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Daily Briefing

Midwestern hospitals are looking to merge — but not without challenges


Over the last year, several hospitals and health systems in the Midwest have pursued new mergers and acquisitions (M&A) to grow their businesses. However, the momentum of these deals may be limited by regulators and policymakers who are concerned about hospital consolidation increasing the price of care, Alex Kacik writes for Modern Healthcare

Hospital mergers are growing in the Midwest

Since October, at least a dozen hospital transactions have either been proposed or finalized by organizations in Illinois, Iowa, Michigan, Minnesota, Missouri, South Dakota, and Wisconsin. While some health systems are looking to join with organizations in adjacent markets, others are aiming to expand into other states.

According to M&A experts, the Midwest has seen an increase in activity because provider organizations typically have a harder time operating in rural areas and larger states, especially when it comes to insurance negotiations.

By merging with other organizations, health system administrators hope to have more negotiating power that will provide them with higher reimbursement rates from insurers. Merging into a larger health system will also allow organizations to keep up with competitors, reduce back-office overhead costs, and increase their service offerings.

"The name of the game is reimbursement," said Nathan Ray, who leads the healthcare merger and acquisition practice at the 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."

"It takes a village when you have a much larger geographic footprint to cover," said Robert Slavkin, chair of the healthcare practice group at the law firm Akerman. It helps to have "the buying power to get people to work at hospitals, surgery centers and clinics and to secure the supplies you need."

Obstacles to these new mergers

Although hospitals argue that they need to grow their organizations to remain solvent and ensure access to care, regulators and policymakers have voiced concerns about how out-of-market health systems will impact local healthcare facilities, as well as potential price increases.

At a federal level, the Federal Trade Commission and the Department of Justice recently proposed new merger guidelines that aim to limit certain types of consolidation. Under the guidelines, organizations would not be allowed to merge if doing so prevents a potential competitor from entering the market or reduces incentives for organizations to pay higher wages.

New state-level legislation could also limit or slow potential M&A activity. For example, Minnesota Attorney General Keith Ellison (D) and state policymakers have designed legislation to increase oversight of healthcare mergers.

In Illinois, lawmakers have proposed legislation that would require healthcare facilities to notify the state attorney general's office of any merger, acquisition, or contracting affiliation 30 days before it closes. California and Pennsylvania have also proposed legislation with similar requirements, and other states may soon do the same.

"Large transactions in various states may spur legislatures to act," said John Saran, a healthcare attorney at Ropes & Gray.

However, despite potential legislation on healthcare mergers, as well as economic concerns, Jordan Shields, a partner at Juniper Advisory, said health systems are likely to continue pursuing M&A going forward.  

"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." (Kacik, Modern Healthcare, 8/1) 


How consolidation and corporate ownership are reshaping healthcare

Vertical integration and consolidation are significantly altering the healthcare landscape. From health plans to retailers to incumbent health systems, consolidation is reshaping conventional norms in the industry. Radio Advisory's Rachel Woods sat down with  Advisory Board  experts Paul Trigonoplos and Eliza Dailey to discuss the reasons for and reactions to the recent explosion in consolidation across the industry and explore how different stakeholders are responding and where the future is heading for diversification and integration. Read a lightly edited excerpt from the interview below and download the episode for the full conversation.


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