Achieving the potential benefits of a partnership depends on how well the partnering organizations understand each other’s culture, capabilities, and needs from the start.
At a Glance
To understand the types of organizational change that will best help them meet strategic goals, hospitals and health systems are:
- Projecting their quality and savings goals for the coming years and weighing their ability to meet them
- Looking for partner organizations that share their culture, goals, and capabilities
- Assessing the types of organizational arrangements that will provide the desired benefits
- Determining the key components needed to make the arrangement fit their goals and culture
Hospitals and health systems that are examining a growing range of new organizational, ownership, and partnership models are frequently driven by the desire for both savings and help in transitioning to value-based payment models. But both providers and market experts warn that careful analyses are needed to determine whether to pursue a new organizational arrangement, when to pursue it, and what type of new structure to pursue.
The growing range of affiliations and ownership models may have increased providers’ options, but they also have raised the importance of weighing the trade-offs inherent to the different options and finding the right fit for their goals. For example, the increased scale provided by a merger may help an organization achieve some quality improvement targets, but it also can cost local communities direct control over their premier healthcare facilities.
The assessment strategies employed by a number of hospitals and health systems of varying type and size before adopting a new ownership or partnership model determined the direction their organizations took—and could provide lessons for other providers considering similar approaches.
Assessing the Role of Culture
One of the highest-profile large-system mergers of 2013 was between two Catholic health systems, Trinity Health and Catholic Health East (CHE). That deal began with an informal conversation between the systems’ CEOs on ways they could collaborate to find savings and improve quality, says Benjamin R. Carter, CPA, who was CFO at Trinity Health. The religious orders that lead both organizations quickly drove the conversation toward a merger—but not before both systems carefully assessed the potential merger’s ability to leverage size, scale, and skill, Carter says.
“The immediate step we took was to look at the synergies we could achieve by combining our organizations through a merger,” Jennifer Barnett-Sarpalius, CPA, who was CFO of CHE. “That was how we identified the initial synergies of a merger, the potential savings from the merger, and where we to focus our efforts once the merger had taken place.”
The preliminary due diligence process for both Trinity Health and CHE followed two consecutive tracks:
- Critical analyses of each other’s strengths and weaknesses—including the standard examination of each other’s books and a search for hidden liabilities or “show stoppers”
- Modeling of what the combined organization would look like
“It was during this due diligence process that we started to look at where merging might present synergy opportunities or enable us to reduce cost, eliminate redundancies, benefit from improved purchasing power on the supply chain side, and strengthen our position in contract negotiations, among other improvements,” Carter says.
Rather than using consultants to identify potential synergies and savings, much of the due diligence process was performed internally. Staff assessments enabled both providers to quickly grasp the importance of a good cultural fit in ensuring a successful merger. These assessments were followed by an employee cultural survey that demonstrated the two organizations’ strong cultural similarities.
“The cultural survey was a critical checkpoint in the due diligence process, because when you merge two such organizations, if they are unable to align culturally, the merger may be doomed from the start,” Carter says.
An example of a cultural distinction in Catholic health care, Carter says, is that decision making tends to be slower in Catholic healthcare organizations than in for-profit organizations because the Catholic organizations use a deliberate “mission-discernment process“ not typically seen in for-profits to ensure key strategic decisions align with core values.
“Both of our organizations had similar processes underway for that type of discernment process,” Carter says. “That was instrumental in knowing that we were aligned.”
The analysis identified $300 million in potential three-year savings from the merger. The organizations merged into CHE Trinity Health in 2013—and by March, less than one year into the merger, the organization had achieved $81 million in savings and was on track to exceed its $84 million first-year savings goal. The next phase of savings from the merger is expected to include up to $40 million from clinical excellence and quality initiatives. By the end of the third year of integration, the new health system, which spans 21 states, expects to achieve more than $300 million in annual run-rate savings.
Carter and Barnett-Sarpalius credit the premerger analysis and planning process with allowing the combined organization to realize significant savings so quickly.
Opting for an Alliance
Less comprehensive information is known about organizational changes that fall short of mergers and acquisitions, but the number of such entities is increasing, according to industry experts.
Although the best financial option for hospitals with weak balance sheets still is an outright acquisition, organizations with strong balance sheets are increasingly considering various types of partnerships, says Jeffrey Hoffman, a senior partner for the U.S. Health Care Group for the global management consulting firm Kurt Salmon. Partnerships that create a new entity and combine back-office functions can find savings while avoiding the costs of mergers, which can consume much of the savings that the merger was supposed to generate. But partnerships carry up-front costs that limit them to hospitals with stronger balance sheets, he says.
“Those with stronger balance sheets are looking less at scale and back-office efficiencies and looking more at skill,” Hoffman says.
In advising clients whose finances allow them to consider partnerships, Hoffman suggests they identify whether there is another provider with a similar growth strategy and needs with which they can form a regional partnership without merging assets. Then, he advises them to assess their ability to implement the partnership, which can carry significant financial risks if done poorly.
Among the growing variety of partnerships the healthcare industry has witnessed was the formation of the BJC Collaborative, an alliance among 35 Midwest hospitals that was established in October 2012. Organizers purposely selected participants based on their lack of market overlap so that they could leverage their different strengths over a larger area, according to Sandra Van Trease, group president of St. Louis, Mo.-based collaborative. Other characteristics of the participating systems, each of which was the largest not-for-profit system in its area, were large cash balances and generally deleveraged balance sheets.
“This collaboration came about because four very strong, very healthy organizations wanted to get to the next level,” says Van Trease. “We all needed to find ways to reduce cost and improve our ability to deliver value.”
Initially, the BJC Collaborative included four not-for-profit health systems in the Missouri market, the southern Illinois market, and parts of eastern Kansas. Since being established, two additional not-for-profit health systems in southern Illinois have joined the collaborative.
The BJC Collaborative uses a limited liability corporation to create clinical and administrative standardizations that participating systems can adopt. The approach allows participating systems to maintain unique strengths, such as their governance structures and brands, while finding more cost-effective practices and clinical care.
Since its launch, the collaborative has succeeded in identifying and helping participating systems implement a range of administrative and clinical standardizations, including reduced IT hardware costs through bundled arrangements with nine common vendors.
Van Trease credits the success of the collaborative to specific planning and implementation steps, including the development of specific operational plans.
“Informality doesn’t work,” Van Trease says.
Other key planning elements were the establishment of a separate legal entity with its own board, regularly scheduled meetings of leaders, and the pursuit of early savings with “low-hanging fruit” to establish momentum.
“We all said that we have to find better ways to get savings,” Van Trease says. “This collaborative continues to allow us to represent a locally based, value-driven approach to preparing for the future of health care without substantially increasing the organizations’ risk profile.”
Pursing an Alternative Alliance
Both BJC and another recent collaboration, AllSpire Health Partners, are forms of aggregating without merging, says Douglas A. Hastings, JD, an attorney at Epstein Becker Green in Washington, D.C. “They allow hospitals and health systems to take more baby steps to learning about population health without committing everything to it,” Hastings says.
AllSpire, which is a consortium of seven Northeast health systems that include 28 hospitals, aims to spawn joint clinical and administrative activities that produce savings while allowing participants to maintain their distinct identities.
Thomas E. Beeman, president and CEO of Lancaster General Health in Lancaster, Pa., says an assessment his organization began five years ago led the health system to join AllSpire in 2013—and led him to become the first-year chair of the consortium. Specific factors that drove Lancaster toward AllSpire were the health system’s desire to move toward population health and its realization that millions of dollars in cuts would be required by the Affordable Care Act (ACA) in the next few years.
“As a consequence, we realized we would have to get some scale,” Beeman says. “But we don’t want to just throw in the towel—we’re pretty well capitalized; we have close to $1 billion in the bank; we’re AA bond rated—so we don’t need to fully integrate.”
To achieve scale, Lancaster opted both to join AllSpire as well as form a strategic alliance with the University of Pennsylvania Health System (UPHS).
Among the many ways the two partnerships differ is that the UPHS initiative, formed this past February, is primarily focused on developing common clinical initiatives, while Lancaster’s collaboration with AllSpire aims to find savings for participants across a range of clinical and administrative areas.
“We wanted to position ourselves as a health system so that if we needed to become larger in the future or to integrate, we’d be able to do it with other strong players,” Beeman says. “And we wouldn’t want to be in a weak position. We’d want to be in a strong position and have a seat at the table.”
The assessment for joining both partnerships began with Lancaster’s ethical and strategic decision-making guide, under which the organization must first examine whether such a move fits the health system’s vision and values and then consider the proposed arrangement’s legal, regulatory, and other aspects.
Lancaster’s assessment of AllSpire included an antitrust review that raised few concerns, because the goal of the partnership was not to change ownership, but to create a clinically integrated network of the type that the ACA is seen as encouraging. Lancaster also examined the capacity of the organizations it has partnered with, which have collectively agreed to limit participants to those with at least $1 billion in revenue and a AA bond rating. Lancaster conducted a third analysis to assess compatibility.
“A thoughtful, drawn-out process that articulates how healthcare decisions will be made, establishes the extent to which partner organizations must participate in the consortium, calls for specified meeting times, and creates a budget is a good start to such a partnership,” Beeman says.
A standing committee was charged with launching initiatives and funded with about $1 million from each participating health system. The funds will allow participants to integrate specific initiatives.
“So the partnership won’t own anything, but it will provide the seed money to launch these initiatives,” Beeman says.
All seven participants had to agree that they would improve clinical outcomes together—through the adoption of best practices. They are required to participate in just 50 percent of the other initiatives undertaken by Allspire.
“We’re undertaking a lot of clinical activity right away, because it has been fun and interesting for our physicians to share in some research,” Beeman says.
The next steps include the launch this summer of the consortium’s first standalone entity: a group purchasing organization.
“We wanted to develop an initiative that creates value for the health systems, not some sort of corporate office that is running the seven health systems,” Beeman says.
Minding Their Region
A larger alliance also has emerged among 12 health systems with 28 hospitals in south and central Georgia.
Stratus Healthcare, established with the goal of finding opportunities for savings among member organizations and developing a clinically integrated network, originated from discussions on possible collaborations between two health systems, says Rhonda Perry, CPA, vice president and CFO of The Medical Center of Central Georgia (MCCG) in Macon, Ga. MCCG and Tift Regional Medical Center in Tifton, Ga., formed an affiliation to explore clinical and administrative collaboration options.
“We talked about there not being enough capital to meet our needs as individual entities, and the fact that MCCG, being a tertiary care facility, prefers not to buy hospitals or own hospitals,” Perry says. “More and more, healthcare organizations were asking for help; some were financially strapped. We didn’t feel that we ultimately wanted to explore mergers and acquisitions, yet we wanted to work with other hospitals in this state to collaborate, to share resources where we could, and to really focus on the right access to high-qualtiy, cost-effective care for patients.”
A growing number of CEOs became interested in a collaboration that would provide economies of scale, skills, and scope while preserving their organizations’ independence. The executives settled on a separate corporation that would have minimal infrastructure and require little capital from any affiliation partner.
What makes the collaboration distinct is that it also aims to spawn regional initiatives among its members that can later be dispersed more widely among its members, if appropriate.
“What may be meaningful to a central Georgia community may not work in Valdosta in south Georgia,” Perry says. “A regional initiative would be driven by the hub, which would ideally also give us a chance to get to know each other and begin looking at how we share data and what we do. Down the road, if members felt that the regional initiative should evolve into something more structured, then we would all be going into it with our eyes wide open.”
The alliance, which formally launched in July 2013, is examining whether its shared services—such as audit and compliance and recovery audit contractor monitoring—should be performed for all members by one central group. The partnership also has begun to establish protocols for care, such as a stroke initiative.
Among the key features of the collaboration that attracted MCCG during its analysis of the alliance were the lack of a large financial commitment and the value component that would focus around the right care, right cost, and right access for patients, Perry says. Participating health systems can decide whether to provide funding for each initiative Stratus proposes to undertake.
“The idea was that we’d all sit at the table and identify what we want to do. It doesn’t mean that everything has to be funded within Stratus,” Perry says. “If an initiative doesn’t work for a particular community, a member doesn’t have to participate.”
Stratus is expected to provide economies of scale and scope for its members, but its major benefits are expected to come through future changes in how participating systems deliver care. One of the keys to the initiative was the commitment of the founding CEOs to travel among the health systems to solicit ideas on ways the small Georgia systems could form vehicles for collaboration with other organizations.
“As this was evolving, there was the realization that we needed to take the message further to other organizations that had interest, because we didn’t want it to feel exclusive,” Perry says. “But there has to be that common culture and a strong belief in what Stratus is doing for us to take that next step.”
The experiences of organizations that have developed new organizational models point to four primary keys to success.
Build a foundation for partnership that will support the move to a value-based payment environment. This effort will require active engagement from senior leaders for partnering organizations, who also will be charged with gaining support from managers and staff for the changes that will result.
Formalize plans for collaborative endeavors. Specific plans with clearly defined objectives enable partnerships to quickly provide concrete benefits without just adding another layer of bureaucracy. Such plans should be developed by a structure of committees and work groups that have both the support and participation of board members and executive leaders.
Establish separate legal identities for organizations at the center of the collaborations. Establishing a separate legal entity to develop and implement the initiatives of the collaboration gives participants the greatest flexibility while ensuring that no single participant is dominating the process.
Look for early wins. Early wins engage staff more quickly in collaborative efforts and build momentum for change.
Rich Daly is a senior writer/editor, HFMA’s Washington, D.C., office. Follow Rich on Twitter.
How the Market Is Pushing Change—and How Hospitals Should Assess Their Options
A growing number of hospitals are undertaking organizational changes, according to market data. For instance, both the number of hospital merger-and-acquisition deals and the number of hospitals involved in such deals have steadily increased since 2009, according to the Medicare Payment Advisory Commission’s March 2013 report to Congress. There were 52 deals in 2009, compared with 100 deals in 2012. Similarly, the number of hospitals involved in such deals grew from 80 in 2009 to 247 in 2012.
But the nature of such mergers also is changing, according to the latest data from Irving Levin Associates Inc. Figures that the market research firm released in April show that the number of hospitals involved in merger and acquisitions continued to increase, from 244 in 2012 to 283 in 2013. But the number of deals plummeted 23 percent from 107 to 83. The change was driven by a decrease in small-hospital deals and an increase in large-system mergers.
Hospitals and health systems are contemplating organizational changes largely because of changes in payment policy among both public and private payers, says Douglas A. Hastings, JD, an attorney at Epstein Becker Green in Washington, D.C. For example, many providers hope a partnership, affiliation, or change in ownership will afford them the cost savings and increased scale needed to compete in an era of reform and to better meet quality-of-care requirements under emerging payment models. Approached correctly, scale can result in higher-quality care and service at a lower cost, Hastings says.
The first step for hospitals and health systems in assessing organizational change options should be to undertake a strategic review of their organizations and markets, Hastings says. They should understand their markets’ dynamics relative to payment changes and examine their own readiness to participate in value-based payment models. “Look at the value proposition out to 2020,” he says.
“A key consideration is the immediacy of the organization’s need for capital: Is it a short-term need or a longer-term need?” Hastings says. “If there is an immediacy to the need for capital, either for short-term survival or for a project that can’t wait, the organization may be compelled to sell some or all of its assets or to pursue a more permanent partnership, which could cause the organization to miss an opportunity for a partnership that could better position it for revenue sustainability or growth over time.”
After comprehensively assessing their current circumstances, the next step for hospitals and health systems should be to consider possible partners that can help them move toward value-based payment models or gain access to capital, Hastings says. For example, some potential partners may have better payer relationships than other candidates.
For the third step, Hastings recommends that hospitals and health systems consider what new organizational structure options are available and best fit their capabilities and goals. “If the organization is considering a collaboration for longer-term market positioning, for example, it might lead to a whole-hospital or whole-system arrangement, but it might also lead to other forms of collaboration, such as an accountable care organization or some sort of other network arrangement,” he says. “We continue to see change-of-control types of transactions, but more and more parties are looking for ways that they can joint venture or collaborate in ways that do not involve a change of control.”
Finally, providers should assess which components need to be part of the any organizational change to fit their goals and their culture, Hastings says. Key details include the type of governance of the new organization.
Publication Date: Thursday, May 01, 2014