“A larger coverage area gives you more leverage with payers,” said Lane Jackson, a healthcare consultant at consultancy LBMC who focuses on revenue cycle. “The other piece of it is the expansion of different levels of service. Acute-care systems can grow their portfolio of ambulatory surgery centers, urgent care locations and other lower-cost settings, which payers are interested in.”
Health system contract negotiations are increasingly adversarial as providers ask insurers for significant reimbursement rate increases to offset inflated labor and supply costs. While insurers are often reluctant to acquiesce, arguing that cost pressures will level out over time, health systems may be able to force their hand as their market shares grow and draw patients who work at large employers, advisers said.
“The name of the game is reimbursement,” said Nathan Ray, who leads the healthcare merger and acquisition practice at consultancy West Monroe. “The more people you serve, that comes to bear when contracting with major payers, and the better off you end up [on reimbursement rates]. Health systems are compelled by the continued attention on their financial margin.”
Insurers may also be persuaded to raise rates for health systems that expand risk-based contracts, said Brett Norell, a principal at Newpoint Healthcare Advisors and former CEO of Holy Family Memorial, a hospital in Manitowoc, Wisconsin. Mergers can give some hospitals the resources to do so, Norell said.
Hurdles to growth
Hospitals’ arguments that they need to grow to stay solvent and maintain access to care may not convince regulators and policymakers, who display increasing concern about out-of-market health systems controlling their local healthcare facilities and about the tendency for mergers to increase prices for services. When hospitals secure higher reimbursement rates from insurers, research has shown that the prices patients pay for services typically rise, health plan premiums balloon and employers offer fewer promotions and pay raises as they spend more on healthcare coverage.
The Federal Trade Commission and Justice Department recently proposed new merger guidelines designed to limit consolidation that would prevent a potential competitor from entering the market and to curtail transactions that would reduce incentives for organizations to pay employees’ higher wages, among other effects.
Still, many of the transactions are cross-market deals to combine organizations with minimal market overlap. Historically, the FTC has not challenged as many of those types of deals because antitrust law is not designed to analyze cross-state mergers.
State policy may dampen momentum instead.
“With respect to the proposed updates to the federal merger guidelines, cross-market transactions don’t seem to raise the same type of antitrust issues that in-market transactions do,” said Timothy McCrystal, a healthcare lawyer at the law firm Ropes & Gray. “These new state laws represent a potential avenue to review [cross-market] transactions that don't typically draw the interest of federal regulators.”
Sanford and Fairview called off their proposed combination amid pushback from Minnesota Attorney General Keith Ellison (D) and state policymakers who designed legislation bolstering healthcare merger oversight. The health systems are expected to continue the search for merger partners, although the Minnesota law may limit their search, consultants and advisers said.
Several pending state bills, including one in Illinois, would similarly ramp up scrutiny. Legislation in Illinois awaiting signature from Gov. J.B. Pritzker (D) would require healthcare facilities to provide notice to the state attorney general’s office of any merger, acquisition or contracting affiliation 30 days prior to its close. Proposed laws in California and Pennsylvania would join at least six other states in imposing similar requirements, according to the law firm Ropes & Gray, which has been tracking related legislation.
Other states are taking note and may follow suit, said John Saran, a healthcare attorney at Ropes & Gray. “Large transactions in various states may spur legislatures to act,” he said.
The laws may not derail all proposed deals, but they are poised to slow would-be transactions and increase integration costs, advisers said.
The economic environment could also delay or deter proposed hospital mergers. LBMC’s Jackson said some clients have been wary of pursuing any acquisitions amid rising interest rates, which make it more costly to fund capital projects through the bond market. The Federal Reserve recently raised the federal funds rate to 5.5%, the highest point since 2001.
Despite the challenges, health systems will continue to pursue mergers and acquisitions, said Jordan Shields, a partner at Juniper Advisory, which advises nonprofit health systems on M&A activity.
He pointed to Advocate, which was initially formed after the 1995 merger between Evangelical Health Systems Corporation and Lutheran General Health System. The health system has since grown to an estimated $27 billion organization, with operations in Illinois, Wisconsin, North Carolina, South Carolina, Georgia and Alabama.
“This isn’t the end,” Shields said. “The pressure will grow on small systems that haven’t pursued transactions yet, and this is not an endpoint for any of these systems that are currently merging. Regional systems have realized a taste of the scale benefits that growth provides and don’t want to be left behind as the industry tips towards larger systems.”
Here's a list of Midwest hospital deals proposed or completed over the past year:
- Liviona, Michigan-based Trinity Health finalized its acquisition of Grand Haven, Michigan-based North Ottawa Community Health Systems in October.
- La Crosse, Wisconsin-based Gundersen Health System and Green Bay-based Bellin Health completed their merger in November.
- Sioux Falls, South Dakota-based Sanford Health and Minneapolis-based Fairview Health Services signed a letter of intent to merge in November. (The proposed merger was called off in July.)
- Downers Grove, Illinois- and Milwaukee-based Advocate Aurora Health and Charlotte, North Carolina-based Atrium Health completed their merger in December.
- In December, the Illinois Health Facilities and Services Review Board approved Brentwood, Tennessee-based Quorum Health’s sale of four southern Illinois hospitals to Evansville, Indiana-based Deaconess Health System and its affiliate Deaconess Illinois.
- University of Chicago Medicine and Altamonte Springs, Florida-based AdventHealth completed an agreement in January for UChicago to acquire a controlling interest in four Illinois hospitals.
- Trinity Health’s MercyOne, based in West Des Moines, Iowa, completed its acquisition of Davenport, Iowa-based Genesis Health System in March.
- Albuquerque, New Mexico-based Presbyterian Healthcare Services of and Des Moines, Iowa-based UnityPoint Health signed a definitive agreement to merge in April.
- Ann Arbor, Michigan-based University of Michigan Health and Lansing, Michigan-based Sparrow Health completed their combination in April.
- Milwaukee-based Froedtert Health and Neenah, Wisconsin-based ThedaCare signed a letter of intent to merge in April.
- St. Louis-based BJC HealthCare and Kansas City, Missouri-based Saint Luke’s Heath System signed a letter of intent to merge in June.
- Wausau, Wisconsin-based Aspirus Health and St. Luke’s Duluth (Minnesota) signed a letter of intent to combine in July.
- Marshfield (Wisconsin) Clinic Health System and Duluth, Minnesota-based Essentia Health signed a definitive agreement to merge in July.