Healthcare Provider Transactions: Trends and Issues

Health Highlights

Editor’s Note: The number of healthcare transactions reached a record-smashing 1,738 in 2018.1 According to a new Capital One poll, mergers and acquisitions are the preferred growth vehicle for 44% of healthcare executives in 2019, indicating that we will continue to see M&A on the rise. What are the trends driving the growth in healthcare transactions? What are the new M&A strategies remapping the healthcare landscape? In a recent webinar, Manatt Health shared the answers. In part 1 of our article summarizing the webinar, published in our April “Health Update,” we examined the major healthcare trends fueling the changes in healthcare M&A. In part 2, below, we share a deep-dive look at provider transactions. Watch for part 3 in June, providing an in-depth analysis of health plan transactions. Click here to view the full webinar free, on demand—and here to download a free copy of the presentation.


The quest for scale has been a drumbeat in the provider healthcare sector for the past three to five years. Merger activity is being driven by a desire to reduce costs, access capital and create the coordinated care networks necessary to manage population health. When thinking about scale, it’s useful to focus on the four “cs”—costs, capital, care coordination and contracting.

  • Costs refer to economies of scale—including increased efficiencies in purchasing, technology, human resources and compliance—achieved through size and the ability to leverage assets and capabilities across a large health system.
  • Capital refers both to funding and to human capital. In many markets, there’s an increasing shortage of qualified senior executives and physician leaders. There is a theory that, as systems get larger, they are able to attract and retain better talent, as well as to manage their human capital more effectively for the betterment of the organization.
  • Care coordination speaks to population health management—the ability to have the scale to deliver the right care at the right time using the right tools.
  • Contracting focuses on having the scale and market relevance to drive optimal contracting opportunities and preferred provider arrangements, as well as to assume greater risk (and reap greater related rewards). In some cases, it may mean owning a health plan, and in others, partnering with large insurers.

There is also a fifth “c” lurking out there—competition. When leaders of provider organizations think about scale, competition is always top of mind. Competition drives offensive types of transactions. It also drives defensive types of transactions, where deals are undertaken primarily to prevent a competitor from snapping up a neighboring physician group or hospital.

Consolidation, Convergence and Alignment

Transactions fall into three buckets—consolidation, convergence and alignment. Consolidation transactions are classic change of control/change of ownership models. They also can include joint ventures and joint operating agreements.

Convergence is the area in which we’ve seen a lot of activity over the past few years. Convergence often creates unusual partnerships and innovative arrangements, such as insurers acquiring health systems, insurers and ancillary companies acquiring large physician groups, retailers acquiring insurers and providers, and private equity investing in physician groups and ancillary service providers.

Finally, in alignment scenarios, providers are not necessarily changing control or ownership but aligning through accountable care organizations, clinically integrated networks, provider contracting organizations or risk-sharing arrangements. In some cases, they are even aligning in shared services organizations in which several providers come together to provide a common service across all participating entities.

Examples of Consolidation

The merger of Advocate Health Care in Northern Illinois and Aurora Health Care in Wisconsin to form Advocate Aurora Health is a strong example of consolidation. Finalized on April 2, 2018, the deal brought together two large health systems in a super-parent model. Basically, the two systems—now with 27 hospitals and $11 billion in operating revenue—created a new parent system with a consolidated management team led by two co-CEOs.

Another example of consolidation is the merger of Dignity Health and Catholic Health Initiatives to form CommonSpirit Health. Effective February 1, 2019, the deal created a system with 700 facilities in 28 states and $29.2 billion in operating revenue. The Dignity and Catholic Health Initiative CEOs have both been named CEO-elect of CommonSpirit. As CommonSpirit goes forward, it will be an interesting case study on whether scale is going to work as a strategy.

Our third consolidation example is Nashville-based Hospital Corporation of America’s (HCA’s) $1.5 billion acquisition of North Carolina-based Mission Health, which became effective on February 1, 2019. Given that it’s a nonprofit transaction, net proceeds from the acquisition go into a foundation named Dogwood Health Trust that will monitor and enforce the continuing covenants of HCA. The Trust will be used to “improve the health and well-being of all people and communities of western North Carolina.”

Mission Health will continue to be managed locally, but HCA’s operations, capital access, clinical trials, research and other areas will be integrated. Under the terms of the agreement, nearly all Mission Health facilities will become part of HCA Healthcare but will continue to carry the Mission Health brand. As an interesting added twist, HCA and Mission both agreed to contribute $25 million to an innovation fund that will invest in businesses providing innovations in healthcare delivery benefiting the people of western North Carolina.

Our final consolidation example is Apollo Global Management’s acquisition of LifePoint Health, which had been a privately owned company. Prior to acquiring LifePoint, Apollo had acquired Regional Care Hospital Partners and Capella Healthcare to create RCCH Healthcare Partners. It then merged LifePoint into RCCH Healthcare Partners to form what is now known as LifePoint. Clearly, the philosophy behind this string of private equity-backed acquisitions is the bigger, the better.

Examples of Convergence

The first convergence example we will examine is Oak Street Health, backed in part by Harbor Point Capital. Oak Street started in Chicago with a very interesting model. It is a primary care physician group that puts physician practices in areas with underserved, low-income seniors and works to move those seniors into Medicare Advantage plans. Not only has Oak Street garnered private equity support, it has expanded outside of Chicago to Ohio, Philadelphia and other markets. In addition, its approach of engaging seniors to keep them healthy and using clinics as community centers, as well as places to get traditional medical treatment, has earned it high patient satisfaction scores.

Haven Healthcare is another fascinating example of convergence. Three major organizations—JP Morgan, Berkshire Hathaway and Amazon—came together to form Haven to address the challenges of delivering healthcare. It is early in the process—but it will be interesting to watch what develops as Haven moves forward.

Alignment and Acronyms

The alignment area is filled with acronyms, from accountable care organizations (ACOs) to clinically integrated networks (CINS). Even health information technology (HIT) and electronic medical records (EMRs) are being used to bring hospitals together and to bind organizations into affiliations.

Evaluating Different Transaction Approaches

Not all transaction approaches are created equal. There are different deal risks (e.g., antitrust, liability assumption, etc.) and different execution risks (e.g., control, future growth, funding, etc.) in every market that need to be analyzed when considering a transaction. It is also important to remember that different models support different strategic and tactical goals. When considering a transaction, it is critical to take into account the desired level of control and level of investment, as well as any branding preferences. It is also important to assess honestly the level of confidence the organization has in a potential partner.

Some transactional models are more durable than others. Acquisitions typically have a higher success rate. Although there have been many joint operating agreements over the past three or four years, those models tend not to be as durable.

The key is for each organization to consider its specific needs, objectives and role. A “cookie cutter” model is very seldom the right choice.

The Strategic Toolbox

The change-in-control tools are the usual suspects that have been available for a long time—acquisitions or divestitures, long-term leases, joint ventures (new entity or contractual), joint operating companies, and transfers of controlling interest.

There also are now a wide range of non-change-of-control tools available that fall within four categories:

  1. Strategic, including strategic affiliations, virtual systems, minority interest transfers, joint operating agreements and management agreements
  2. Provider contracting, including ACOs, CINs and provider network organizations
  3. Clinical service enhancements, including clinical service line arrangements, physician recruiting and physician staffing arrangements
  4. Expense reduction and infrastructure, including shared services organizations, IT hosting (electronic medical records), IT departments and resources, and group purchasing arrangements

All of these tools bring providers together into closer working relationships. None are mutually exclusive. They can be used in combination to create stronger ties among organizations with similar cultures, strategies and goals.

Understanding Organizational Structures

There are several potential organizational structures to consider when deciding on a transaction:

  • In super-parent structures, two affiliating systems form a super-parent organization that is typically a nonprofit, tax-exempt corporation. Basically, this structure puts a new corporate entity on top of two existing health systems. The super-parent model presents the possibility of co-CEOs—and often allows the entity to postpone certain hard decisions until the super-parent board is formed. The risk is that this model is easy to break up—particularly if there are co-CEOs.
  • In buyer joint ventures, an investor-owned hospital company is often backed by one or more private equity firms. The hospital/health system remains nonprofit and tax-exempt. Buyer joint ventures offer multiple affiliation options, expanded clinical services, access to physician recruitment and integration, clinical protocols, quality improvement systems, operational expertise, and access to capital. The management agreement is the vehicle for the joint venture to take advantage of those critical services and achieve economies of scale. It is important to remember, however, that the parent will take a percentage of net revenue off the top. There will typically be a 2% management fee that goes back to the investor-owned hospital.
  • In a seller joint venture, we typically see a for-profit health system partnering with a nonprofit. The nonprofit contributes its hospital system to the joint venture and receives a cash payment plus at least 20% ownership in the joint venture. The for-profit partner provides capital and management expertise. There is true shared governance with a 50/50 board that includes an equal number of physicians and community representatives. The structure protects tax-exempt status.
  • Joint operating companies (JOCs) and joint operating agreements are handcrafted arrangements that bring together organizations in a market. In a joint operating company, two hospitals form a new business entity—a JOC—to operate the subject hospitals. In a joint operating agreement (JOA), a regional health system and a community hospital agree to combine the operations of particular hospitals through a JOA, with each party retaining ownership of its respective assets. These models tend to be less durable. They often present, however, flexible, customizable approaches to affiliation that are an effective interim step—lasting three to five years—before the systems become more completely integrated.
  • In minority interest nonprofit strategic affiliations, a regional health system receives a minority interest in a community hospital and two seats on the community hospital’s board of directors. The model enhances the level of care in the area that the community hospital serves and expands the regional health system’s presence in the market.

NOTE: Watch for part 3 of our summary in our June “Health Update,” focused on health plan transactions.

1S&P Capital IQ.



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