Much of today’s activity in hospitals and health systems continues to focus on consolidation. Hospitals have been here before, but today’s pressures have added to the list of strategic reasons to consider partnerships with other hospitals or health systems.
“Many of the forces behind today’s consolidation are similar to those in the past. However, this cycle’s deeper and more prolonged economic downturn is the key backdrop driving the recent wave of consolidations . . . Spiraling healthcare costs and the insurmountable federal deficit necessitate reducing waste and gaining efficiencies through consolidation.” (Lisa Goldstein, Moody’s Investors Service Special Comment: New Forces Driving Rise in Not-for-Profit Hospital Consolidation. March 8, 2012)
Lisa Goldstein (Moody’s Investors Service), Michael Irwin (CitiGroup), and Ken Kaufman and Kit Kamholz (Kaufman, Hall & Associates) speak on the continuing trend towards healthcare consolidation in the iProtean course Mergers & Acquisitions. They cover why hospitals are now at a crossroads, the history of consolidation, M & A considerations, partnering options, key metrics, the consolidation process, and critical questions you need to ask.
Lisa Goldstein, Moody’s Investors Service
When a hospital is considering a merger partner or an acquisition strategy to purchase another hospital, it is up to all of the board members to assess the organization’s long-term future. We meet with many hospitals that want to remain independent, maybe they have been independent and operating in their market for the past 100 years, or the past 50 years and there is a strong desire to remain independent. It’s really up to the board members, however, to not look at the past but look to the future and to the best of their ability determine what are the best steps for the hospital’s future viability to remain a viable member of their community, providing high quality care. And in certain cases the answer may be we actually need to find a merger partner, we need to find a capital partner to ensure that for the next 50 years or 100 years we can provide high quality services.
For many board members this can be a very difficult decision to make because they have been an independent provider of healthcare. But it is a necessary discussion that we believe needs to happen at the board level with senior management to make what may be a tough decision for the long term viability of the hospital.
Michael Irwin, CitiGroup
We certainly find ourselves at an interesting crossroads. There have been several emerging trends that have created pressure on not-for-profit healthcare organizations. Constrained revenue stream is one, especially given the high level of reliance on federal government funding, and the budget challenges confronting states and local governments. This pressure continues to build. At the same time, hospitals and health systems have the physician realities—the physicians they have been working with are exposed to the same kind of pressure. You also have the challenges of the capital markets. And on top of all of that you have the new imperatives that healthcare reform suggests for all organizations.
As a result of these and several other factors, many boards realize there are some serious challenges out there, and it means they are going to have to explore alternatives in order to deal with the challenges. If you ask people in the hospital business, they will tell you, “Everybody’s talking to everybody else.” That is a natural outcome of a period of challenge. Those better prepared to confront the challenge consider bringing more hospitals into their health systems, while others, finding themselves very vulnerable, are recognizing that they are going to have to take steps to do something.
Ken Kaufman, Kaufman, Hall & Associates
Consolidation is a very interesting phenomenon in economics in American industry. One of the things we have to understand is that it is a naturally occurring phenomenon in our 21st century economy. Consolidation tends to move at a faster pace when you’re in the midst of business model changes, and we have a business model change going on in healthcare. That is one of the factors now pushing consolidation. Many organizations begin to look for a partner because they can’t handle the transition from one business model to the other, and that makes perfect sense. If you have been in business for 50 or 60 or 70 years and you are very accomplished under one business model, it’s not obvious to you that you’re going to be accomplished under another business model. Just think of Joe Smith who owns the steel company and then he sees this huge business model change because of low-cost steel in China and low-cost steel in India. His best feeling about how to continue his firm may be to consolidate it with another firm because he may feel there just isn’t the talent or the cash flow necessary in order to manage his steel firm in another business model. And that, of course, is very analogous to what is happening in hospitals.
Kit Kamholz, Kaufman, Hall & Associates
There is a whole spectrum of potential partnership options available to community hospitals and other organizations considering partnerships in hospital and health system mergers and acquisitions. We generally divide them into things that are less than fully integrated and structures that are more than fully integrated . . . so if you have large capital needs or you’re in financial distress, you’re probably going to lean towards a more fully integrated structure to capture the financial elements of that. If some of your needs lie more on specific service lines that you want to develop, perhaps an affiliation arrangement with a tertiary care provider in your market can provide you with that specific type of opportunity. So, it depends on the goals and objectives the organization is trying to accomplish in terms of where it ends up on that partnership spectrum.
In terms of community hospitals considering partnership alternatives, there are four critical questions they want to be able to address as they consider partnership options. The questions are: who is going to be a strong partner? . . . what would it mean to operate as part of a larger system? . . . how well does that partner’s proposal match your goals and objectives? . . . are you better off entering into the partnership knowing what you know about that partnership, or is the organization better off remaining independent and continuing on its own path?
Michael Irwin, CitiGroup
M & A activities are likely to continue for the foreseeable future, which provides both good news and bad news to hospital trustees. There will be more formidable competition in many markets as a result of this. Trustees are going to have to be very careful in their consideration of whether their organization has the resources to meet their community need to ensure high quality services are available in the community they have served for a long time.
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iProtean Symposium & Workshop
Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.
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