Kate GuelichThe shift to value-based care has spurred new partnerships in health care, with strategic alliances among hospitals, health systems, and other providers being announced almost weekly. Given the rate of change, organizations may feel pressured to rush into a partnership, but a successful affiliation that yields the desired synergies requires careful evaluation, planning, and execution.

In today’s environment, mergers and other partnerships increasingly are being driven by strategic considerations as organizations respond to a changing revenue model. Partnering allows hospitals and health systems to enhance clinical alignment, consolidate and grow services, and lower operating costs. A combined organization can benefit from economies of scale that yield better purchased-service contracts and lower per-unit supply costs, as well as improved market position. There also is the potential to achieve a credit rating upgrade, resulting in increased capital access to support strategic investment and enhance top-line revenue growth.

Brian KellyHowever, to achieve these benefits, organizations need to avoid common pitfalls when evaluating partnership and/or affiliation opportunities. In particular, affiliating organizations should be careful not to overestimate the level of achievable operating synergy, the required investment to support identified synergies, and the timeline over which the benefits can be realized.

The synergy analysis process is embedded in multiple phases of the partnership evaluation process.

Phase I: Evaluate strategic options. This initial phase entails a high-level assessment of the benefits that multiple potential partners might offer. Information used in this analytical phase is primarily through publicly available documentation to help ascertain a potential partner’s market positioning and financial leverage. This process establishes the value proposition for a proposed transaction and marks the initiation point for the synergy analysis. High-level identification of benefits to be gained should be followed by subsequent, more in-depth assessments in later phases of the process. In Phase I, the primary goal is to understand what level of synergy could be achieved and whether that level would result in an accretive strategic alliance. If a potential partnership seems likely to result in a high level of synergy, the organization should start the more detailed phase II analysis and initiate discussions with the potential partner.

Phase II: Move forward with a partnership. Assuming partnership discussions progress and a letter of intent is signed, this phase involves development of a high-level business case, including a thorough assessment of each organization’s current position based on market and industry realities. The analytics undertaken in this phase establish a “base” case, upon which a more in-depth synergy plan can be developed. In this phase, the organization also begins to analyze high-level clinical and financial synergies to identify opportunities for capital avoidance/investment, back office alignment, and programmatic growth and consolidation. This phase can take weeks and/or months. The results, however, are vital to moving the organizations forward to signing a definitive agreement.

Phase III: Engage in detailed business planning. Once a definitive agreement is signed, organizations should proceed with a more formal integration planning process. This process begins with assigning teams to develop business plans focused on synergy opportunities such as back-office consolidation, service line redistribution/rationalization, and medical staff integration. At this point in the affiliation process, the parties are able to share more information, and additional synergy opportunities inevitably will be identified. However, organizations must remain vigilant until the deal has closed to avoid engaging in data sharing that is restricted by anti-trust laws.

Detailed business planning can take anywhere from three to 18 months. Plans designed to capitalize on “low hanging fruit” (e.g., back office consolidation opportunities) typically will be on the shorter end of the spectrum, whereas clinical and service distribution planning will take significantly longer and involve multiple organizational constituencies.

Ultimately, each of these phases will help the partners establish a rigorously developed initial strategic financial plan that will evolve as the partnership matures. Careful evaluation throughout the affiliation process can help hospitals and health systems maximize synergies, better prepare for the impacts of healthcare reform, and improve capital access for reinvestment. It will also position the new organization for the type of disciplined ongoing strategic financial planning necessary for long-term sustainability and success. 

Kate Guelich is a senior vice president and a member of the strategic financial and capital planning practice, Kaufman Hall, Skokie, Ill.

Brian Kelly is a senior vice president and a member of the strategic financial and capital planning practice, Kaufman Hall, Skokie, Ill.

Publication Date: Wednesday, April 24, 2013