Getting Healthy Together

The Recorder

A whole lotta conjunctions goin' on with California health care system players, an exceptional surge of large acquisitions and consolidations, some with surprising pairings. Fueled by game-changing facets of the federal Patient Protection and Affordable Care Act, pursuits of cost efficiencies, purchasing and pricing power and economies of scale, quality enhancements, the determination of payor and hospital systems to align with physician groups to achieve these, employer demands for controlling coverage costs, the provider partnership needs of the rapidly emerging "Accountable Care Organizations," "dual eligibles" programs and other PPACA constructs (add in a dash of good old-fashioned hegemonic cravings), and big new relationships in the health care delivery system are poppin'. And this follows on the recent, rapid growth of hospital-bound physician medical foundations in California in pursuit of similar objectives. The consolidation of HMOs in California, of course, occurred primarily in the past century.

The rapid move is on nationally toward greater coordination and integration of care, away from fragmented nonsystems of care; towards value-based models of reimbursement and away from volume-stimulating fee-for-service compensation. The theme is that providers should be incentivized and rewarded for keeping patients healthy and curbing costs. Some skeptics see this as dreamy HMO deja vu all over again, but this time the player mixes are more diversified and less monolithic than traditional HMO companies. And the federal government is into it in a big way, courtesy of PPACA.

While access to capital, sophisticated technologies and larger patient platforms are important goals in this new delivery environment, the established expertise of California medical groups, institutional providers and systems with cost-effective, quality-controlling practices is also very attractive to potential partners. California has long had the highest penetration rate of managed care in the country, and distinctive within that has been risk-sharing capitation and especially "the California model" of delegation of cost-management and quality control to physician groups by HMOs and insurance carriers. (The California Legislature, acknowledging the prevalence and importance of these relationships, in 1999 instituted standards and guidelines for what it denominated "risk-bearing organizations" (Health and Safety Code §1375.4 et seq.) and the Department of Managed Health Care then adopted a comprehensive regulatory regimen for them (28 CCR 1300.75.4 et seq.)). Facility with this proven practice management set and its operational infrastructure is sought after by national players who want to partner with it, learn it and import it into their broader operations.

Major changes in federal reimbursement models in Medicare are also fueling the consolidations, with a shift from fee-for-service to systems of financial incentives for integrated, cost-effective care. A companion innovation, inspiring conjunctions, is the new "Accountable Care Organizations," enabled by PPACA, wherein local Medicare populations are treated in more tightly integrated care, coupled with enticing financial incentives. The ACO must meet 33 quality measures to qualify to share in the savings. The federal Centers for Medicaid & Medicare Services (CMS) have already approved 153 ACOs nationally, 14 in California, involving a projected 2.4 million beneficiaries and savings of $940 million over four years. Likewise, the "dual eligibles" programs enabled by PPACA — wherein individuals in local areas eligible at once for both Medicare and Medicaid — are treated in managed, integrated, seamless care structures geared to eliminate the current fragmentation of services and access, as well as the attendant inefficiencies. "Duals Demonstrations" are slated to launch in 2013 in the counties of Alameda, San Mateo, Santa Clara, Los Angeles, Orange, Riverside, San Bernardino and San Diego. The state estimates an ultimate participant population of 1.1 million.

These new constructs require sophisticated management and practice skills sets and California has them.

Three Big Ones

While there have been conjunctions among small and large medical groups, IPAs and systems, a major highlight of the California consolidations is the pending merger of the state's HealthCare Partners, the country's largest operator of medical groups and physician networks, with Denver-based DaVita Inc., a leading national provider of kidney services. The $4.4 billion stock and cash deal leaves the HCP management and structures in place and establishes HCP founder and CEO Dr. Robert Margolis as co-chair of the board of the new venture, to be called DaVita HealthCare Partners Inc.

Both entities have long emphasized integrated care in their practices and services and speak of it as their "mission." HCP for 20 years has been a staunch national leader in coordinated, "clinic-centric and patient-centric" care. HCP will bring to the new venture its invaluable California-honed cost and quality management expertise, of which it has been an innovator and model. HCP operates three "Pioneer" ACOs, while DaVita and its allies have been importuning the federal government to allow them to establish renal care ACOs. DaVita's vision is "to build the greatest healthcare community the world has ever seen," while HealthCare Partners aspires "to lead the transformation of American health care to higher quality, efficiency and value" — which the parties found to be "absolutely complementary." Given the relatively broader scope of HCP's services, DaVita sees it becoming the "largest part of the enterprise."

The recent acquisition by national giant United Health Group (through its OptumHealth unit) of the large Southern California Monarch Healthcare, A medical group is another major conjunction. Following on the heels of several smaller physician group acquisitions in California by United's OptumHealth, the Monarch transaction, together with the smaller ones, marks the first acquisition of medical groups in California by a company that owns a national HMO/insurance company, a noteworthy shift in the traditional California delivery system structural paradigm. Like HCP, Monarch also was a "Pioneer" ACO.

The largest health insurer in the country, Wellpoint Inc., parent of California's Anthem Blue Cross, last year acquired Cerritos-based CareMore Health Group, which has a strong record of integrated care in managing Medicare Advantage, chronic care and clinics oriented to seniors in California, Arizona and Nevada. This Spring Wellpoint also acquired Amerigroup Corp., an Eastern outfit that specializes in providing and managing Medicaid coverage. These strategic acquisitions position Wellpoint well in the new PPACA "dual eligibles" arena, which it sees as potentially a $100 billion market. Seniors need highly coordinated care: The California CareMore expertise coupled with the Medicaid expertise of Amerigroup afford Wellpoint a potent resource mix of managed, integrated care capabilities through which to provide care in the large senior sector. It plans to operate a pilot dual eligibles program in California starting in 2013. (Not unrelated, PPACA raises Medicaid reimbursement rates for primary care to the levels of Medicare, considerably higher.)

Catholic Systems on the Move

Two California Catholic hospital systems are going in distinctly different conjunction directions, but with similar growth objectives. San Francisco-based Dignity Health, the erstwhile, but recently secularized Catholic Healthcare West, is acquiring Valencia-based U.S. HealthWorks, the largest independent operator of occupational health and urgent care centers in the country. This acquisition moves Dignity towards becoming a national health care system: U.S. HealthWorks is already in 16 states, and Dignity plans to expand from that base. With the doctor shortages anticipated as a result of PPACA's expansions of coverage, Dignity will be in a good position to help service that sudden new demand, through the U.S. HealthWorks urgent care physician ranks. Dignity's break-off from the Catholic Church has enabled it to pursue conjunction opportunities (and more expeditiously) that were not available to it previously.

The Daughters of Charity Health System, headquartered in Los Altos, with six hospitals and 22 sites, is taking another tack in the conjunction movement, joining Ascension Health Alliance, headquartered in St. Louis and the nation's largest Catholic and nonprofit health system. This will gain the Daughters the fiscal and operational advantages of affiliation with a strong national system. Ascension, for its part, will gain entry into the California market and first-hand access to the cost-effective, quality-controlling management expertise of the state's accustomed delivery modes.

Cardinal on the Hunt

Stanford hospital centers are on a resolute march in the Bay Area to expand their physician group and institutional relationships, including through recruitment to their medical foundations. Referrals to its renowned tertiary and quaternary services appear to be a principal objective. The adult-oriented Stanford Health Alliance has linked in the Bay Valley, Affinity and Alliance medical groups. Stanford's Lucile Packard Children's Hospital has been aggressively seeking to recruit physicians and groups in the East Bay and in San Francisco to its foundation, including two as-yet unsuccessful conjunction pursuits with Children's Hospital & Research Center Oakland and with the John Muir Health System.


Clearly a strong evolutionary thrust towards more integrated and coordinated care is well under way, the drivers of which, from the federal government and private systems and payors, are in place. The conjunctions sketched above are paralleled in other parts of the country. California's especial managed care expertise will continue to be a sought-after value-added. The judgment is that larger, more integrated systems can achieve cost savings and better buffer the cost squeezes of new reimbursement models and economic realities and afford better care to patients. And not coincidentally, grow ,too.

Scale, it seems, matters. Big conjunctions that make sense are likely to continue.

Richard Spohn is chair of Nossaman's health care practice group and resident in the San Francisco office. He can be reached at

Note: Nossaman represented HealthCare Partners, Monarch Healthcare, and Children's Hospital & Research Center Oakland in the transactions sketched above.


Related Practices

Jump to Page

We use cookies on this website to improve functionality, enhance performance, analyze website traffic and to enable social media features.  To learn more, please see our Privacy Policy and our Terms & Conditions for additional detail.