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Health care consolidations: Complex maneuvers in a high-stakes environment

October 11, 2015

By John W. Greenleaf III

In today’s shifting health care landscape, providers are consolidating and forming strategic partnerships that position them to offer comprehensive, high-quality services at reasonable costs.

Motivations vary, but in any merger, all parties want the same outcome – a seamlessly operating new entity. If they’re to succeed, merging corporate cultures must mesh in a happy marriage like Exxon-Mobil and not head toward a messy divorce like Daimler-Chrysler.

In these circumstances, health care providers must approach the consolidation process ready to meet all challenges. The legal footwork is tricky, and one misstep can complicate matters beyond repair. Merging health care providers can start off on the right foot by answering two fundamental questions: Why are we consolidating? And how do we create a sound legal structure that ensures the new enterprise will start successfully?

Adapting to reimbursement changes

The Affordable Care Act has put into place a number of moving parts, including changes in the way health care services will be reimbursed over the next 5 to 10 years. Hospitals and physicians accustomed to a fee-for-service model must adapt to compensation based on reducing the cost of care for populations of patients.

In this atmosphere, health care systems and providers increasingly work as Accountable Care Organizations (ACOs), responsible for improving health among patients grouped together by ZIP code. Just as a financial portfolio needs diverse investments to weather ups and downs in the market, ACOs strive to diversify and soften their risks by acquiring multiple populations of patients.

Four main reasons providers seek consolidation:   

  1. Hospital and health system mergers: Traditional inpatient hospitals might seek the expertise of academic medical centers, or they merge with systems in the same geographic area that offer a stronger regional presence or diverse patient portfolios. Often, systems seek partners with complementary services that fill gaps in their offerings.
  1. Hospitals acquiring physician practices: A successful ACO reduces hospital admissions – a good health outcome from the hospital’s perspective, but also a drain on revenues. By buying practices and employing physicians, hospitals spread the risk and enhance their control over patient populations before they become inpatients.
  1. Individual practices seeking benefits of being part of a larger hospital: Physician practices could see drastic cuts in revenue, depending on specialty, because federal health payers need huge amounts of data to establish baselines and track health-improvement goals. Small practices lack the infrastructure to report this data, and they can’t afford massive sums on IT upgrades. They find themselves asking whether they’d fare better by plugging into a hospital or larger practice. 
  1. Younger doctors less inclined to buy into individual practices: Some physicians in their 50s – still practicing, but with their eyes on retirement – feel the ground shifting under their feet. As young doctors, they bought into their practices, expecting significant return on their investments at retirement, but today’s younger physicians, saddled by educational debt, are less inclined to buy in. For older physicians, acquisition by hospitals or larger practices can make financial sense.

Running the oversight gauntlet

An experienced legal team can structure consolidation agreements that comply with all legal requirements, whether the parties are truly merging or affiliating through a series of contracts. Oversight matters can include:

  • Conforming with antitrust laws: The state Office of Attorney General and the Federal Trade Commission review proposed health care consolidations that significantly impact local markets, whether they involve nonprofit or for-profit institutions. Working with an enormous number of documents filed by the consolidating parties, both offices run inquiries, ask questions, and initiate discussions. They have the power to give approvals, offer suggestions, or reject plans.
  • Management of charitable assets: When nonprofits consolidate, the Pennsylvania Attorney General’s Charitable Trust Division reviews the plans to ensure that charitable assets are maintained. More frequently, for-profits absorbing nonprofits face additional scrutiny. In these cases, assets must be placed in trusts that assure continued charity care for patients in need.
  • Managing ancillary services: When physician practices are involved, the fate of any ancillary services, such as laboratories and testing facilities, must be resolved. These services are regulated more heavily than professional physician services, and the transaction must be structured to position them (and their revenue) properly.

As health care rides wave after wave of unprecedented change, successful consolidations demand strict attention to detail. As long as health care providers have the proper legal guidance and the right reasons for merging, they can emerge from the process stronger, more efficient, and well positioned as key players in maintaining healthy communities. 

John W. Greenleaf III is a member of the Healthcare Law Practice Group at McNees Wallace & Nurick. He advises hospitals, physician groups, nursing homes and other health care providers on corporate matters and joint ventures and has developed significant expertise on matters relating to HIPAA. He can be reached at 717-237-5453 or


McNees is a full-service law firm based in central Pennsylvania with more than 130 attorneys representing corporations, associations, institutions and individuals. The firm serves clients worldwide from offices in Harrisburg, Lancaster, State College and Scranton, PA; Columbus, OH; and Washington, D.C. McNees is also a member of the ALFA International Global Legal Network. @McNeeslaw LinkedIn