Academic medical centers face numerous challenges today.
Clinical margins are shrinking. Payers are creating networks favoring lower-cost providers. Community health systems are increasingly offering high-end services that threaten patient inflows. Education and research funding has declined.
As a result, many AMCs are struggling to sustain the activities that historically enabled them to fulfill their tripartite mission. To preserve these activities, AMCs are looking for new ways to improve their clinical margins. At the same time, they seek opportunities to improve outcomes and the patient experience in response to rising consumerism and value-based care trends.
Many AMCs have viewed increased scale as a way to pursue both goals. Although some AMCs have merged successfully with community health systems, there have also been a number of high-profile deals that went sour.1 An increasing number of AMCs, including MD Anderson Cancer Center in Houston and Cleveland Clinic, have chosen instead to pursue non-M&A partnerships as a way to access some of the value drivers of scale without the complexities of full integration (Exhibit 1).2 With careful planning, these arrangements can yield significant benefit to both sides.
How value can be created
A partnership makes sense only when both sides anticipate value creation that exceeds what either side could produce on its own. The value creation potential must also exceed the deal's resource requirements and coordination costs, as well as the management and governance complexities that arise when a structural relationship with another entity is established. For each partner, the value ultimately created depends on the value drivers being pursued and the project's scope (e.g., inpatient only), level of integration (e.g., joint venture versus affiliation), and transaction terms, including investment and resource commitments.
• Simply put, well-constructed health system partnerships can create value in a variety of ways, including patient volume growth, per-case revenue growth, margin enhancement and margin from new businesses (Exhibit 2).
Implications of value drivers for partnership structure
Exhibit 3 illustrates the range of partnership structures that AMCs and community health systems can consider. The choice of value drivers helps determine which partnership structure is most appropriate, since it strongly influences the level of integration required.
The level of integration, in turn, influences the results that can be achieved. For example, consolidation (e.g., through creation of a shared-services infrastructure) is usually required to derive full value from back-office efficiencies. In this case, a joint venture may be appropriate, especially if consolidation requires extensive sharing of resources and/or capital. Lesser value can be obtained from back-office efficiencies if a less consolidated model (e.g., joint purchasing) is used. When the partnership has a narrow scope or focuses only on intangibles such as brand, non-equity partnerships (e.g., alliances) may be appropriate.
Getting it right: Lessons learned
To succeed, AMC–community health system partnerships must overcome many hurdles, not least of which is the need to make the partnership compelling to each side. AMCs should heed eight important lessons if they want these deals to succeed.
1. Don't get swept up in a vague vision — define specific sources of value. Too often, we have seen partners come together around vaguely articulated gains (e.g., the "halo effect" of the academic mission) rather than a clear, quantitative definition of where partnership value will come from. Although co-branding may be an important element of the deal, it is critical that both partners be very specific — and aligned — about how much value they expect to create (for patients as well as for themselves), why the value created will be greater than what either side could achieve on its own, and what role each partner will play in creating value. Partnerships that do not do this up front are set for failure.
2. It's not just about value — can you work together? Often, partner selection happens opportunistically because of the competitive dynamics in a particular market. Many organizations fail to proactively diagnose and manage cultural differences in the mistaken belief that such differences cannot be quantified or tactically addressed. If these deals are to succeed, leaders on both sides need a deep understanding of the range of stakeholders who will have to be involved and whether these stakeholders have a common commitment to working together to achieve the value at stake.
3. Ensure clinical leaders are engaged early on. Many failed partnerships could have been saved had clinical leaders been involved, and core clinical issues prioritized, early in the process. Too often, the "business" aspects of the deal overshadow critical elements such as clinical integration, physician engagement and clinical governance. When these elements are left until later, the employed and aligned physicians on both sides often distrust the agreement, which can poison the partnership.
4. Start with a simple set of value drivers and build from there. A partnership can offer multiple strategic advantages, but stretching its scope to encompass them all can lead to an overly complex set of requirements that exceed both sides' capacity for change. Instead, partners should at first focus on a finite set of goals. These are goals that can be achieved within roughly six to 12 months, yield sufficient benefits to demonstrate the partnership's value and allow for further expansion. This approach allows the partnership to undergo an initial proof of concept. Furthermore, early successes can build momentum and help change the minds of stakeholders in each organization who were not initially enthusiastic about the deal.
5. Details matter — develop compelling financial terms. A number of initial terms must be articulated carefully. In addition to the partnership's goals, scope, and structure, the terms should cover how resources will be committed to the partnership and how created value will be divided. The terms should be built around the primary value drivers each side is pursuing and the overall value expected to be created. They should also detail the level of resource commitment from both sides and what those commitments should translate to in terms of "ownership" of future value.
6. Breaking up is hard to do — but in some cases may be necessary. Even a handful of potential partnership conversations can create expectations and a sense of momentum that is hard to break. As the two sides develop the partnership's terms, they need to carefully consider what each of them can do outside of the partnership (e.g., compete in certain geographies), how long the partnership contract will last and what exit terms should be included. Often, during the early stages of a partnership, organizations are reluctant to consider how they would dissolve the arrangement if it were to become necessary. Articulating an exit strategy that permits each side to minimize potential future losses can ensure that if one or both partners chose to walk away, both sides are protected.
7. Design a robust governance model. All partnerships need a governance model to ensure leadership remains actively engaged in direction-setting and performance. The partners should establish a regular meeting cadence for their governance and operational committees, agree on the scope of decision rights that will reside with each committee, and install a robust performance management system that includes agreed-upon implementation deadlines and outcome-based performance metrics for each major value driver.
Beyond the governance and operational committees, the organizational structure can vary significantly depending on which partnership structure is being pursued. For a joint venture that involves development of a new entity, for example, the partners may need to create a new organization with a dedicated board, management team and framework for how the joint venture will interact with the parent organizations.
8. Create sustainable economics and funds flows for both parties. While the specific financial terms for value creation need to be compelling for both sides, it is also important that the overall economics be sustainable for both parties. Many AMCs use funds flows to support their tripartite mission, and some of the value created through the partnership can be directed toward this goal. However, we have encountered numerous examples of academic departments that used a potential partnership as an opportunity to ask for very high levels of support — this disconnect between financial ties and overall value creation can kill a partnership. Thus, the economic commitments made by both partners must be realistic and reflect overall value accrual.
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As pressure on the healthcare industry intensifies, non-M&A partnerships may become increasingly attractive to academic and community health systems alike. By carefully selecting a partner, developing a robust structure and mutually beneficial terms, and engaging with key stakeholder groups, both sides can partner to provide better care and experience to patients and significantly improve their strategic position for years to come.
Alex Harris is an associate partner in McKinsey's Washington, DC, office. Pooja Kumar, MD, is a partner in its Boston office. Saum Sutaria, MD, a director in McKinsey's Silicon Valley office, is head of the firm's provider work in the Americas.
References for main article
1 Among the successful mergers are those undertaken by Johns Hopkins Health System and Partners Healthcare. Examples of unsuccessful mergers include those undertaken by Henry Ford-Beaumont, Hershey Medical Center-Geisinger, WellStar-Emory, and Jefferson-Main Line Health.
2 McKinsey press search. Also, Levin Associates. Hospital Acquisition Report, 2015. April 2015.
3 http://healthcare.mckinsey.com/unlocking-potential-academic-and-community-health-system-partnerships
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