Community hospitals stand to benefit greatly from healthcare transactions and consolidations, but only if done at the right time and for the right reasons. Partnerships, affiliations and mergers with larger hospitals and health systems may provide community hospitals with more resources to meet evolving healthcare standards and patient needs. For this reason, many community hospitals have already or are currently considering transactions. Here Joe Lupica, chairman of Newpoint Healthcare Advisors, discusses three emerging trends for community hospital transactions – when a transaction is warranted.
1. Emphasis on future community benefit. Community hospitals are increasingly looking to guarantee long-term benefits in the terms of transactions. "There are more ongoing commitments attached to hospitals. Transactions are moving away from black and white, binary agreements. "It is not longer a 'hand over the keys and you’re done' situation," says Mr. Lupica. Trustees are insisting on affiliations that will not only generate proceeds for the hospital's immediate operations but will also generate proceeds to reinvest in the future of the hospital and its community. These elements are incorporated into terms regardless of whether the community will continue to own the hospital. "Even when the community hospital retains no ownership interest, I have seen deals lay out terms for a hospital's obstetrics department to remain open for the next 10 to 40 years unless the medical standard of care for obstetrics changes," says Mr. Lupica. He warns, however, that hospital leaders must be sure to embed these commitments into the official transaction documents.
The proposed merger between Burlington, Mass.-based Lahey Clinic and Beverly, Mass.-based Northeast Health System is a recent transaction illustrating this trend. According to the proposed plans, "essential" services such as obstetrics, pediatrics, cancer and cardiac services at Northeast Health's Beverly Hospital and Addison Gilbert Hospital in Gloucester, Mass., would be preserved for at least three years, and all employees of the system would be kept on for at least one year.
2. Focus on post-transaction governance. According to Mr. Lupica, more hospitals are designing post-transaction governance beyond economic ownership. For instance, minority organizations in the transaction — and even partners who may no longer have an economic interest in the resulting entity — have successfully negotiated for the right to appoint board members to the hospital board, or at least to a governing board with documented powers. "This speaks to how the focus is shifting to what occurs after a transaction — what the structure will look like, how the investments will be used and so on — rather than on ownership, per se," says Mr. Lupica.
In addition, more hospitals are including details for managing and clinical partners or creating unique ownership and governance agreements, says Mr. Lupica. The recent merger between Waterbury (Conn.) Hospital, St. Mary's Hospital in Waterbury and LHP Hospital Group in Plano, Texas, is an example of interesting ownership and governance terms. Under the terms, LHP was given an 80 percent interest in the joint venture with the Greater Waterbury Health Network, the parent of Waterbury Hospital, and St. Mary's each owning 10 percent interest. Governance of the joint venture is shared among all three entities.
The recent transaction between Twin County Regional Healthcare in Galax, Va., and Duke LifePoint Healthcare in Brentwood, Tenn., to jointly own and operate Twin County Regional also includes unique governance terms. Under the final agreement, Duke LifePoint owns 80 percent of Twin County Regional and its assets, while the Twin County board of directors retains 20 percent ownership. While ownership is split 80/20, governance of the hospital is equally shared between Twin County and Duke LifePoint.
3. Bigger presence by non-profits. In the past, hospital executives may not have thought to consider a non-profit hospital or health system as a potential partner in a transaction, but that is no longer true. According to Mr. Lupica, non-profits have developed more aggressive acquisition programs with departments and officers specifically targeted to seek and develop potential transactions.
"When I call a non-profit system to talk about an acquisition opportunity they now answer the phone or call right back. In the old days when I called a non-profit system, the purpose of my call didn't always compute for them. It was hard to get through a phalanx of staffers to reach someone who wanted to hear about a system development idea. Now, they connect you directly to the vice president of strategy," says Mr. Lupica. Since non-profits have become more proactive in the transaction market, a hospital looking for a potential partner will lose out on a diverse array of options if it does not consider non-profit organizations.
Raising Hospital Value Multiples: 5 Best Practices
Restructuring or Turning Around a Hospital: It Doesn’t Mean Bankruptcy
1. Emphasis on future community benefit. Community hospitals are increasingly looking to guarantee long-term benefits in the terms of transactions. "There are more ongoing commitments attached to hospitals. Transactions are moving away from black and white, binary agreements. "It is not longer a 'hand over the keys and you’re done' situation," says Mr. Lupica. Trustees are insisting on affiliations that will not only generate proceeds for the hospital's immediate operations but will also generate proceeds to reinvest in the future of the hospital and its community. These elements are incorporated into terms regardless of whether the community will continue to own the hospital. "Even when the community hospital retains no ownership interest, I have seen deals lay out terms for a hospital's obstetrics department to remain open for the next 10 to 40 years unless the medical standard of care for obstetrics changes," says Mr. Lupica. He warns, however, that hospital leaders must be sure to embed these commitments into the official transaction documents.
The proposed merger between Burlington, Mass.-based Lahey Clinic and Beverly, Mass.-based Northeast Health System is a recent transaction illustrating this trend. According to the proposed plans, "essential" services such as obstetrics, pediatrics, cancer and cardiac services at Northeast Health's Beverly Hospital and Addison Gilbert Hospital in Gloucester, Mass., would be preserved for at least three years, and all employees of the system would be kept on for at least one year.
2. Focus on post-transaction governance. According to Mr. Lupica, more hospitals are designing post-transaction governance beyond economic ownership. For instance, minority organizations in the transaction — and even partners who may no longer have an economic interest in the resulting entity — have successfully negotiated for the right to appoint board members to the hospital board, or at least to a governing board with documented powers. "This speaks to how the focus is shifting to what occurs after a transaction — what the structure will look like, how the investments will be used and so on — rather than on ownership, per se," says Mr. Lupica.
In addition, more hospitals are including details for managing and clinical partners or creating unique ownership and governance agreements, says Mr. Lupica. The recent merger between Waterbury (Conn.) Hospital, St. Mary's Hospital in Waterbury and LHP Hospital Group in Plano, Texas, is an example of interesting ownership and governance terms. Under the terms, LHP was given an 80 percent interest in the joint venture with the Greater Waterbury Health Network, the parent of Waterbury Hospital, and St. Mary's each owning 10 percent interest. Governance of the joint venture is shared among all three entities.
The recent transaction between Twin County Regional Healthcare in Galax, Va., and Duke LifePoint Healthcare in Brentwood, Tenn., to jointly own and operate Twin County Regional also includes unique governance terms. Under the final agreement, Duke LifePoint owns 80 percent of Twin County Regional and its assets, while the Twin County board of directors retains 20 percent ownership. While ownership is split 80/20, governance of the hospital is equally shared between Twin County and Duke LifePoint.
3. Bigger presence by non-profits. In the past, hospital executives may not have thought to consider a non-profit hospital or health system as a potential partner in a transaction, but that is no longer true. According to Mr. Lupica, non-profits have developed more aggressive acquisition programs with departments and officers specifically targeted to seek and develop potential transactions.
"When I call a non-profit system to talk about an acquisition opportunity they now answer the phone or call right back. In the old days when I called a non-profit system, the purpose of my call didn't always compute for them. It was hard to get through a phalanx of staffers to reach someone who wanted to hear about a system development idea. Now, they connect you directly to the vice president of strategy," says Mr. Lupica. Since non-profits have become more proactive in the transaction market, a hospital looking for a potential partner will lose out on a diverse array of options if it does not consider non-profit organizations.
More Articles on Hospital Transactions:
Pursuing Affiliation for Community and Patient Care: Q&A With Alan Channing, CEO of Sinai Health SystemRaising Hospital Value Multiples: 5 Best Practices
Restructuring or Turning Around a Hospital: It Doesn’t Mean Bankruptcy