As hospitals and health systems face pressure to simultaneously contain costs and improve patient outcomes, they are increasingly forced to consolidate.
That solution presents them with a whole new set of challenges. In a McGuireWoods webinar, Scott Becker, partner and publisher of Becker's Hospital Review, and attorneys Bart Walker, Geoff Cockrell and Holly Carnell gave an overview of the most interesting and challenging aspects of hospital sale transactions.
They discussed basic issues of hospital transactions and shared their experience leading and co-leading such deals. Additionally, they provided insight into what a successful transaction looks like.
The approval process
First, panelists discussed going through the attorney general regulatory approval process. Ms. Carnell was recently involved in a transaction where a 150-bed community hospital was sold to a for-profit strategic buyer. She noted that when a for-profit system is buying a nonprofit hospital, the state attorney general will be interested in the value of the sale as well as the disposition of sale proceeds. The attorney general wants to ensure proceeds are used in a way that reflects the nonprofit's charitable mission.
The transaction process also varies from state to state. Regulations can vary across state lines, and nuances of the market also influence how the deal is done. For instance, if the state is dealing with its first transaction involving a for-profit and community hospital, or if this is the state's first hospital sale after a deal previously went sour, then the approval process will be more rigorous, Ms. Carnell said.
Mr. Cockrell was recently involved in a hospital sale in Michigan, and he said the attorney general approval process was likely the most challenging part. Due to Detroit's distressed financial situation, the Michigan attorney general took more time to look at the important aspects and practical details of the transaction. "That was by far the most extended time driver," he added.
Picking the right transaction partner
When a hospital or health system is choosing a transaction partner, they look at buyers outside of their market as well as direct competitors. Geography does not always dictate these deals: Hospitals sometimes find their natural transaction partner is 30 miles or 40 miles away.
And yet there is another option: An investment bank can help a hospital by providing a broad range of potential buyers from different geographic regions.
Ultimately, the decision boils down to the hospital's wants and needs. For instance, one hospital may want a regional partner that can help it increase market share.
Mr. Cockrell recalled a recent affiliation where a larger hospital talked to many potential partners and had to choose one of many. He believes culture was the biggest driver in the one they chose. "It's really amazing how culture really does drive a lot of these decisions," he said.
As far as capital investment, Ms. Carnell said she's seen many cases where a hospital desires to know what types of capital investments the buyer will make in the short- and long-term. These investments, such as facility maintenance or upgrades, often end up as conditions of many hospital sales.
Insights
Panelists were also asked about the most interesting issues they've encountered in recent years while going through the hospital transaction process.
Mr. Walker said he's seen at a local level how politics and public sentiment shapes the process, and how you have to carefully manage that to ensure that the hospital board isn't getting ahead of constituents.
Ms. Carnell has received feedback after a deal has closed, indicating that the hospital is doing great and the community is satisfied.
"It's great when the community wins," she said.