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  • Hospitals May Benefit From Wide Range of Integration Options

    HFMA News

    While 75 percent of hospitals are exploring or involved in mergers or acquisitions, that group represents only part of the healthcare integration picture, according to a presentation at ANI.

    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.

    Hospitals May Benefit From Wide Range of Integration Options

    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.   

    Cultural Aspects of Integration 

    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.   

    Examples of Integration

    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.  

    • Trinity Health and Ascension, two of the largest competing Catholic systems in the United States, formed Together Health, comprising 25 hospitals in Michigan. Seventy-five percent of the state’s population lives within 20 minutes of one of the two locations. Customers benefit from a network, and network physicians benefit from access to resources.  
    • Amita Health was formed as the joint operating company of Alexian Brothers Health System and Adventist Midwest Health. Combining as the third-largest system in Illinois, these two not-for-profit organizations maintain separate asset ownership because of different religious identities.  
    • Banner Health affiliated with the University of Arizona (UA) Health Network, an academic medical center, in an academic affiliation agreement that includes shared services and branding. Banner Health provides operational efficiency and capital to the UA academic medical enterprise.  
    • Socius Health Solutions, a capital-light alignment of WakeMed Health and Hospitals, Vidant Health, and Wake Forest Baptist Medical Center, combined back-office infrastructure and IT to negotiate better rates from vendors. This joint venture is not a merger or acquisition, but supports accountable care organization development and population health.

    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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