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June 27—Market activity in health care is nearing an all-time high, and various integration structures are being pursued, said Brent McDonald, managing director and head of Healthcare Strategic Advisory Services, Bank of America Merrill Lynch.
Currently 75 percent of hospitals are exploring or involved in mergers or acquisitions, but that is only part of the picture, said McDonald, who gave a presentation, “Integration Trends: Best Practices, and Post-Integration Opportunities,” on Monday at ANI. Nontraditional,
“capital-light” affiliations comprise a spectrum of transaction structures. These frequently untracked relationship-building activities can involve shared services, management services agreements, partnerships, strategic alliances, and collaborations.
A driver of affiliation is that rating agencies like Moody’s and Standard and Poor’s highly value scale and growth, with operating revenues accounting for 25 percent of ratings scorecards, McDonald said. The bigger an entity, based on agency scoring methodologies, the more likely it is to receive
a higher credit rating that will lower borrowing costs. If a health system can affiliate in ways to improve its balance sheet, the transaction can be credit-positive.
Health systems can also obtain more advantageous payment rates from health plans if they have the capacity to manage care across the whole continuum, McDonald said—for example, from joint ventures with retail clinics to urgent care, ambulatory, and hospital settings, along with rehabilitation,
home health, and hospice. Organizations also are able to retain every dollar through that chain of care by keeping the patient in their system.
Proactive planning at the executive level is necessary, given that each entity has its own goals and objectives, McDonald said. A smaller hospital may affiliate with a larger system to obtain a lower cost of capital, but use a capital-light structure as an alternative to full
integration to avoid sacrificing governance at the local level.
Conversely, a large health system may want to affiliate with a nonprofit community hospital to increase market share and block competitors. By investing capital and transforming operations to improve the hospital’s performance, the health system can benefit from higher payment rates. The
system often pledges capital long-term, given the benefits to the community.
Over the past year and a half, a variety of partnership structures have focused on growth through population health measures as well as via traditional healthcare delivery systems. McDonald and his co-presenters cited the following examples.
McDonald presented the session with Liz Foshage, senior vice president of finance, Ascension Health; Scott Nordlund, executive vice president of strategy, growth, and innovation, Trinity Health; and Mike Waldrum, CEO of Vidant Health.
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