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athenahealth, Inc. 
Published: February 2013

Executive Summary

A dizzying number of recent acquisitions, both physician practices acquiring more physicians and hospital systems acquiring physicians, have been occurring in today’s volatile health care environment. But are acquisitions really the right way to go? And how can health care leaders pursue successful strategies without resorting to acquisition? Before your hospital system or medical group pursues acquisition as a strategy to thrive through the ongoing change, consider the following four points.

  • Acquisition, despite its considerable disadvantages, is rampant for a number of understandable reasons, including the benefits of leveraging with payers in specific markets, and the perception that it will aid risk contracting.
  • A smart acquisition plan includes the following three strategic goals: a coalescing that ensures a high-performance medical group, the cultivation of effective affiliate relationships, and the deployment of the right IT strategy.
  • Clinical integration, not necessarily organizational consolidation through acquisitions, will be the ultimate goal for hospitals and group practices.
  • Should acquisition be the centerpiece of your strategy? Health systems like Cook Children’s in Texas are investing in clinical integration without acquisition, and so are some group practices, like Valley Medical Group in Massachusetts.

Health care executives are currently developing strategy and making investments in a highly uncertain market. Constant political tension surrounding the Affordable Care Act and varying interpretations about how to implement it, the launch of Accountable Care Organizations (ACO) and bundled payment pilots, and the persistent pressure on commercial reimbursement rates make strategic planning for health care leaders a daunting task. “You can just continue to hunker down and push as much volume as you can through your system at the current…contract rates. But in the long term you’ll be in a much more difficult position,” observes Wes Champion, Senior Vice President at Premier, Inc.1 Confronting future realities involves trying to predict what percentage of contracts will be at risk in ten years and what the level of fee-for-service payments will be. Hospitals know that the days-per-patient will be managed-down on risk contracts, but how much should you look to new or different services, new geographies, or new partnerships to backfill and keep beds full? Or will you be prepared to shrink capacity? For example, the Chief Medical Officer at Advocate Health Care in Illinois wants his organization’s shared savings contracts with Blue Cross to reduce health cost increases to the level of the Consumer Price Index within three years.2 Charlie Baker, former CEO of both Harvard Pilgrim Health Care and Harvard Vanguard Medical Associates and who is now with General Catalyst Partners (and an athenahealth board member), predicts that within five years, Medicare “will pay dramatically less than they pay now.” The leadership at Norton Healthcare of Louisville, Kentucky, believes Medicaid-level payments will become the norm and is preparing accordingly.3

What are many health care leaders turning to as the remedy? Acquisitions. Many independent physician practices are adding doctors and becoming bigger. Many hospitals are acquiring physician groups, and physicians are more willing to be bought than in years past. This is strikingly reminiscent of the wave of consolidation that occurred 15 years ago. While the health care landscape has changed, the antitrust, organizational, and financial risks that surrounded consolidation have not.

The financial risks of consolidation were underscored in a recent Medical Group Management Association study. This study found a stunning 500% variation in revenue, and a 25% variation in overhead, among integrated medical groups.

   Best Non-Hospital MS Groups Rest of Non-Hospital MS Groups Best Hospital IDN MS Groups Rest of Hospital / IDN MS Groups
 Overhead % 58.3 60.0 56.8 83.4
Total MD Revenue after Operating Cost per FTE MD $351,082 $280,439 $261,865 $69,881

Source: Medical Group Management Association. Performance and practices of successful medical groups. 2011 report based on 2010 data. Englewood, CO: MGMA; 2012.

Note that Total MD Revenue after Operating Cost in the table above did not deduct the physician salary cost, which actually results in net operating losses for many integrated systems.

Acquisitions may be a defensive measure for many hospital systems and medical groups, which are concerned about declining referrals, but they must have other reasons for this strategy. What are the underlying goals of these organizations, and could their goals be achieved without acquisitions?

There are two main reasons for the recent spate of acquisitions. One is the desire for critical mass to gain leverage with payers in specific markets. These dynamics are very market specific because there are independent providers, especially in rural areas or in urban areas in underrepresented specialties, who have plenty of contracting leverage with payers. But small providers in some metro markets attest that only big physician groups, or physicians who have hospitals negotiating for them, get favorable contract rates. John Briggs, MD, an athenahealth client who is a cofounder of the largest OBGYN group in Florida, said, “In a five-doctor group, I was a voice that went unheard and [we were] getting killed with decreasing reimbursement levels, and higher costs of doing business, so we developed ourselves into a group. Now the voice I’ve always had is for the first time actually being heard.” Michael Wasylik, MD, who chaired the Florida Medical Association’s managed care committee, offers a similar perspective: “I told a CEO for a managed care company in Tampa that dealing with them was a little like dealing with Fast Eddie’s Used Car Sales. Only Fast Eddie treats you with more respect.”4

Risk contracts are the second major reason health care leaders say they are participating in acquisitions. But managing risk requires actuarial data and skills, as well as expertise in pricing insurance, which many providers don’t have. As the Massachusetts Attorney General’s 2011 Annual Report on Health Care Costs Trends and Cost Drivers concluded, “[R]isk contracts continue to expose providers to random insurance risk, which they are ill-equipped to bear, and which creates a troubling incentive for providers to ‘size up.’”5 Risk also requires the capital and infrastructure to handle population management. Often the acquirers have purchased an enterprise software system and are trying to enable all providers to access the same databases and one shared record for each patient. Tom Leyden, Director of the Value Partnerships Program for Blue Cross Blue Shield of Michigan, said, “We want providers to access better data than what we can provide from claims data. They need to have more robust data where they can see the ramifications and total picture of the care that’s being provided.”6 Lastly, risk contracts make leaders think that they need to own physicians in order to have control over them and to manage care. Providers open to being acquired are in turn seeking the infrastructure support and capital investments that a large health system is able to make. Some physicians choosing acquisition are also concerned about their financial revenue model on a stand-alone basis going forward. T. Clifford Deveny, MD, formerly VP for Physician Alignment of Summa Health System, predicted, “With the reduction in physician payment, we’ll see more physicians consolidating and moving towards health systems that can support them because their practices will not be generating enough funds.”7

However, acquisition alone is not sufficient to be prepared for the future. If leaders decide that acquisitions are the right strategy for their organization, there are at least three key areas they must get right in order to maximize the value of their acquisition.

First, once a health system or physician practice acquires physicians, they still need to coalesce and transform into a high-performing medical group. An Advisory Board study of 25 high-performing medical groups concluded that neither size nor ownership structure had any correlation to successful performance; they have to work at it.8

What do high-performing medical groups need to do well? First, they need good governance, where the goals and incentives of leadership and management are aligned. Second, they need visibility over referral patterns and total transparency for the care team. And third, they need an infrastructure with the demonstrated capacity to influence the providers who are making the decisions at the point of care. High-performing medical groups ultimately depend on their ability to achieve goals around quality, efficiency, and utilization. Meeting quality metrics will require the ability to align care across the medical group in terms of protocols and evidence-based guidelines. It will require the ability to manage care at the point of interaction with the patient, and it will require driving patient compliance and self-care. Efficiency goals will include the ability to adopt organizational workflows, track budgets, and shorten payment cycles.

In some cases, making a medical group high-performing may mean increasing productivity. Most medical groups will continue to have some percentage of fee-for-service medicine and some percentage of risk contracts with downside potential and penalties, and they will need to learn how to handle both sets of incentives at the same time within a single organization. “[T]he hospital is not a safe haven for income protection without improvement on quality and cost reduction,” said Clayton Harbeck, VP, MedSynergies, a medical practice management firm in Irving, Texas.9 The leader at one multihospital health system told us candidly that he’d rather not employ any physicians, but he is “willing to acquire doctors if it makes more profit.” With more market share, he can offer more attractive packages to employers. Knowing that rates of hospital nights per patient are likely to decline on a fee-for-value contract, he also is betting that he may not have to close down a hospital if he can increase market share. The leader of another health system pointed to the cheap capital available to consolidate. He uses it to acquire doctors and then focuses on getting the performance of the medical group to improve. “If you think the current regulatory environment is challenging, wait until you are regulated internally by a group of physicians at risk. They will not tolerate some of the behaviors in medicine today,” observed Paul Weygandt, MD, VP of Physician Services at consulting firm JA Thomas.10

Second, even if acquisitions are managed successfully, it’s essential to have an effective affiliate strategy. For those who are trying to manage patient care better in order to respond to performance-based payment models, there will continue to be some care delivered outside the four walls, where patients end up at an outside specialist, in another hospital, or in an independent skilled nursing facility. There’s a capital limit and a legal (antitrust) limit to how much any one health system can own. This means managing patient care requires good relationships and diplomatic governance of affiliates. Trinity Health, for example, is headquartered in Michigan but operates in eight states and has 1,300 employed multispecialty providers. They use what they call a “pluralistic physician alignment model” with three components: an employment model, a comanagement model including direct contractual relationships, and an independent/affiliated model through care-delivery system relationships.11

For these affiliates to collaborate effectively, separate financials with integrated clinicals are especially critical. Affiliate physicians don’t want to be forced onto an electronic health records (EHR) system that doesn’t respect their independence. Anne Rice, CEO of UC Davis Medical Center, also points to the importance of measures that protect reputation, economic stability, and legal status of each party.12 Rice described the tradeoffs any affiliate strategy should evaluate carefully, such as reduced referrals from other sources, alienation of medical staff, and diffusion in management resources.13

Third, getting bigger without the right IT strategy is a dangerous play. An acquisition has no chance of paying off unless IT is effectively and strategically leveraged. The acquisition itself has already increased fixed cost and debt for the enterprise—according to a recent NEJM article, the average loss per doctor acquired is $150,000-250,000 per year for the first three years.14 Leaders face a choice in IT solutions between more fixed costs or variable costs. Large HIT systems like Epic or Cerner have a 15-20 year amortization time horizon, whereas favorable payer contracts are on a 3-5 year horizon. To match what they can predictably know, leaders can instead leverage cloud-based IT systems with low fixed costs and an appropriate time horizon. Solutions need to enable strategy and serve as the means to an end—driving measurable outcomes. Ultimately, the right technology solution should provide leaders with visibility into referral patterns and provider behavior (“I can see what happened”), control (“I can influence behavior to achieve outcomes”), and nimbleness (“I can respond to changes rapidly”).

Affiliates and other partners across the care continuum need to be able to interface appropriately, and the system should allow the easy exchange, connection, and coordination of data among various providers.An ambulatory revenue-cycle solution can be different from a hospital revenue-cycle solution as long as the overall IT strategy is aligned and the set of IT delivers the best business intelligence and analysis to the organization. Heidi Moore, a physician on the executive board of the Northern Adirondack Region Medical Home Project, described how her health system had to switch EHR vendors midway through a multiyear process. “Our former vendor had no national vision; we had to make a horribly difficult choice to drop them,” Moore said.15

Japa Volchok, DO, Chief Operating Officer of athenahealth client Vohra Wound Physicians, which provides wound and skin care in 22 states, said, “It’s much easier to go to a payer and say: ‘this is the average cost of care for a patient that we care for with this diagnosis, and here’s comparative costs that are 70% more.’ That is a concrete number that a payer understands. If you’re not able to adjust those [numbers] and start on a small scale, then you’re not going to be able to do it on a scale of 100 or 1000 diagnoses. The technology [needs to be there] to manage the data and understand outcomes.”

While much is uncertain, the future of health care is clinical integration. Whether you pursue an acquisition model or a more pluralistic alignment strategy, it doesn’t matter—you need to have the same capabilities. Some health care leaders are doing scenario planning, whereby they are preparing for a future in which they could face 30% rate cuts, and then are aiming to lower their own costs enough below that 30% to preserve a margin. The percentage of risk versus fee-for-service contracts is actually less relevant than the fact that everything —including fee-for-service arrangements— will eventually look more like a risk contract. This is because Medicare rate cuts are likely, and there will be less cost-shifting possible with commercial insurance, resulting in more provider exposure to cost overruns. Readmit penalties on traditional contracts will mean those, too, will require coordination “beyond the walls.”

Even if a provider negotiates favorable contracts with payers, prepare for payers that are not able to follow through on some promised rates due to vetoes by state regulators. In Massachusetts, the governor has vetoed several contract increases negotiated with providers, even though providers have agreed to reduce prices within contracts rather than be left out of contracts altogether. In a world of the accountable care model, a debate over affiliated versus employed will not matter as much.

Hospitals will need to stop being all things to all people. They will need to optimize where care is done, who does it, and how it’s done. Patients and their doctors need the right information delivered at the right time to make the right decision about care and about cost. Providing that information will finally allow patients to “shop” for a value-priced, high-quality venue, and allow doctors to “shop” for a value-priced, high-quality specialist to recommend.

Clinical integration, not necessarily organizational consolidation through acquisitions, is “the real key to reform,” and an effective way to expand geographic reach and scale, according to William Petasnick, past chair of the American Hospital Association.16 He describes clinical integration as “an effective tool for promoting innovation, enhancing quality, and aligning incentives.”17 This means clinical integration in the broadest sense: beyond doctors who manage one patient’s care, to consistent, aligned, and accessible care management of entire patient populations, regardless of the economic backdrop of taking on risk to reduce costs and improve quality. For example, as president and CEO of Froedtert Health in Milwaukee, Petasnick partnered with Bellin Health in Green Bay, Wisconsin, to jointly operate a virtual ICU made possible by clinical integration.18 

Clinical integration’s ascendency has been made possible because rates have dropped precipitously over the years. Michael Blau, head of the health care venture practice at Foley & Lardner said, “Two years ago if you were the 800-pound gorilla in your marketplace, you could go and get good rates…as much as 20 to 30% above competitors on a statewide average basis. Today, if you go to almost any health plan, you’re going to get only a 2-3% trend rate increase—period. You’re not going to get anything more, no matter what your clout, no matter what your market position is—unless you have a different value proposition. That is, unless you’re also ready to talk to the insurer about how you are going to transform care to improve quality while reducing total medical expense. There has to be a commitment by physician leaders to take ownership of the clinical integration process and to find ways to wring out the inefficiencies in care where you can, in a quality way.”

Below are two in-depth examples of how a hospital and an independent group practice believe they will achieve clinical integration without acquisition, along with some early signs of success.


Pursuing acquisition is understandable, but it’s often not necessary and it’s by no means sufficient. Providers who have the ability to look at care and cost across the entire continuum will be best prepared for risk contracts and “risk”-like penalties and metrics. The best hospital and group practice innovators can only succeed and thrive in a challenging future by using smart, nimble technology and by achieving clinical integration. Choosing variable cost over fixed cost in technology solutions leaves far more flexibility to respond to the unknown. As Japa Volchok, COO of Vohra Wound Solutions, said, “Technology can help start your analyses of your own outcomes and your own data. If you do that on a one-provider scale, you will be in a position where you’re no longer thinking ‘I’m not big enough to be able to compete.’ I think there will come a day where there will probably be different pay scales depending on what your quality outcomes are, and it won’t necessarily be dependent on a practice that has 50 providers, it will be applied the same way to a practice that has one provider.”

In conclusion, both acquisition decisions and technology decisions can either add financial risk or mitigate it—and every health care system needs all the financial flexibility it can get. What physicians urgently need to compete in the new world is access to the right information at the right time to make the right medical decisions with their patients. Rather than building a bigger closed system through acquisition, physicians are far better served with strategies embracing open platform and exchange capabilities. Ultimately, health care systems will need to share clinical data, without boundary, with any provider to serve any patient across the nation.


  1. “ACOs Forging the Links,” Ken Terry, Hospitals & Health Networks, Jan 2011, p. 20.
  2. “ACOs Forging the Links,” Ken Terry, Hospitals & Health Networks, Jan 2011, p. 22.
  3. “Getting Ready for Accountable Care Organizations,” Joseph Goedert, Health Data Management, Apr 2011, p.24.
  4. “How Doctors Are Paid Now, And Why It Has to Change”, John Carroll, Managed Care, Dec 2007;
  5. Massachusetts Attorney General Examination of Health Care Cost Trends and Cost Drivers, Report for AnnualPublic Hearing, June 22, 2011, p. 23.
  6. “Private Market ACOs,” Julie Miller, Managed Healthcare Executive, Dec 2011, p. 31.
  7. “Hospital-Physician Alignment: Insights and Strategies,” Healthcare Financial Management Association Executive Roundtable, Oct 2010, p. 2-3.
  8. See “The High-Performance Medical Group,” The Advisory Board Company, 2011, p. 11.
  9. “Hospital-Physician Alignment: Insights and Strategies,” Healthcare Financial Management Association Executive Roundtable, Oct 2010, p. 3.
  10. “Building Connections on the Care Continuum,” Gary Baldwin, Health Data Management, Feb 2012, p. 38.
  11. “Hospital-Physician Alignment: Insights and Strategies,” Healthcare Financial Management Association Executive Roundtable, Oct 2010, p. 3.
  12. “Successful Affiliations: Principles and Practices,” Ann Madden Rice, FACHE, Frontiers of Health Service Management, 27:4, p. 17.
  13. Ibid.
  14. “Hospitals’ Race to Employ Physicians – The Logic Behind a Money-Losing Proposition,” Robert Kocher, M.D., and Nikhil R. Sahni, B.S., The New England Journal of Medicine, May 12, 2011, p. 1790.
  15. “Building Connections on the Care Continuum,” Gary Baldwin, Health Data Management, Feb 2012, p. 34.
  16. “It’s Time to Get on with the Work at Hand,” William Petasnick, Journal of Healthcare Management, Mar/Apr 2011, p. 97.
  17. Ibid.
  18. Ibid.