Dissecting the hospital and health system market could take many routes, especially within the transaction field, but one trend continues to be evident: More hospitals are joining forces, either formally or through loose affiliations, to take on the new era of population health.
Some industry experts have said more than 1,000 hospital mergers and acquisitions have taken place since 1994. Further, many hospitals and health systems — especially smaller, community hospitals — have gotten creative with transactions, such as creating clinical affiliations and joint ventures instead of resorting to full-asset mergers or sales.
Franciscan Health System, a six-hospital system based in Tacoma, Wash., and part of Englewood, Colo.-based Catholic Health Initiatives, has been part of the active M&A scene, especially as of late. Franciscan CFO Mike Fitzgerald has held his position since 1996 and has played an active role in helping Franciscan expand its base in the Puget Sound area. Here, he talks about Franciscan's latest deals, what CFOs should be doing in hospital transaction today and how integration should not take away from a CFO's other responsibilities.
Question: In April, Franciscan finalized its affiliation with Burien, Wash.-based Highline Medical Center, making it the sixth hospital within your organization. What was the process like, and what were some of the motivations behind it?
Mike Fitzgerald: Highline approached us seeking a partner. It was a standalone hospital and had been in existence for a long time. Particularly in Puget Sound, there have been a lot of recent affiliations and mergers, and there are very few independent hospitals left as a result. Sometimes, out of necessity, hospitals have merged to stay viable. Highline realized they needed a partner to help with electronic medical records.
We went through the [request for proposal] process. Many different hospital systems here participated in that. After a four- to five-month search process, they selected us. We were happy to be selected. It's a natural extension, and we're in the process of putting an integration plan together that could really take advantage of the fact they are close and connected to our market place. We could consolidate some services that would reduce costs and improve patient care. That's what we're busy doing now — integrating Highline as a full member of Franciscan Health System. Hopefully, our transaction with Harrison Medical Center in Bremerton, Wash., across the Sound and to the north of us, will also be finalized.
Q: Do all of these deals, both with your organization and elsewhere across the area, reflect the current M&A environment in the industry?
MF: It certainly has across the whole county and in Puget Sound. It's a reflection of the marketplace. Generally across the country, most areas have seen drops in patient volume, and that's put an added pinch on financial operations and trying to remain financially viable. Decreasing demand has led hospitals to seek partners where previously maybe they didn't need to. There's a retrenching taking place as many patients think twice about going to the doctor or hospital for services, given high-deductible health plans or copays they face.
If smaller hospitals don't affiliate, they may go out of business, and then there's even less competition in the market. Sometimes, mergers and acquisitions happen so strategies and synergies can develop to lower costs, but sometimes they happen out of necessity. On the flip side of not merging is going out of business, and that's not good for the community or the patient.
Q: How can CFOs like yourself be forward-thinking leaders during M&A discussions? What should CFOs be doing internally and externally?
MF: CFOs sometimes get excited about the possibility of doing a deal. CFOs would hopefully add a little reality to the discussion and make sure all sides are viewed: "Maybe this affiliation won't be good for us. Maybe there won't be synergies. Maybe it's too expensive." I think that's important to help provide a sense of reality as discussions are being held.
As the due diligence process begins, CFOs must make sure reserves are adequate and that there are no unfunded pension liabilities. There are any number of things you could inherit if you're not careful, and when there's good due diligence, you know exactly what you're affiliating with. A lot of this is an internal process. The external communications are usually led by someone else.
Q: Going into the second half of 2013, what are the biggest financial initiatives you, Franciscan and CHI have on your plate? What needs to be accomplished between now and 2014, and what should other CFOs be doing as well?
MF: For us, particularly, we're very busy in integrating two new hospitals into our system. That will occupy the next six to 12 months, at least. Additionally, and for many hospitals across CHI, we are in the process of implementing EMRs, so that's another very big item on our plate that we need to manage and work through.
In terms of other things CFOs need to be focused on, even when you have these other issues — integration of affiliations and EMRs — they need to focus on growth and the bottom line. They need to try to make sure they are growing the business and gaining market share, which I think is a key to financial success. You can't lose sight of those basics when you have some of these other things going on.
More Articles on Hospital CFOs and Transactions:
The Evolving Role of the CFO: Q&A With HFMA CEO Joe Fifer
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Establishing a Firm Financial Footing: Q&A With Swedish Health Services CFO Dan Harris