The Issue

Today, more than ever, the nation's independent community hospitals are facing the critical decision of whether to remain independent or to align with a strategic partner. Many are seeking opportunities to align, but it's likely this decision presents unfamiliar ground to their leaders-for most independent community hospital leaders, this type of strategic transaction is a once-in-a-lifetime event. To understand how best to proceed, they can take five lessons from the experience of others.

Background

American Hospital Association Annual Survey data indicate the number of independent community hospitals fell by 345 from 1999 through 2009 (from 2,432 to 2,087), and more drastic decreases are predicted as merger and acquisition activity heats up. Data from Norwalk, Conn.-based Irving Levin Associates indicate that the pace of hospital mergers and acquisitions accelerated 33 percent in 2010 relative to 2009, and experts believe that many of the factors responsible for this increase will likely continue through 2011 and beyond.

This trend toward consolidation is being driven by a variety of strategic and financial factors that have emerged largely under the influence of healthcare reform. Independent community hospitals are challenged to remain relevant in the market as competitors grow and form accountable care structures, and their financial viability is threatened by declining payment rates from both government and private payers.

Action Steps for Providers

Community hospitals that see benefit in aligning with a stronger partner, be it a not-for-profit hospital or health system or a for-profit hospital corporation, should keep in mind the following five key points based on the experiences of hospitals that have successfully completed a merger.

They should view alignment as a strategic move rather than one focused only on finding the best immediate financial solution. The most successful consolidations are values-driven, focused on
mission and a common vision rather than just the financial benefits afforded by a potential partner.

They should give due consideration to more than one prospective partner, regardless of  preferences for an outcome. Without the dynamic of competing interests, the community hospital can lose its negotiating leverage and jeopardize its ability to close the deal under its terms.

The governance structure of an alignment between two not-for-profits should not be based on the relative value of each entity's contributed assets. Sustaining a governance structure that is representative sets the stage for decision making fraught with opposing ideas from the two sides. The merged entity has a newly defined purpose, and its governance should reflect an amalgamation of the two partners to best serve this purpose and develop solutions that are in the best interest of the organization overall.

The board has a fiduciary responsibility to make choices that best serve the long-term  interests of the hospital and its community. The economic interests of independent physicians are similar to but not the same as those of the hospital. Although these physicians' interests should be given consideration when contemplating alignment, they should not dominate a conclusion.

The hospital should understand its own finances thoroughly before any merger discussions. The independent hospital's senior finance leader should fully assess and understand the hospital's financial condition and be prepared to answer any financial questions likely to arise during due diligence. Positioning the issues before a partner raises them will help with value retention for the hospital and its ability to close successfully. 

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Publication Date: Tuesday, November 01, 2011

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