Dan GraumanMany would have you believe that your independent stand-alone hospital must merge into a larger health system, or be doomed to failure. We say, “not so fast.” 

Although it is absolutely true that we are in the midst of a major transformation of our healthcare financing system, one size does not fit all when it comes to the M&A and collaboration options facing hospitals.

The healthcare reform law, the introduction of new Medicare payment models, and the adoption of ACO-like models by commercial insurers are certainly encouraging healthcare providers to be more accountable and responsible for the health of a population. The shift to population health management can wreak havoc for hospitals and their CFOs, because hospital operations, profitability, and capitalization have all been designed around the imperative to maximize admissions and outpatient volume.  

Significant financial and human capital are required to successfully implement the management and operations infrastructure for population health management, including physician alignment and engagement, care management initiatives, data and IT, and working capital for cash flow. Because most hospitals do not possess the experience, resources, and talent for this type of management, the argument goes, your hospital needs to be part of something bigger to have a chance to survive.   

However, there are collaboration options other than mergers or acquisitions that can enable independent hospitals to be successful in population health management. Before jumping into a merger, the independent hospital should self-evaluate its ability to remain independent. A comprehensive look might include a thorough examination of   the following organizational attributes:

Organizational Attribute Key Indicators
Market Position
  • Market share overall and by major product line
  • Admissions, emergency department, and outpatient trends by service and product line
  • Key competitor activity; outmigration trends
  • Population and housing trends
Financial Performance and Access to Capital
  • Profitability – operating and bottom line
  • Cash position
  • Leverage and overall capitalization
Physician-Hospital Alignment
  • Medical staff resources by specialty; additions, retirements, etc.
  • Relationship between hospital and medical staff
  • Consolidation and acquisition activity
Population Health Management Readiness
  • Overall preparedness for clinical integration and population health management
  • Ability to manage with new payment innovations – ACOs, bundled payments, Degree of adoptions re care management and clinical IT
Leadership
  • Effectiveness/historical performance of current management team
  • Strength of relationship between Board of Trustees and administration
  • Presence of medical leadership and structure necessary for success

If your conclusion is that your position is unfavorable in a few of these key areas—a weak balance sheet, a severely eroded market share position—then, you may be on a path to being distressed, and a change of control merger or sale may be in order. On the other hand, if your independent hospital enjoys a strong position, a viable option to prepare for population health management could just as well involve a collaboration, in which your hospital maintains its independent governance and control. 

In fact, as we have discussed in previous blog posts, many hospitals and smaller systems are forming collaborative networks that will pursue clinical integration, joint-ventured population health management infrastructure, and operational capabilities. These models make a lot of sense for certain hospitals that have worked hard to achieve success and financial security under the traditional hospital financing model. 

Why abandon a history of independence, autonomy, and a strong financial position if your hospital can access much of what is needed in the future through other collaborative initiatives? The hospital industry has a tendency to quickly adopt the absolutely newest thing, and some experts may fuel the frenzy. This is the time to ask hard questions, but more often than not, there are no easy answers, and certainly a merger/sale does not suit all organizations.

Dan Grauman is CEO, DGA Partners, Bala Cynwyd, Pa.

Publication Date: Thursday, October 03, 2013