Nontraditional partnerships explicitly form to manage accountable care organizations and clinically integrated networks. Shared governance is typical in these types of partnerships. Other nontraditional partnerships include insurance companies, retailers and pharmacy companies.
Accountable care organizations and clinically integrated networks both collaborate among hospitals and physicians to manage large groups of patients to reduce the cost of care below a certain benchmark and allow independent physicians to collaborate with a hospital without violating anti-trust laws.
Clinically integrated networks have their own governance structures that work with hospital management to establish, implement and monitor outcomes and costs against targets. Physicians in a clinically integrated network are not necessarily employed by the hospital as opposed to the traditional M&A or physician practice acquisition by hospitals.
Nontraditional partnerships present risks different from traditional M&As. For example, financial risks loom large, especially for new lines of business. Or if the healthcare system provides its brand equity (i.e., its name on buildings and marketing materials), it risks dilution of its reputation from poor customer experience.
Credit Impact
Moody’s Investors Service considers various financial and strategic factors when evaluating the credit impact of a given nontraditional partnership. (Moody’s Investors Service Sector in Depth, May 2016) These include:
- The size of the venture relative to overall operations
- Size of the investment and projected impact to operating margins
- Choice of financing (debt, equity or use of joint venture partner’s financing)
- Legal structure of the partnership
“In general, the credit effect of financial disruptions from any new strategy with nontraditional partners depends on management’s ability to make mid-plan course corrections, availability of cash reserves or access to liquidity and financial strength of the system.” (Hospitals Look to Nontraditional Partnerships to Diversify Operations, Moody’s Investors Service Sector in Depth, May 2016)
Moody’s noted in its report that most negative rating actions to date have resulted from challenges associated with insurance companies or “large scale” physician integration plans. Its analysts wrote, “We consider insurance companies to be among the riskiest nontraditional partnerships because most hospitals’ expertise is in the delivery side of health care, not the underwriting side.” Required experience/skills include strong actuarial expertise in underwriting, pricing know-how, customer service and proven ability to project use rates.
With respect to large scale physician integration plans, the credit risk arises from the need to meld cultures and to make employment terms clear.
We extend a special thank you to Moody’s Investors Service for allowing iProtean, now part of Veralon to share its Sector In-Depth with our subscribers.
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