Small and medium independent hospitals are facing increasing pressure as healthcare organizations form mergers, affiliations and other combined arrangements. Should these independent hospitals join the masses and sell to a larger system or hospital? Two experts in hospital management share questions independent hospital leaders should ask to determine if a sale or affiliation would benefit the organization and if so, how to begin the negotiating process.
1. Have I made the hospital as efficient as possible? Bill Siren, practice leader of Healthcare in the Financial Advisory Services unit at consulting firm AlixPartners, says independent hospitals should exhaust opportunities to improve the facility's efficiency before considering a sale. If the administration has done everything possible to increase efficiency and the hospital is still losing money, "then it's not much of a choice," Mr. Siren says — hospitals should pursue a merger or affiliation.
Mr. Siren suggests one way non-profit independent hospitals can improve their efficiency is to behave like a for-profit hospital. "If non-profit hospitals would begin to operate more like their for-profit brethren, they would see a huge change in their status both clinically and financially. When you look at the best-performing hospitals across the country, many of them are for-profit entities." he says.
2. What are my reasons for forming a merger of affiliation? Mr. Siren says the first step in considering a relationship with another hospital is understanding the reasons for building a relationship, because they may determine what type of relationship — a merger, clinical partnership, etc. — the hospital should pursue. There are a variety of reasons independent hospitals may decide to integrate with another system, including improving efficiency, implementing technology, forming an accountable care organization and gaining profit. Leaders should articulate these reasons so they can form a relationship best suited to the hospital's goals.
Howard J. Peterson, managing partner of the management consulting firm TRG Healthcare, says the underlying reason for considering an affiliation or merger should be helping the hospital follow its mission. "[TRG's] mindset for an independent hospital is that the fundamental fiduciary question for a board is to figure out what the best position is for their hospital to continue its mission of service to the community. Board members often confuse that; they often start with the premise that their fiduciary responsibility is [for the hospital] to remain independent," he says.
3. What type of transaction would best meet my needs? Independent hospitals have several options when building a relationship with a larger hospital. The hospital can sell, partner for clinical services or partner for capital, among other options. Mr. Siren says independent hospitals may pursue a capital partnership if they are failing financially, but want to keep their administration in place. "There are other ways to access capital and at the same time maintain independence," he says.
One factor in choosing a merger, partnership or other arrangement is the system of governance. Independent hospitals should learn how the leadership of the new relationship will be structured. They should think about who will manage each separate organization and how both teams will interact. "It's not only about local governance for the independent hospital that joins a system, but [also] participation in the system's governance," Mr. Peterson says.
As leaders consider a form of integration, however, they should remember that one option is always to remain independent, according to Mr. Peterson. "Just because you go through a process doesn't mean you've taken independence off the table," he says.
4. What are my decision-making criteria? Mr. Peterson suggests setting decision-making criteria before beginning negotiations with an organization. "Make [them] before you start your process, because boards and management can agree on principles and criteria. But if you wait until the end to figure out how you'll decide, people make criteria to get their preferred outcome," he says. Examples of criteria for choosing a partner or buyer include access to capital, alignment with the hospital's mission, continuation of clinical services and a long-term plan for the hospital's survival.
5. What hospitals and health systems would I consider? Including multiple organizations in the negotiating process is a key to pursuing a merger or partnership, Mr. Peterson says. "If I'm an independent hospital, the last thing I want to do is decide to have a discussion with just one other party. There are two fundamental problems: One, you lose leverage because you don't keep the other choices in the mix. The other problem is that [you] are unlikely to get information on what partnerships could look like with a variety of parties," he says.
Approaching only one organization reduces the hospital's ability to successfully negotiate because the other organization does not have to compete with another entity. "The best outcomes are from the preservation of a competitive dynamic," Mr. Peterson says. In addition to shrinking the independent hospital's negotiating power, excluding multiple organizations from consideration limits the amount of information the hospital can learn. "[The process] should really be about information gathering for making an incredibly important decision. Gather it from multiple sources," Mr. Peterson says.
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5 Changes That Can Increase a Hospital's Value
Rethinking Your Hospital's Independence?
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1. Have I made the hospital as efficient as possible? Bill Siren, practice leader of Healthcare in the Financial Advisory Services unit at consulting firm AlixPartners, says independent hospitals should exhaust opportunities to improve the facility's efficiency before considering a sale. If the administration has done everything possible to increase efficiency and the hospital is still losing money, "then it's not much of a choice," Mr. Siren says — hospitals should pursue a merger or affiliation.
Mr. Siren suggests one way non-profit independent hospitals can improve their efficiency is to behave like a for-profit hospital. "If non-profit hospitals would begin to operate more like their for-profit brethren, they would see a huge change in their status both clinically and financially. When you look at the best-performing hospitals across the country, many of them are for-profit entities." he says.
2. What are my reasons for forming a merger of affiliation? Mr. Siren says the first step in considering a relationship with another hospital is understanding the reasons for building a relationship, because they may determine what type of relationship — a merger, clinical partnership, etc. — the hospital should pursue. There are a variety of reasons independent hospitals may decide to integrate with another system, including improving efficiency, implementing technology, forming an accountable care organization and gaining profit. Leaders should articulate these reasons so they can form a relationship best suited to the hospital's goals.
Howard J. Peterson, managing partner of the management consulting firm TRG Healthcare, says the underlying reason for considering an affiliation or merger should be helping the hospital follow its mission. "[TRG's] mindset for an independent hospital is that the fundamental fiduciary question for a board is to figure out what the best position is for their hospital to continue its mission of service to the community. Board members often confuse that; they often start with the premise that their fiduciary responsibility is [for the hospital] to remain independent," he says.
3. What type of transaction would best meet my needs? Independent hospitals have several options when building a relationship with a larger hospital. The hospital can sell, partner for clinical services or partner for capital, among other options. Mr. Siren says independent hospitals may pursue a capital partnership if they are failing financially, but want to keep their administration in place. "There are other ways to access capital and at the same time maintain independence," he says.
One factor in choosing a merger, partnership or other arrangement is the system of governance. Independent hospitals should learn how the leadership of the new relationship will be structured. They should think about who will manage each separate organization and how both teams will interact. "It's not only about local governance for the independent hospital that joins a system, but [also] participation in the system's governance," Mr. Peterson says.
As leaders consider a form of integration, however, they should remember that one option is always to remain independent, according to Mr. Peterson. "Just because you go through a process doesn't mean you've taken independence off the table," he says.
4. What are my decision-making criteria? Mr. Peterson suggests setting decision-making criteria before beginning negotiations with an organization. "Make [them] before you start your process, because boards and management can agree on principles and criteria. But if you wait until the end to figure out how you'll decide, people make criteria to get their preferred outcome," he says. Examples of criteria for choosing a partner or buyer include access to capital, alignment with the hospital's mission, continuation of clinical services and a long-term plan for the hospital's survival.
5. What hospitals and health systems would I consider? Including multiple organizations in the negotiating process is a key to pursuing a merger or partnership, Mr. Peterson says. "If I'm an independent hospital, the last thing I want to do is decide to have a discussion with just one other party. There are two fundamental problems: One, you lose leverage because you don't keep the other choices in the mix. The other problem is that [you] are unlikely to get information on what partnerships could look like with a variety of parties," he says.
Approaching only one organization reduces the hospital's ability to successfully negotiate because the other organization does not have to compete with another entity. "The best outcomes are from the preservation of a competitive dynamic," Mr. Peterson says. In addition to shrinking the independent hospital's negotiating power, excluding multiple organizations from consideration limits the amount of information the hospital can learn. "[The process] should really be about information gathering for making an incredibly important decision. Gather it from multiple sources," Mr. Peterson says.
Related Articles on Hospital Transactions:
5 Changes That Can Increase a Hospital's Value
Rethinking Your Hospital's Independence?
Private Equity Funds Are Changing the Face of U.S. Hospitals