Hospital and health system consolidation is on the rise, and most experts believe healthcare delivery will further consolidate under a reimbursement model that rewards efficiency and integration — the model many predict will govern healthcare payments of the future. Hospitals that haven't adequately prepared for the move toward integrated care and bundled payments could find themselves looking for an acquisition, merger or other type of affiliation. Even forward-thinking organizations that want to adjust their business model may find they lack the capital needed to do so.
As a result, these facilities will be seeking partners. While for-profit and non-profit systems are often eager to expand their market share with a promising acquisition or partnership, over the past several years a number of facilities across the country have been forced to close after failing to find a buyer. This is not to say that all independent facilities are doomed, but those with shaky foundations should begin seriously thinking about a partnership — before their operations decline to a point where they are no longer attractive.
Forces toward consolidation
Two key factors that lead hospitals to seek a partner are unsustainable finances and lack of access to capital, says James M. Fojut, a director in Navigant Consulting's healthcare practice. Poor reimbursement and high levels of charity care are taxing for a hospital, and in some cases, improving the efficiency of operations isn't enough to stay in the black if the hospital has a large percentage of uninsured, Medicare and Medicaid patients and/or unfavorable commercial contracts.
Additionally, integrated health systems often receive higher rates than standalone hospitals. According to Mr. Fojut, payors are looking to provide strong and stable networks of hospitals and physicians to employers and their employees. Systems are better positioned to provide a more comprehensive and more integrated range of services over a broader geographic area than a stand-alone facility, which often translates into better rates.
Jordan Shields, a vice president at Juniper Advisory, a healthcare investment bank based in Chicago, categorizes the forces that might lead a hospital board to consider a sale or merger into two categories: situational and systemic factors. Situational factors — such as short-term operational hiccups or the loss of a key physician group — are issues that can be overcome with strong turnaround advisors. Systemic issues, which include lack of access to capital, long-term reimbursement issues and long-term difficulties in recruiting physicians, are more concerning. Mr. Shields says he would advise hospitals with these more serious issues to explore a merger or sale.
Even hospitals that break even may need to bring in partners to gain access to resources needed for success under healthcare reform. These may include electronic medical record systems and other software needed to take on risk-bearing reimbursement. Hospitals with some financial trouble but great potential — for example, facilities with good physicians but poor contracts or lack of access to capital — are most attractive to systems with access to better contracts and money for investment.
Avoid preconceived partnership structures
If a hospital board decides to move forward with a partnership or sale, Mr. Shields recommends the board members be as open as possible to all partnership structures, if they want to draw the most attractive offer possible from the market. "It's usually a bad idea to have a preconceived notion of [what structure to consider] before learning from the market which options are at your disposal," says Mr. Shields. "To go only to the big non-profit medical center down the street because you've worked with them in the past isn't likely to result in the best offer possible."
Rex Burgdorfer, who is also a vice president with Juniper Advisory, concurs. "The market of buyers often has really good and creative ideas," he says. "A big hospital operator with 100-plus hospitals is likely to have some good ideas about what could be done better or differently. Even if the potential seller has no intent (at least initially) of considering for-profit companies, they should go to them to benefit from their expertise."
To illustrate, Mr. Burgdorfer explained that a recent client his firm worked with received offers that spanned six different partnership structures. These could include:
The number and value of offers a facility receives depends, of course, on the seriousness of situational and systemic factors that plague it as well as the goals of the buyer. Mr. Shields explains that national buyers are looking specifically at the opportunity to grow the facility's business and improve operations. Regional buyers are also concerned with these issues, but additionally consider how bringing the hospital into their system will help them integrate and distribute care across a continuum. For example, they may gain an advantage by partnering with a hospital and shifting which services are offered at each of their facilities.
Mr. Fojut adds that hospitals can increase their odds of receiving an attractive offer by playing to the buyer's goals. "If it's a particular service line they want, show them the awards you've received for this area or indicators [of strong performance]," he says.
Selecting a partner
Once a hospital board has received offers from the market, they will select key contenders based on two considerations: economic and noneconomic factors. As Mr. Fojut puts it, "How much are they going to get?" is a major driver. Buyers may offer a combination of cash, assumption of debt and pledges for future investment.
After that, noneconomic factors come into play. These include:
In the end, the board must find a balance between economic and noneconomic characteristics of the deal and then work to promote the deal and its importance in protecting future healthcare access to its key stakeholders.
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As a result, these facilities will be seeking partners. While for-profit and non-profit systems are often eager to expand their market share with a promising acquisition or partnership, over the past several years a number of facilities across the country have been forced to close after failing to find a buyer. This is not to say that all independent facilities are doomed, but those with shaky foundations should begin seriously thinking about a partnership — before their operations decline to a point where they are no longer attractive.
Forces toward consolidation
Two key factors that lead hospitals to seek a partner are unsustainable finances and lack of access to capital, says James M. Fojut, a director in Navigant Consulting's healthcare practice. Poor reimbursement and high levels of charity care are taxing for a hospital, and in some cases, improving the efficiency of operations isn't enough to stay in the black if the hospital has a large percentage of uninsured, Medicare and Medicaid patients and/or unfavorable commercial contracts.
Additionally, integrated health systems often receive higher rates than standalone hospitals. According to Mr. Fojut, payors are looking to provide strong and stable networks of hospitals and physicians to employers and their employees. Systems are better positioned to provide a more comprehensive and more integrated range of services over a broader geographic area than a stand-alone facility, which often translates into better rates.
Jordan Shields, a vice president at Juniper Advisory, a healthcare investment bank based in Chicago, categorizes the forces that might lead a hospital board to consider a sale or merger into two categories: situational and systemic factors. Situational factors — such as short-term operational hiccups or the loss of a key physician group — are issues that can be overcome with strong turnaround advisors. Systemic issues, which include lack of access to capital, long-term reimbursement issues and long-term difficulties in recruiting physicians, are more concerning. Mr. Shields says he would advise hospitals with these more serious issues to explore a merger or sale.
Even hospitals that break even may need to bring in partners to gain access to resources needed for success under healthcare reform. These may include electronic medical record systems and other software needed to take on risk-bearing reimbursement. Hospitals with some financial trouble but great potential — for example, facilities with good physicians but poor contracts or lack of access to capital — are most attractive to systems with access to better contracts and money for investment.
Avoid preconceived partnership structures
If a hospital board decides to move forward with a partnership or sale, Mr. Shields recommends the board members be as open as possible to all partnership structures, if they want to draw the most attractive offer possible from the market. "It's usually a bad idea to have a preconceived notion of [what structure to consider] before learning from the market which options are at your disposal," says Mr. Shields. "To go only to the big non-profit medical center down the street because you've worked with them in the past isn't likely to result in the best offer possible."
Rex Burgdorfer, who is also a vice president with Juniper Advisory, concurs. "The market of buyers often has really good and creative ideas," he says. "A big hospital operator with 100-plus hospitals is likely to have some good ideas about what could be done better or differently. Even if the potential seller has no intent (at least initially) of considering for-profit companies, they should go to them to benefit from their expertise."
To illustrate, Mr. Burgdorfer explained that a recent client his firm worked with received offers that spanned six different partnership structures. These could include:
- An outright acquisition. A buyer pays cash to acquire a hospital's business and assets.
- An asset merger. A buyer absorbs a hospital's balance sheet under the parent company's umbrella.
- Whole hospital joint venture. A buyer acquires a majority stake, while the selling hospital retains a minority stake in future operations, entitling it to 50/50 board representation.
- Membership substitution. The seller hospital keeps its balance sheet intact and maintains some governance but reports up to buyer/partner.
- Affiliations. These range from less invasive to more invasive and do not involve ownership changes. Examples include contracts for clinical services and/or clinical oversight to licensing and branding agreements.
The number and value of offers a facility receives depends, of course, on the seriousness of situational and systemic factors that plague it as well as the goals of the buyer. Mr. Shields explains that national buyers are looking specifically at the opportunity to grow the facility's business and improve operations. Regional buyers are also concerned with these issues, but additionally consider how bringing the hospital into their system will help them integrate and distribute care across a continuum. For example, they may gain an advantage by partnering with a hospital and shifting which services are offered at each of their facilities.
Mr. Fojut adds that hospitals can increase their odds of receiving an attractive offer by playing to the buyer's goals. "If it's a particular service line they want, show them the awards you've received for this area or indicators [of strong performance]," he says.
Selecting a partner
Once a hospital board has received offers from the market, they will select key contenders based on two considerations: economic and noneconomic factors. As Mr. Fojut puts it, "How much are they going to get?" is a major driver. Buyers may offer a combination of cash, assumption of debt and pledges for future investment.
After that, noneconomic factors come into play. These include:
- Governance issues. For example, will the smaller hospital have seats on the board? Will local interests be represented?
- Cultural issues. Combining any combination of religious, secular, public and/or private institutions can be done but is more difficult than merging like institutions.
- Commitments to retain employees. Will the partner commit to no or low levels of layoffs?
- Commitments to maintain services. Will the partner commit to keep all services lines open for a certain amount of time? Will the partner commit to maintain current levels of charity care?
In the end, the board must find a balance between economic and noneconomic characteristics of the deal and then work to promote the deal and its importance in protecting future healthcare access to its key stakeholders.
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