the process and reduce related costs.

“Obviously, antitrust scrutiny is very high at the federal and state level. If federal regulators can’t challenge a deal that can go a long way, although now states are very active,” said Kenneth Vorrasi, a healthcare attorney at the law firm Faegre Drinker Biddle & Reath. “[Antitrust] exemption certainly changes the risk profile of the regulatory review.”

For instance, Mobile, Alabama-based University of South Alabama Health in October completed its $85 million acquisition of Ascension Providence Hospital and its clinics in west Mobile.

Ascension Providence may not have survived without the transaction, which was only possible due to federal antitrust immunity, said Colin Luke, a healthcare attorney at the law firm Holland & Knight who represented USA Health in the deal.

"I don't know if any other party would've been able to do the acquisition," he said. "The state action doctrine provides academic medical centers the opportunity to do more teaching, bring in economies of scale and invest in the rural safety net."

St. Louis-based Ascension also recently announced plans to sell several other hospitals to another academic system in Alabama. Last week, the University of Alabama at Birmingham Health System Authority signed an agreement to acquire Ascension St. Vincent's five central Alabama hospitals and affiliated facilities for $450 million.

There is a presumption that academic medical centers are acting in the best interest of the public, and those centers are often the last option for financially struggling community hospitals, M&A advisers said. Academic systems try to keep physicians they train practicing in underserved areas, which can help with access to care in rural communities in places like Alabama, they said.

Virginia and California have also seen a recent uptick in academic medical center-led acquisition activity.

In Virginia, UVA Health has been expanding beyond its Charlottesville headquarters since 2021, when it acquired Winston-Salem, North Carolina-based Novant Health’s ownership stake in a three-hospital joint venture predominantly covering northeast Virginia. The transaction expanded care options in Culpeper and Prince William counties, UVA CEO Dr. Craig Kent said.

“We have recruited about 70 to 80 new physicians, many of whom are subspecialists who can treat patients at those hospitals,” he said, adding that surgical volumes at those northeast Virginia hospitals continue to rise. “We’re designing new programs in those hospitals that weren’t available prior to our full ownership.”

In July 2023, UVA acquired a 5% ownership stake in Newport News, Virginia-based Riverside. That partnership has significantly increased the number of heart surgeries performed at Riverside, Kent said. UVA is currently in talks with another hospital about a potential acquisition, Kent added.

In Southern California, Orange-based UCI Health in March acquired four Dallas-based Tenet Healthcare Corp. hospitals and their affiliated outpatient locations in an $800 million deal. In the northern part of the state, UCSF Health and Chicago-based CommonSpirit Health in February signed an acquisition agreement involving two CommonSpirit hospitals in San Francisco.

The UC systems are behaving like many of their peers around the country, trying to grow outside of their urban trauma centers, said Rex Bergdorfer, a managing director at Juniper Advisory, which predominantly works in the nonprofit healthcare M&A sector. 

Some question whether academic health systems deserve the state and local breaks they get, but these institutions fund graduate medical education and provide many other public health benefits, said Dr. Jonathan Jaffery, chief healthcare officer at the Association of American Medical Colleges.

“[Regulators] should give AMCs relief so they can get these transactions done because it is in the public good,” Jaffery said.

However, if an academic system has grown under state-sanctioned immunity and is outperforming the competition, it would be interesting to see why regulators cleared an otherwise prohibited transaction involving an academic medical center, said Nathan Ray, a partner at the consultancy West Monroe who advises healthcare transactions.

Academic health systems' access to capital, capacity constraints, brand recognition, favorable regulatory standing and research endeavors will continue to propel hospital acquisitions, M&A experts said.  

“Academic medical centers feel pretty confident around the goodwill their brand can have. Some have the opportunity to capitalize on the strategic play of being a regionally dominant system,” Ray said.