Sacramento, Calif.-based Sutter Health and Minneapolis-based Allina Health plan to combine into a $26 billion, 39-hospital system, but the financial case for the integration goes well beyond economies of scale. It’s about using growth to overcome a fundamental problem in healthcare: Costs are rising faster than reimbursement, and standing still is becoming increasingly difficult to sustain.
“In this broken economic model, the only way to make the math work is growth,” Allina Health CFO Douglas Watson said during a Nov. 3 keynote panel at Becker’s CEO+CFO Roundtable.
The two nonprofit health systems are pursuing a combination that would bring together Sutter’s expansive ambulatory network and Allina’s established clinical footprint across Minnesota and western Wisconsin. Both organizations see opportunities to expand patient access, spread fixed costs across a larger platform and reinvest operating efficiencies into their communities.
During separate conversations at Becker’s CEO+CFO Roundtable in November, Mr. Watson and Sutter Health Executive Vice President, CFO and Treasurer Jonathan Ma outlined the financial and strategic rationale behind the proposed deal, the challenges of integrating two geographically distant systems and why growth has become central to their long-term sustainability strategies.
Both emphasized that the opportunity extends beyond traditional merger savings. The bigger picture is combining complementary expertise, scaling outpatient care and building an operating model capable of supporting continued investment despite mounting reimbursement pressures.
More than a scale play
For Sutter, the proposed combination reflects a strategy of partnering with organizations that share its commitment to expanding care, rather than pursuing growth simply for the sake of becoming larger.
Mr. Ma said discussions with Allina began about 18 months ago and were grounded in a common vision for the future.
“We were really leading with combining with like-minded organizations that have similar values and a similar outlook,” he said. “Without that as the foundation, it wouldn’t allow us to build a stronger platform to deliver healthcare in our respective communities.”
Sutter has already been investing heavily in expanding its clinical footprint throughout California, particularly in primary care, cancer care, orthopedics and neurosciences. Mr. Ma said much of that investment is addressing pent-up demand following years of when capital was focused on seismic requirements and pandemic pressures.
The system’s growth strategy increasingly emphasizes ambulatory and outpatient care, while preserving inpatient capacity for patients requiring more complex services. Over the past three years, the system has opened nearly 30 new ambulatory locations. It now operates more than 40 ASCs and one surgical hospital, with plans for continued outpatient growth.
Mr. Ma said Sutter’s net revenue is already distributed roughly evenly among three categories: hospital inpatient services, hospital outpatient services and ambulatory care.
“We start with the guiding principle that we want the right care delivered in the right setting,” he said.
That outpatient expertise is particularly attractive to Allina, which faces growing demand for specialty services as its patient population ages, creating pressure to improve access without relying exclusively on traditional hospital expansion, according to Mr. Watson.
Allina has made significant investments in complex care, including a $1 billion surgical and critical care tower at Abbott Northwestern Hospital in Minneapolis. But the organization’s next phase of growth requires a stronger ambulatory platform to bring care closer to patients’ homes.
“The biggest driver for us was expertise and perspective,” Mr. Watson said. “Sutter has been very successful in the ambulatory space with a lot of what it has done in California.”
He pointed to lengthy wait times for neurology, oncology and other specialty services as challenges Allina hopes to address through the partnership.
“Right now there’s a significant access problem,” he said. “People wait a very long time to get in to see a neurologist or an oncologist.”
For Allina, the combination offers a way to accelerate its existing growth strategy by tapping into Sutter’s experience developing outpatient facilities, physician networks and ambulatory services.
There’s also a significant opportunity to connect the two organizations’ different innovation ecosystems.
Minnesota is home to a major medtech industry, while Sutter operates in the heart of Silicon Valley, where AI and other emerging technologies are reshaping healthcare.
“We’re very advanced in medtech; many of the world’s leading companies, Medtronic and others, are in our backyard. Sutter is in Silicon Valley,” Mr. Watson said. “There are a lot of very different things happening, and figuring out how we knit them together is a really exciting prospect.”
Making the math work
Beyond expanding access, both CFOs see opportunities to improve their organizations’ underlying economics by leveraging existing infrastructure across a larger base of patients and services.
Mr. Ma pointed to several areas where the proposed combination could unlock efficiencies, including supply chain purchasing, revenue cycle management, shared administrative services and clinical best practices.
“We see a lot of potential synergies,” he said, adding that improvements across those functions could create opportunities to reinvest more resources into the communities each system serves.
Mr. Watson agreed that purchasing power could provide some financial benefits. Combining the volume of supplies purchased by two large systems, for example, could help them negotiate more favorable pricing.
But he cautioned that traditional purchasing synergies are only part of the opportunity.
“Most of what we’re going to see is leveraging our own fixed cost structure with greater volume, and that’s a big part of our growth strategy,” he said.
That distinction is important in an environment where many hospitals have already reduced expenses but continue to face a structural mismatch between reimbursement growth and expense inflation.
Mr. Watson said as with most health systems, with reimbursement rates increasing slower than expense inflation, there is an annual gap that has to be overcome just to stay even with where you are.
For a health system facing that kind of recurring financial pressure, maintaining the same operating footprint year after year becomes increasingly difficult.
“If you stay static, you have the same problem every year: Your revenue grows by a smaller percentage than your cost structure from an inflation standpoint,” he said. “If you let that roll out a couple of years and stay the same size, you’re in trouble.”
The need to grow is top of mind, and Allina’s current strategy is focused on increasing patient volume, expanding access and making better use of the assets and infrastructure it already has. The proposed combination would accelerate those efforts through Sutter’s capital investment and operational expertise.
“Pending regulatory approval, Sutter has committed to bringing in a significant amount of capital, but also expertise in areas where they’ve been very successful on the ambulatory side,” Mr. Watson said. “Being able to grow and scale that in our local market would give us the ability to leverage the assets we have better and use those fixed costs more effectively.”
The opportunity is also complementary for Sutter, which sees the combination as a way to share expertise across markets and strengthen care for patients in both regions.
Mr. Ma said the system sees opportunities for health systems operating in multiple regions to diversify their operations, share expertise and build broader platforms for delivering care.
“I think it’s a way for health systems to continue to diversify, grow and perhaps invest capital in different areas,” he said.
Both CFOs stressed that the combination remains a proposal pending regulatory approval, and significant integration and financial planning work lies ahead.
“Legally, we are two separate entities until we close, so we have to continue our independent efforts,” Mr. Watson said.
He noted that much of the detailed cost integration work cannot occur until the transaction closes, making it premature to quantify the full financial benefits.
The integration test
The biggest challenge may be turning the financial promise of the combination into measurable operational improvements across two organizations serving distinctly different markets.
Mr. Ma acknowledged that integrating health systems across state lines presents complexities, particularly as leaders work to align operations, financial systems and care delivery strategies. But he argued that Sutter already manages substantial variation within its existing California footprint.
Its Silicon Valley division, for example, has a different patient population, competitive environment and service mix than its Central Valley operations.
“Even though we are primarily in Northern California right now, even many of our adjacent markets are very different,” he said.
That experience could help Sutter approach integration with Allina in a way that balances systemwide efficiencies with the unique needs of local communities.
Mr. Watson emphasized that cultural compatibility and shared decision-making principles are essential to realizing the financial benefits of a combination.
He said Allina was deliberate in seeking a partner whose values, growth objectives and operating philosophy aligned with its own.
“We were only looking at a partnership or relationship where there was alignment of culture, values and in the way we look at the world, but also where it’s accretive from an expertise standpoint,” he said.
Mr. Watson argued that the most successful partnerships begin with a clear understanding of the problem each organization is trying to solve and whether the other brings capabilities that would be difficult to develop independently.
“I’ve done a lot of M&A work in my career, and you have to go back to what problem you’re trying to solve, and then whether there are others who can help you do that better than you can on your own,” he said. “It’s just like picking a great marriage partner.”
That philosophy is also shaping how the organizations are beginning to evaluate opportunities to work together.
Mr. Watson described an approach he called “share, compare and dare,” in which leaders examine how each organization performs a particular function, determine whether one has a stronger model and consider whether a different approach could improve both.
“Here’s how we do it; here’s how you do it. Is one of us clearly better at it, and should we adopt that? Or do we want to look at a third way?” he said.
The process could extend from clinical operations and administrative functions to AI, automation and other technologies that help the organizations improve efficiency.
For Mr. Ma, execution remains critical as Sutter navigates reimbursement pressures, evolving payer relationships and rising operating costs. He said finance leaders must continue to focus on the areas they can control, including revenue cycle performance, supply chain efficiencies and operational improvement.
“The budget is not a finance exercise,” he said. “It’s really the forcing function for us as an executive team and as leaders to really understand what the risks and the potential tailwinds could be.”
The proposed combination also comes as health systems nationwide face uncertainty surrounding Medicaid financing, Medicare reimbursement and the long-term sustainability of hospital operating margins.
Both CFOs see growth as an important response to those pressures, but not an end in itself.
Mr. Ma said Sutter’s priority remains expanding access where patient demand supports additional investment and where the organization has the resources and clinical partnerships necessary to deliver it.
“If we have the resources to continue reinvesting and the partnership of clinicians and medical groups, we should be trying to serve more patients,” he said.
Mr. Watson framed the strategy in terms of Allina’s nonprofit mission: Stronger margins are necessary not simply to improve financial performance, but to expand the organization’s ability to care for its communities.
He recalled an expression that has guided his thinking throughout his career: “More margin, more mission.”
“We’ve got to figure out how to generate more margin so we can do more great things for our patients and our community,” he said. “That’s what our plan has been about: how we grow in a way that lets us bring our great care to more people, while leveraging the cost structure we have, so we can spread that cost over greater volume and hopefully make the economics work.”
