While healthcare is delivered locally, the business of healthcare
is regional, and the regions are only getting bigger. Hospital
and health system mergers alike have continued to shift from
local to regional, and the recently announced merger between Advocate Aurora
Health and Atrium Health clearly highlights that the regions are only getting
Advocate Aurora, with a presence in Illinois and Wisconsin, and Atrium Health,
with a presence in North Carolina, South Carolina, Georgia, and Alabama, will
combine to create a $27 billion health system that will span six states and make it
one of the leading healthcare delivery systems in the country. The combined
organization, which will transition to a new brand, Advocate Health, will operate
67 hospitals and over 1,000 sites of care, employ nearly 150,000 teammates, and
serve 5.5 million patients. Together, Advocate Health will become the 6th largest
system in the country behind Kaiser Permanente, HCA Healthcare, CommonSpirit
Health, Ascension, and Providence.
We have seen a number of large health systems come together recently,
including Intermountain Healthcare + SCL Health to create a $15 billion revenue
system, Spectrum Health + Beaumont ($14 billion), NorthShore University Health
System + Edward-Elmhurst Healthcare ($5 billion), LifePoint Health + Kindred
Healthcare ($14 billion), and Jefferson Health + Einstein Healthcare Network ($8
The exact reasoning for each merger differs slightly, but one of the common
threads across all is scale. But not scale in the traditional M&A sense. Rather,
scale in covered lives; scale in physician infrastructure and alignment; scale in
clinical and operational capabilities; scale in technology, innovation, and
partnerships with non-traditional players; scale for capital access; and scale for
insurance risk to compete in a value-based world. It is no longer the strong
acquiring the weak. Rather, strong players are coming together to gain scale to
face the headwinds in a unified manner.
For Advocate Aurora and Atrium, coming together is about leveraging their combined clinical excellence,
advancing data analytics capabilities and digital consumer infrastructure, improving affordability, driving health equity, creating a next-generation workforce, research, and environmental sustainability. Together, they have pledged $2 billion to disrupt the root causes of health inequities across underserved communities and create more than 20,000 new jobs.
Both Advocate Aurora and Atrium are no strangers to mergers. Advocate and Aurora came together in 2018, and prior to that Advocate was intending to merge with NorthShore before being blocked due to anti-trust. Atrium has grown over the years, merging with systems such as Navicent Health in Georgia in 2018, Wake Forest Baptist Health in North Carolina 2020, and Floyd Health System in Georgia in 2021. In the newly proposed merger, Advocate Aurora and Atrium are coming together via a joint operating arrangement where each entity will be responsible for their own liabilities and maintain ownership of their respective assets but operate together under the new parent entity and board. This may allow the combined entity more flexibility in local decision-making. The current CEOs, Jim Skogsbergh and Eugene Woods will serve as co-CEOs for the first 18 months, at which point Skogsbergh will retire, and Woods will take over as the sole CEO.
Mergers can come in various shapes and structures, but the driving forces behind consolidation are not unique. With the need to compete in value-based care, adequately manage risk, gain scale across covered lives, physicians, and points of access, successfully deliver affordable high-quality care, and the need to deal with the vertical and horizontal consolidation of the large-scale payers, the markets that health systems operate in must be large enough to be effective and relevant. We fully expect to see more of these larger scale health system mergers in the near term.
The physical delivery of healthcare is local, but, again, the business of healthcare is not; it is regional, and the regions are only getting bigger.
It feels like a precarious moment in health systems’ relationships with their doctors. The pandemic has accelerated market forces already at play: mounting burnout, the retirement of Baby Boomer doctors, pressure to grow virtual care, and competition from well-funded insurers, investors and disruptors looking to build their own clinical workforces.
Many health systems have focused system strategy around deepening consumer relationships and loyalty, and quite often we’re told that physicians are roadblocks to consumer-centric offerings (problematic since doctors hold the deepest relationships with a health system’s patients).
When debriefing with a CEO after a health system board meeting, we pointed out the contrast between the strategic level of discussion of most of the meeting with the more granular dialogue around physicians, which focused on the response to a private equity overture to a local, nine-doctor orthopedics practice. It struck us that if this level of scrutiny was applied to other areas, the board would be weighing in on menu changes in food services or selecting throughput metrics for hospital operating rooms.
The CEO acknowledged that while he and a small group of physician leaders have tried to focus on a long-term physician network strategy, “it has been impossible to move beyond putting out the ‘fire of the week’—when it comes to doctors, things that should be small decisions rise to crisis level, and that makes it impossible to play the long game.”
It’s obvious why this happens: decisions involving a small number of doctors can have big implications for short-term, fee-for-service profits, and for the personal incomes of the physicians involved. But if health systems are to achieve ambitious goals, they must find a way to play the long game with their doctors, enfranchising them as partners in creating strategy, and making (and following through on) tough decisions. If physician and system leaders don’t have the fortitude to do this, they’ll continue to find that doctors are a roadblock to transformation.
In our work with health systems, physician groups, and other organizations over the years, we’ve often been asked to facilitate board-level discussions about governance—resolving board conflicts, navigating difficult decisions, evaluating board composition.
A recent discussion again highlighted one of our main observations in working with boards: governance problems are often strategy problems in disguise. Working with a system that has grown through acquisition over the years, and whose board includes members from several of the “legacy” hospitals which had merged into the system over time, we were asked to help facilitate a dialogue about investment priorities across the component parts of the system.
At the root of the issue: each of the “representatives” of the subsidiary entities were pushing to have their own investment needs take precedence. On the face of it, that’s a governance problem: boards shouldn’t be constituent assemblies, with each member representing the interests of a sub-unit. Rather, they should act with one purpose: to advance the interests of the whole.
But that misalignment turned out to be a symptom of a larger problem: there was no consensus at the board level about what the strategic direction of the combined system should be, and what role each component part played in that direction.
That’s a strategy problem, masquerading as a governance issue. Identifying the strategic issue allowed the board to reframe the dialogue around vision, which then unblocked the subsequent decisions about investments. Good strategy and good governance go hand in hand.
- Tenet and its subsidiary USPI have entered into a $1.2 billion deal to acquire ambulatory surgery center operator SurgCenter Development, expanding on a previous $1.1 billion cash deal inked with SCD last year.
- Under the new deal announced Monday, Tenet will acquire SCD’s ownership interests in 92 ambulatory surgery centers and other support services in 21 states.
- In addition to the acquisition, USPI and SCD plan to enter into a five-year partnership and development agreement in which SCD will help facilitate “continuity and support for SCD’s facilities and physician partners.” USPI will also have exclusivity on developing new projects with SCD during the five-year agreement.
Despite being a legacy hospital operator, Tenet’s outpatient surgery business is key to its long-term strategy.
After the latest deal closes, USPI will operate 440 surgery centers in 35 states, Tenet said Tuesday. The acquisition will boost USPI’s footprint in existing markets, such as Florida where it already operates 47 centers and will gain an additional 15. USPI will also enter new markets, such as Michigan, with a sizable footprint at the outset, executives said Tuesday.
The deal includes 65 mature centers and 27 that have opened in the past year or will soon open and start performing their first cases. Tenet may also spend an additional $250 million to acquire equity interests from physician owners.
Tenet leaders touted SCD’s service line mix, pointing out that a significant portion of the cases performed by these centers are for musculoskeletal care, which includes total joint and spine procedures.
The deal is expected to generate $175 million in EBITDA during the first year, executives said.
SVB Leerink analysts characterized the deal as savvy and said it will reshape the company’s earnings towards a “faster growing, higher margin, and improved capital return profile.”
Heading into 2021, Tenet had expected a greater share of its earnings power to come from its outpatient surgery business. This deal accelerates that aim over the long-term.
In 2014, Tenet’s ambulatory surgery business accounted for just 5% of the company’s overall earnings. Prior to this latest deal, Tenet expected the unit to account for 42% of its overall earnings in 2021.
This latest announcement follows Tenet’s deal in October with Compass Surgical Partners to acquire its ownership and management interests in nine ambulatory surgery centers located in Florida, North Carolina and Texas for an undisclosed sum.
We’ve historically divided the physician landscape in two parts: hospital-employed or independent. But over time, the “independent” segment has become more complex and inclusive of more types of groups who don’t fit the traditional definition of shareholder-owned and shareholder-governed. Even true independent groups don’t look like they once did, adapting in ways like receiving funding from a range of investors or adding more employed physicians.
So our standard way of thinking—hospital-employed or independent—has become obsolete. It’s time for a more nuanced approach to a diversified market.
When the pace of investment and aggregation in the independent space picked up, we conceptualized the changes primarily in terms of funder: private equity, a health plan, a health system, or another independent group.
That made sense at the time because each type of funder was using similar methods to partner with groups—health systems acquired, private equity invested directly in the independent group, and so forth.
But the market has shifted such that remaining independent groups are both stronger and more committed to independence. So organizations who want to partner with these groups have had to refine and diversify their value propositions—and often times are doing so without all-out acquisition. For more information on themes within these funder organizations, see our companion blog.
We set out to make sense of an ever-changing independent physician landscape in a way that would make it easier to understand for both independent groups and for those who work with them. Instead of dividing the landscape by funder, we assessed organizations based on their level of autonomy vs. integration, their growth model, and their geographic reach.
The map above has five physician practice archetypes and is oriented around two axes: local to national and autonomy to integration. The four archetypes on the top are larger in scale than a traditional independent medical group, often moving regionally and then nationally.
The archetypes are also ordered based on the degree of physician and practice autonomy, with organizations on the right using more of an integrated and standardized model for care delivery and sharing a brand identity.
So far, we’ve tracked two types of trends within this landscape. First, independent groups partner with national archetypes in one of two ways. Either the groups continue to exist as both independent groups and as part of the corporate identity OR they get integrated into the corporate entity. The exception is that we have not seen national chains integrate existing medical groups—though they may in the future.
The other trend we have seen is the evolution of some of these archetypes. We currently see service partners in the market shift to look more like coalitions. We assume we may see coalitions that start to look more like aggregators, and we know many aggregators have ambitions to function more like national chains.
Below you will find a brief description of each archetype as well as a more robust table of key characteristics.
Definitions of physician archetypes
Independent medical group
Independent medical groups are traditional shareholder-owned, shareholder-governed practices. They are governed by a board of physician shareholders, and shareholders derive direct profits from the group.
A service partner is an organization whose primary ambition is to make profits through providing a service, such as technology, data, or billing infrastructure, to physician groups. This type of partner may create some sort of alignment between practices since it sells to like-minded practices (e.g., those deep in value-based care, within the same specialty), but that alignment is more of a byproduct than the primary goal.
Coalitions are formed from physician practices who want to get benefits of scale without giving up any individual autonomy. They join a national organization to share resources, data, and/or knowledge, but each practice also retains its individual local identity and branding. Common coalition models include IPAs, ACOs, and membership models.
Aggregators are the most traditional approach to getting scale from independent medical groups. They acquire practices and usually employ their physicians. The range of aggregators is very diverse. It includes health plans, health systems, private equity investors, and independent medical groups who have shifted to become aggregators themselves.
We have historically referred to national chains as disruptors, but that name is inclusive of many organizations who are not physician practices and what qualifies as “disruptive” is ever-changing—so we needed a new name that better suited these groups. National chains are corporate organizations who develop a model (e.g., consumerism, value-based care, virtual health) and bring that model to scale, usually by building new practices or hiring new providers. These are highly integrated organizations, with each new location using the same care delivery model and infrastructure.
As the independent physician landscape evolves, it has implications not only for independent groups but for those who work with them. We hope that a shared terminology helps bridge some of the gaps in understanding this complex landscape.
For those who partner with independent groups, we’d suggest reading our companion blog for our take on the three biggest funders and questions to ask yourself to work successful with today’s physician groups.
An estimate from the Partnership for America’s Healthcare Future predicts that nearly four out of five 60- to 64-year-olds would enroll in Medicare, with two-thirds transitioning from existing commercial plans, if “Medicare at 60” becomes a reality.
In the graphic above, we’ve modeled the financial impact this shift would have on a “typical” five-hospital health system, with $1B in revenue and an industry-average two percent operating margin.
If just over half of commercially insured 60- to 64-year-olds switch to Medicare, the health system would see a $61M loss in commercial revenue.
There would be some revenue gains, especially from patients who switch from Medicaid, but the net result of the payer mix shift among the 60 to 64 population would be a loss of $30M, or three percent of annual revenue, large enough to push operating margin into the red, assuming no changes in cost structure. (Our analysis assumed a conservative estimate for commercial payment rates at 240 percent of Medicare—systems with more generous commercial payment would take a larger hit.)
Coming out of the pandemic, hospitals face rising labor costs and unpredictable volume in a more competitive marketplace. While “Medicare at 60” could provide access to lower-cost coverage for a large segment of consumers, it would force a financial reckoning for many hospitals, especially standalone hospitals and smaller systems.
Michael Freed, the former CFO of Spectrum Health, said he was “stunned” when he heard that the Grand Rapids, Mich.-based system plans to pursue a merger with Southfield, Mich.-based Beaumont Health, for myriad reasons.
In a June 24 open letter to Spectrum’s board of directors, Mr. Freed said during his tenure they discussed possible mergers routinely and that a Spectrum-Beaumont combination “brought nothing new with it” and wouldn’t enhance value.
“The markets didn’t overlap, so there were no significant administrative savings opportunities. The ability of each hospital to grow wasn’t enhanced by adding the other to the ‘system,'” Mr. Freed wrote. “In short, I never saw how such a merger could improve health, enhance value or make care more affordable. I still don’t.”
Mr. Freed was Spectrum’s CFO from May 1995 to December 2013. During his tenure, he helped oversee the formation of Spectrum and a substantive period of growth for the Michigan system. Mr. Freed also served as CEO of Spectrum’s health plan, Priority Health, from May 2012 until he retired in January 2016.
In his letter, Mr. Freed outlined several reasons he was “stunned” by the pursuit of the merger that would create a health system with 22 hospitals, 305 outpatient centers and about $13 billion in operating revenue.
Mr. Freed wrote that the merger with Beaumont, which is based in Southfield, Mich., may not be in the best interest of West Michigan. He said the combination of the two systems raises questions about whether governance truly will remain in the region and with Spectrum, if financial transparency will continue and if Spectrum will continue to honor the consent decree it signed in 1997 establishing a set of operational guidelines.
If the merger moves forward, “debt can be placed on the books of West Michigan while investments EARNED IN West Michigan could be spent in SE Michigan … and vice versa,” Mr. Freed wrote. “If this entity should someday merge with other out-of-state entities, West Michigan could find itself investing in healthcare in other states as well, rather than in its own health.”
Mr. Freed raised concerns over the agreement between Spectrum and Beaumont to create a 16-person board of directors, seven of whom would come from Spectrum and seven from Beaumont. The CEO would come from Spectrum, and one new board member will be appointed.
“While this structure looks to favor Spectrum Health initially, it would only take the hiring of a board member more favorable to Beaumont Health and the replacement of the CEO (in favor of Beaumont Health) for Spectrum Health to find itself outvoted 9 to 7 on key issues,” Mr. Freed said.
Additionally, Mr. Freed noted that the merger has the potential for massive financial losses to West Michigan. In particular, Mr. Freed said losses would stem from the financial assets of Spectrum and Priority Health no longer residing in West Michigan.
“I’ll admit, I don’t see any value in this merger,” Mr. Freed wrote. “I only see the potential for massive financial loss, both historically and an undetermined amount going forward, to the region that produced all of Spectrum Health.”
Mr. Freed urged the Spectrum board to take a few steps before moving forward with the merger, including selling or divesting Priority Health.
“When you sign the documents that will permanently change this region, your signature will forever hold you accountable for the repercussions,” Mr. Freed wrote. “Please sign carefully.”
Spectrum Health told MiBiz it remains committed to the commitments in the 1997 consent agreement and that it “remains enthusiastic” about the merger.
“Spectrum Health is fully committed to fulfilling its consent decree obligations and will continue to uphold its tenets,” the health system said. “We remain confident that creating a new system not only meets our current obligations to our local communities but will also improve the health of individuals in West Michigan and throughout the state.”
Access the full letter here.
- Tenet, a major U.S. health system, has agreed to sell five hospitals in the Miami-Dade area for $1.1 billion to Steward Health Care System, a physician-owned hospital operator and health network.
- The deal also includes the hospitals’ associated physician practices. Dallas-based Steward has agreed to continue using Tenet’s revenue cycle management firm, Conifer Health Solutions, following the completion of the deal, which is expected to close in the third quarter.
- Further underscoring Tenet’s strategic focus, the sale will not include Tenet’s ambulatory surgery centers in Florida. Tenet will hold onto those assets as its ambulatory business becomes a bigger focus for the legacy hospital operator.
Dallas-based Tenet continues to bet on its ambulatory surgery business.
It’s noteworthy that this latest billion-dollar sale does not include any of its surgery centers in Florida, but half of its hospitals. Jefferies analyst Brian Tanquilut said the ambulatory segment now becomes even more important as it will contribute a majority of consolidated earnings in the near term.
That’s a significant leap from 2014 when earnings from the ambulatory unit represented about 4% of the company’s earnings.
The money generated from the sale could also pay for more ASCs, under Tenet’s unit, United Surgical Partners International (USPI), further bulking up Tenet’s ASC portfolio that already outnumbers its competitors.
Tenet is traditionally viewed as a hospital operator, even though its surgery center footprint dwarfs its hospital portfolio. Tenet operates 310 ASCs following a $1.1 billion deal in December to acquire 45 centers from SurgCenter Development. Tenet said Wednesday it operates 65 hospitals.
Of Tenet’s 10 Florida hospitals, Steward will buy up half, including Coral Gables Hospital, Florida Medical Center, Hialeah Hospital, North Shore Medical Center and Palmetto General Hospital.
Tanquilut said that leaves Tenet in control of its “core” south Florida business in the Boca and Palm Beach market, located about 75 miles north of the Miami area where Tenet is selling its hospitals.
During the volatile year of 2020, Tenet was able to post a profit of $399 million for the full year, which includes provider relief funding. As recovery continues, Tenet posted a profit of $97 million during the first quarter, which also includes federal relief due to the pandemic.
In our work over the years advising health systems on M&A, we’ve been struck by how often “social issues” cause deals that are otherwise strategically sound to go off the rails.
Of course, it’s an old chestnut that “culture eats strategy for breakfast”, but what’s been notable, especially recently, is how early in the process hot-button governance and leadership issues enter the discussions.
Where is the headquarters going to be? Who’s going to be the CEO of the combined entity? And most vexingly, how many board seats is each organization going to get? That last issue is particularly troublesome, as it’s often where negotiations get bogged down. But as one health system board member recently pointed out to us, getting hung up on whether board seats are split 7-6 or 8-5 is just silly—in her words, “If you’re in a position where board decisions turn on that close of a margin, you’ve got much bigger strategic problems.”
It’s an excellent point. While boards shouldn’t just rubber stamp decisions made by management, it’s incumbent on the CEO and senior leaders to enfranchise and collaborate with the board in setting strategy, and critical decisions should rarely, if ever, come down to razor-thin vote tallies.
If a merger makes sense on its merits, and the strategic vision for the combined organization is clear, quibbling over how many seats each legacy system “gets” seems foolish. No board should go into a merger anticipating a future in which small majorities determine the outcome of big decisions.