More and more hospitals are involved in various transactions as part of their integration efforts to prepare for accountable care organizations.
Although specific rules regarding ACOs have not been released, many healthcare providers are looking for ways to consolidate care. In the rush to integrate, however, hospitals may ignore several key components that hospitals need in order to succeed.
Terry Peltes, national managing partner of healthcare at the executive services company Tatum, says, "It's undeniable that there's almost a frenzy going on in the provider world with hospitals trying to consolidate, physicians and hospitals trying to integrate, and physician practices trying to consolidate for various reasons.
"There's a very good business case made that scale actually does improve performance of a hospital and integration does increase the quality of care. So the race really is on to achieve a substantive level of integration and scale. And of course, the magical elixir that allows this to happen is access to capital," says Mr. Peltes.
Private equity firms provide access to capital
One source of capital comes from private equity firms, which have recently participated more in hospital transactions. Mr. Peltes suggests private equity groups may have gained interest in healthcare because of the healthcare reform legislation and greater visibility of providers.
Mr. Peltes says, "Healthcare has become an attractive business model for private equity."
He cites the example of the acquisition of nonprofit Caritas Christi in Boston by the private equity firm Cerberus Capital Management. Cerberus operates Caritas through Steward Health Care, which recently offered to buy county-owned Miami's Jackson Health System for $1.1 billion.
Another transaction involving a private equity firm and a Catholic system is the joint venture between St. Louis' Ascension Health and New York City-based Oak Hill Capital Partners to buy failing Catholic hospitals and health systems. They formed Ascension Health Care Network in February to maintain Catholic healthcare providers' nonprofit status and Catholic identity. The Network thus offers Catholic healthcare organizations access to capital without having to sell to a non-Catholic hospital operator.
Unique arrangements
Even outside of private equity transactions, transaction activity continues to grow. Both for-profit operators and non-profit systems are actively looking to acquire or partner with independent facilities. While many of these transactions mimic traditional sale or partner arrangements in the sector, many hospitals are forming unique arrangements to retain governance while receiving an influx of capital.
Mr. Peltes points to the example of the joint venture between Durham, N.C.'s Duke University Health System and LifePoint Hospitals to show how transactions between for-profit organizations and nonprofit hospitals can benefit both groups. Through this arrangement, LifePoint provides capital that will allow Duke to continue offering quality healthcare, while Duke supports the clinical services and quality systems of the community hospitals they acquire. This transaction between an academic health system and a hospital operator is one of the first of its kind.
Transactions for ACOs
Besides gaining access to capital, hospital leaders need to prepare their hospitals' systems and finances in order to draw interest from a for-profit or non-profit partner or buyer. Mr. Peltes says successful transactions require fully implemented healthcare IT, strong bond ratings, strong balance sheets, a plan for scale, a plan for integration and an ability to execute these plans as these characteristics appeal to future partners, buyers or other parties in a transaction.
Although good practice for all transactions, these preparations are especially important for those involving the formation of ACOs because of the necessary integration. For instance, healthcare IT, including electronic medical records, will help position a hospital for the development of an ACO by coordinating care under one system.
Mr. Peltes explains that different kinds of transactions involve varying levels of integration. Examples of different types of integration include partnerships, joint ventures, and finally mergers or acquisitions, which are as the most integrated transaction. Each type of transaction requires a different level of capital and alignment between the two organizations; understanding these differences as they relate to ACOs may help leaders as they develop strategies for their hospitals.
Learn more about Tatum.
Although specific rules regarding ACOs have not been released, many healthcare providers are looking for ways to consolidate care. In the rush to integrate, however, hospitals may ignore several key components that hospitals need in order to succeed.
Terry Peltes, national managing partner of healthcare at the executive services company Tatum, says, "It's undeniable that there's almost a frenzy going on in the provider world with hospitals trying to consolidate, physicians and hospitals trying to integrate, and physician practices trying to consolidate for various reasons.
"There's a very good business case made that scale actually does improve performance of a hospital and integration does increase the quality of care. So the race really is on to achieve a substantive level of integration and scale. And of course, the magical elixir that allows this to happen is access to capital," says Mr. Peltes.
Private equity firms provide access to capital
One source of capital comes from private equity firms, which have recently participated more in hospital transactions. Mr. Peltes suggests private equity groups may have gained interest in healthcare because of the healthcare reform legislation and greater visibility of providers.
Mr. Peltes says, "Healthcare has become an attractive business model for private equity."
He cites the example of the acquisition of nonprofit Caritas Christi in Boston by the private equity firm Cerberus Capital Management. Cerberus operates Caritas through Steward Health Care, which recently offered to buy county-owned Miami's Jackson Health System for $1.1 billion.
Another transaction involving a private equity firm and a Catholic system is the joint venture between St. Louis' Ascension Health and New York City-based Oak Hill Capital Partners to buy failing Catholic hospitals and health systems. They formed Ascension Health Care Network in February to maintain Catholic healthcare providers' nonprofit status and Catholic identity. The Network thus offers Catholic healthcare organizations access to capital without having to sell to a non-Catholic hospital operator.
Unique arrangements
Even outside of private equity transactions, transaction activity continues to grow. Both for-profit operators and non-profit systems are actively looking to acquire or partner with independent facilities. While many of these transactions mimic traditional sale or partner arrangements in the sector, many hospitals are forming unique arrangements to retain governance while receiving an influx of capital.
Mr. Peltes points to the example of the joint venture between Durham, N.C.'s Duke University Health System and LifePoint Hospitals to show how transactions between for-profit organizations and nonprofit hospitals can benefit both groups. Through this arrangement, LifePoint provides capital that will allow Duke to continue offering quality healthcare, while Duke supports the clinical services and quality systems of the community hospitals they acquire. This transaction between an academic health system and a hospital operator is one of the first of its kind.
Transactions for ACOs
Besides gaining access to capital, hospital leaders need to prepare their hospitals' systems and finances in order to draw interest from a for-profit or non-profit partner or buyer. Mr. Peltes says successful transactions require fully implemented healthcare IT, strong bond ratings, strong balance sheets, a plan for scale, a plan for integration and an ability to execute these plans as these characteristics appeal to future partners, buyers or other parties in a transaction.
Although good practice for all transactions, these preparations are especially important for those involving the formation of ACOs because of the necessary integration. For instance, healthcare IT, including electronic medical records, will help position a hospital for the development of an ACO by coordinating care under one system.
Mr. Peltes explains that different kinds of transactions involve varying levels of integration. Examples of different types of integration include partnerships, joint ventures, and finally mergers or acquisitions, which are as the most integrated transaction. Each type of transaction requires a different level of capital and alignment between the two organizations; understanding these differences as they relate to ACOs may help leaders as they develop strategies for their hospitals.
Learn more about Tatum.