It has been said that politics makes strange bedfellows. In the health care industry, politics in the wake of health care reform and the lingering economic recession are producing innovative partnerships that would have been difficult to imagine a decade ago. These new combinations provide important strategic advantages as industry players position themselves for a post-reform marketplace, and it is likely more are on the way.

Physician practices for sale

After the enactment of health care reform legislation in 2010, physician groups and practice management companies became prime acquisition targets. Hospitals and health systems have been buying medical groups in efforts to position themselves for the implementation of accountable care organizations. Simultaneously, many of the largest managed care companies — including UnitedHealth Group, Humana, WellPoint and Cigna — are quietly buying physician practices that treat patients covered by their plans. The managed care companies hope to control rising health care costs by managing patient care more tightly through practice ownership. The health care services and information technology giant, McKesson Corp., even entered the physician practice arena earlier this year by acquiring US Oncology.

The models of physician alignment have changed from the models of the 1990s with the proliferation of direct employment, clinical co-management and other non-equity models. As health care delivery moves away from a fee-for–service environment, the emphasis is on sustainable, truly integrated models that reward quality and efficiency. As a result, models that incorporate quality benchmarks and encourage transparency are becoming the norm.

Joining forces

Over the past year, there have been numerous high-profile announcements of joint ventures and other transactions between investor-owned companies (including private equity sponsors) and tax-exempt health care providers. Many of the transactions involve tax-exempt hospitals seeking to continue their mission in challenging economic times.

The need of tax-exempt hospitals for a capital partner to help finance new service lines and the drive of investor-owned companies for market expansion has created a fertile environment for joint ventures.

Recent examples include:

  • The November 2010 acquisition of Caritas Christi Health Care by Steward Health Care System LLC, a new company formed by Cerberus Capital Management LP, a New York-based private investment firm.
  • The February 2011 formation of a joint venture by Ascension Health and private equity firm Oak Hill Capital Partners to provide an alternative funding source for the acquisition of Catholic hospitals and other providers.
  • The January 2011 formation of DLP Health Care LLC (Duke/LifePoint) by Duke University Health System Inc. and Nashville's LifePoint Hospitals Inc., one of the first joint ventures between an academic health system and a hospital operations company.
  • Birmingham-based Surgical Care Affiliates has entered into a joint venture with Sutter Health, a not-for-profit network of hospitals and doctors based in Northern California to jointly operate outpatient surgery centers there.

There are many advantages with these arrangements. The tax-exempt systems gain capital partners with the financial resources to make the necessary investment in the bricks and mortar as well as technology upgrades to satisfy the meaningful use requirements related to electronic medical records necessary and health care information technology. They also gain management expertise and the advantages of scale from their investor-owned partners.

For their part, the investor-owned companies have increased their deal flow since these partnerships provide the community with comfort that their charitable missions will continue. With this comes the opportunity to realize cost savings by increasing scale and to increase market share.

There are some important issues that must be considered, such as the government's increased emphasis on antitrust enforcement and cultural differences between the organizations. These hurdles can be addressed with proper planning and due diligence, however, and it is likely that the health care industry will see more partnerships as investor-owned companies, tax-exempt providers, physicians and payers join together to position themselves competitively.

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