8 reasons for independent hospitals to affiliate

Many community hospitals are considering whether or not they should continue as an independent. These entities are faced with the question of retaining their organizational identities or to affiliate with another hospital or health system.

Spurred on by growing economic, regulatory and operational challenges, many remaining stand-alone hospitals may be considering some degree of affiliation with a larger health system. Until the first half of this year, hospital mergers and acquisitions had been increasing at a rapid pace since the Great Recession of 2007-2009.

A Growing Trend
According to Irving Levin Associates, there were 51 merger or acquisition deals in 2009, 75 in 2010, 92 in 2011 and 94 in 2012─the highest number in the past decade. Interestingly, the number of transactions completed year to date in 2013 is down slightly compared to the same period in 2012.

However, this could be the calm before the storm, as the Affordable Care Act (ACA) is expected to push independents to strongly consider an affiliation with a partner as healthcare reform is phased in. The impact of ACA is projected to increase expenses and to reduce revenues due to greater compliance and reimbursement cuts. It is evident that the ACA will make it more difficult for smaller hospitals to remain autonomous. Additionally, by mandating new delivery models to reduce costs and to improve quality, the ACA will essentially encourage affiliation by rewarding integrated health systems that can achieve these goals.1

Why Merge?
While the economic pressures are external drivers, there are several internal indicators that may signal when an independent hospital should consider aligning itself with a partner. When conducting an assessment of a stand-alone hospital’s ability to remain independent, leadership should focus on these eight key indicators:

1. Ongoing financial problems, indicating a strained balance sheet and an unfavorable cost position
2. Limited debt capacity to meet current or long-term capital needs
3. Inability to attract and retain physicians
4. Reduction in total market share and a lack of profitable service lines
5. Poor clinical performance
6. Deteriorating utilization and financial performance trends
7. Weakened position in negotiating rates with insurers
8. Inability and/or unwillingness to pursue new opportunities.

Once the assessment has been made and leadership believes the hospital can no longer remain independent, it is not always a “merge or perish” situation. There are a range of affiliations that a hospital’s leadership can consider, from a fairly simple cooperation agreement between hospitals for some mutual benefit, such as group purchasing, to an acquisition of one facility by the other in which all control is surrendered to the acquiring entity. In between are management agreements, clinical affiliations and lease transactions – each one a formal partnership with legal and financial commitments by each party.

It is important that board members and senior management understand what is involved with each type of affiliation – the resulting legal, governance and financial aspects of the structure under consideration. While the idea of partnering may seem to be an obvious decision, the benefits of any type of affiliation must be weighed against the loss of independence, local control and flexibility.

In part two of this series, I’ll discuss what due diligence and financial analysis needs to take place before a vote of the board is taken to affiliate with another hospital or system.

NOTES

1 “Current Trends in Hospital Mergers.” Thomas C. Brown, Jr., Krist A. Werling, Barton C. Walker, Rex J. Burgdorfer and J. Jordan Shields. www.hfma.org. March 1, 2012.