HFMA survey: Strategy now beats competitive advantage as reason to merge

The pressure to control costs and manage risk-based payment systems is changing the reasons why healthcare providers merge finds a new survey of Healthcare Financial Management Association (HFMA) members.

It is no longer just about creating a competitive advantage or shoring up market share. Instead, more HFMA senior financial executive members surveyed (58 percent) listed cost efficiencies/economies of scale as a driver of acquisition and affiliation activity over the second place reason, improved or sustained competitive position (51 percent). In addition, the ability to manage the health of a defined population was listed by 28 percent compared to the traditional financial reason to merge of access to capital, which was listed by just 23 percent.

Indeed, the survey report authors noted that the traditional acquisition model of one struggling healthcare provider being acquired by a stronger capital-rich partner is not only not as dominant, it is becoming undesirable. Strong healthcare systems are increasingly seeking to partner with other strong systems that can bring new capabilities. This is leading to new types of affiliations that do not require one partner to give up control to the other, as well as organizations of different types joining to create vertical integrations, such as healthcare systems affiliating with health plans, the report authors found.

Another notable trend uncovered by the survey and targeted interviews with some HFMA members was that market conditions and the need for new capabilities are opening up the possibility of collaboration with traditional competitors and leading to “a blurring of the lines” between competition and collaboration.

The report included data from 145 senior financial executive HFMA members who responded to an October 2013 survey. Fifty percent of respondents represented stand-alone hospitals, and fifty percent represented systems (20 percent at the system headquarters level and 30 percent at the system facility level). In addition, site visits and interviews were conducted with seven health systems and hospitals, as well as with experts in strategic planning, finance, and legal and regulatory issues.

“A trend now is that mergers and acquisitions are occurring between organizations that are both financially strong,” stated Jullia Quazi, managing director at BMO Capital Markets, one of the experts interviewed for the report. “This is different even from the recent past, when traditionally one party to the transaction had significant financial concerns.”

The focus on the strategic imperative for better cost control, population health management and efficiency is also important in avoiding issues with Federal Trade Commission (FTC) approval or Department of Justice enforcement of the Clayton Act. Generally, the pro-competitive effects of a merger, affiliation or acquisition on local healthcare quality, cost efficiency and access must outweigh any potentially negative competitive effects, such as partners dividing up the healthcare services market in such a way as to drive up prices. 

"Affiliations that improve value for patients and other care purchasers are likely to be well received," said HFMA president and CEO Joseph J. Fifer, FHFMA, CPA, in a press release. "When a merger or acquisition happens for the right reasons, everybody wins."