By Conor Green & Chris Hoffmann

Two of the largest healthcare systems in the Twin Cities have announced plans to merge – and if approved it will created the second largest hospital system in Minnesota in terms of revenue (Mayo Clinic is first).

For those non-Midwesterners – the geographical environs of the Twin Cities Metro area comprise a 50 mile circumference anchored by Minneapolis to the west and St. Paul to the east. At a high level, this move essentially links West (Park Nicollet) and East (HealthPartners) and according to news releases from both organizations, the combined health system will include more than 20,000 employees and 1,500 multispecialty physicians. However, there is a more compelling angle to this story.

On the surface the motivation for this move could be primarily economic: The average operating margin for a U.S. hospital is 2.5% — tough financial sledding in a disrupted and crowded market. Overly simplified, the economics of a hospital requires keeping beds full (aka “heads in beds”) … and as hospitals today strive to better align with physicians in order to get more than their fair share of referrals, a range of new business models and ways to engage consumers are emerging in the marketplace.

However, HealthPartners is also a health plan – serving 1.4 million members and has ties into Cigna’s national provider network. By combining with Park Nicollet, the reality of how this move (essentially a hospital systems with staff and affiliated physicians and a myriad of specialty facilities) creates line of sight for HealthPartners to not just improve its hospital financials, but meaningful member growth for its health plan business as well.

In the Twin Cities market, Park Nicollet was relatively small compared to its competition and late last year was named a Pioneer Accountable Care Organization by the Centers for Medicare and Medicaid Services (CMS). Their business model was that of a physician group practice aligned with a single hospital. Park Nicollet and HealthPartners coming together make sense for both entities, but as an HMO, HealthPartners should be the real winner in the deal as it will expand the number of members covered by HealthPartners insurance plan and create a large and very meaningful integrated delivery system comprised of a health plan, two premier hospitals, dozens of medical and dental clinics, and 1,500+ providers.

Nationally, the movement for health systems to create leverage in their geographic markets is a result of health reform and will ultimately dictate the success of risk-bearing business models (like ACOs). In addition, it gives them leverage with health plans because their expanded footprint makes them much more viable care providers for commercial health plan members, and those with employer sponsored coverage.

Is this a trend? In this case, this merger actually speaks to two separate but related trends: the desire for hospital-based systems to get larger and lock up physicians as well as the vertical integration of payers directly aligning with provider organizations (or simply acquiring them, as with UnitedHealth’s acquisition of Monarch HealthCare last year). Nationally, we expect to see much more of this in the months ahead and locally, we will be particularly interested to see how Allina and Fairview (the other large systems in the Twin Cities) respond.

Let us know what you think.

Chris Hoffmann is a Senior Director at TripleTree covering ‘consumerism’ and the convergence of social, mobile and cloud technologies in healthcare. Follow him on Twitter @CTHoffmann. Conor Green is a Vice President at TripleTree covering the healthcare industry, and specializing in revenue cycle management and tech-enabled business services.