Hospital boards sit in a precarious situation today: Sit idle during the waves of healthcare reform, or move aggressively to look at partnerships with other institutions.
While there is no one right answer, hospital and health system leaders have to at least comb through the top healthcare transactions trends and issues and figure out where their organization sits in their respective market.
For boards that have decided to take the plunge, here are nine thoughts that must be considered.
1. It is difficult to determine the exact time to start a transaction. There is never a perfect time to enter the M&A market, but there is a bad time. It may behoove hospital boards to consider transactions while they are still healthy instead of waiting until the organization's finances begin to falter. Once a system or hospital is struggling, it will have less negotiating power, and it can be difficult to find a partner. Some recent examples of self-described "healthy" systems that have been proactive in partnership talks include Jameson Health System in New Castle, Pa., and Community Memorial Healthcenter in South Hill, Va.
2. A hospital system has to cast a broad net when looking for buyers. In some instances, board members may prefer to only hold affiliation discussions with two or three preferred partners. However, in almost all circumstances, a board is better off looking at a wide list of potential suitors. It's not uncommon today to see the most successful transactions include eight to more than a dozen interested parties. A larger array of choices will allow hospital board members to have more leverage in choosing the right partner.
3. Similarly, board members should leave their biases about specific buyers at the door. Hospitals should consider all interested buyers and not limit their field too closely. Board members may have preconceived notions of partners who will be "good" or "bad" for a system, but those biases are better left checked at the door. Today's era of healthcare reform requires hospitals to consider aligning their goals with all providers that are willing to make the right investment. The partner they may have the preconceived bias toward may be the right strategic partner for them.
4. An investment banker is becoming a must. This past January, PinnacleHealth in Harrisburg, Pa., and Penn State Milton S. Hershey (Pa.) Medical Center announced investment banking firm Cain Brothers would advise on their pending affiliation. These types of moves have become more commonplace in the hospital sector, as transactions have become so complex that they often need an investment banker, notwithstanding the fees that may be paid. However, the investment banker must be capable, qualified and driven to do a great transaction for the board. Other hospital-focused investment bankers include Juniper Advisory, Newpoint Healthcare Advisors, Raymond James, AMB, Stroudwater Associates, KeyBanc, Duff & Phelps and many others.
5. The board must spend a lot of time deciding what it wants from the transaction. Is it looking for a merger where it remains in partial control? Is it looking for management help only? Is it looking to fully sell the hospital? Is it looking for an acquirer who will retain the facility as an acute-care hospital? Is it looking for capital to expand or rebuild? What are the long-term goals? Overall, what does the board ultimately want to get out of the transaction? These questions, among many others, must be considered upfront and not during the frenzy of negotiations.
6. Internal diligence must be conducted. Different types of internal issues can derail or interfere with a transaction, and they should be discovered early so that they can be managed more easily. For example, hospital boards must consider self-disclosure or working through any potential Stark Law or Anti-Kickback Statute issues, and they should review physician relationships, HIPAA compliance, medical staff credentialing and compliance within billing, coding and the revenue cycle.
7. A letter of intent does not mean the deal is closed. Discontinued M&A deals are not uncommon in the healthcare space: Last year, Livonia, Mich.-based CHE Trinity Health and St. Joseph's Hospital Health Center in Syracuse, N.Y., decided to not move forward with their proposed affiliation. This past January, Winfield, Ill.-based Cadence Health and Rockford (Ill.) Health System also ended merger discussions. A letter of intent is only part of the battle, and a deal is from over once the LOI is signed. Board members and hospital leaders must remain vigilant about the hospital business while they work on concluding the transaction. They also should be prepared with a plan B in case the transaction does not close.
8. Understand the workings of transactions short of a merger or sale. The board should fully know what they expect and whether there are means to terminate the relationship.
9. Anticipate obstacles early. The most successful hospital transactions are those in which board members and executives have a clear plan and lay out their options in the event something goes awry. Foresight in hospital leaders is worth its weight in gold.
More Articles on Hospital Transactions:
Hospital M&A Activity Grew Slightly in 2013
Hospital Transaction Outlook for 2014: 6 Things to Watch
Troubled Transactions: Why There's Still Hope for Financially Struggling Hospitals