Hospitals are responding to the pressures of shrinking reimbursements, an increasingly complex regulatory environment, and the pressing need to acquire expensive information technology by consolidating at a pace not seen in years. Even institutions that are not currently imperiled may be convinced that there is safety in numbers – exacerbated by concerns regarding the financial impact of the Accountable Care Act (ACA), as its long-term implications for hospitals begin to emerge.
How can you, as a hospital executive or board member, determine if your hospital should surrender its independence and/or embrace a new partner? There are many questions that senior hospital leadership and the board must answer to illuminate the best path forward. It is essential that these questions be approached in an objective and dispassionate manner, despite the anxiety and emotion that such discussions and analyses inevitably provoke. The questions themselves must be focused retrospectively — on trends and past performance — as well as on the current and anticipated future state of the organization.
Here’s a quick list of a few basic questions that can help leadership determine if a merger makes sense:
- What has been the financial performance of the organization over the past five to ten years?
- What are the short, intermediate, and long-term financial forecasts for the organization?
- What are the critical assumptions underlying the forecasts? Do these forecasts take into account anticipated changes triggered by the ACA? Specifically, the forecasts should reflect the following:
- Actual and anticipated changes in reimbursement.
- The changing competitive environment and anticipated shifts in marketshare.
- Changing demographics within the hospital’s service area and the likely impact on utilization and payer mix.
- Growing operating expenses, including the financial burden of an increasingly employed medical staff.
- Greater capital demands, primarily associated with information technology, medical technology, and the need for new or refurbished facilities.
- If the hospital remains independent, can it continue to meet the needs of the marketplace?
- Would its competitive position change dramatically if it had access to the resources of a larger system?
- How would these new services or resources be presented or utilized in order to be meaningful to the community?
- Would access to needed specialists improve?
- How would the medical staff react to a change in the ownership or management of the local facility?
- How would the community and its leaders react to such a change?
- How would being part of a larger system affect contracting and thus potentially alter forecasts?
- Would a merger improve the quality and efficiency of care? If so, how?
- How would a merger impact the cost of care to the community?
- Are there legal impediments that would prevent or restrict certain types of transactions or transfers of assets to other hospitals or health systems?
- What do we, the leaders of this hospital, believe in our “gut” to be the right course of action for the institution and the community it serves?
If leadership determines that a merger or affiliation represents the wisest course of action, a new level of discovery must begin regarding potential suitors. Prior to engaging in dialogue or negotiations, additional questions must be answered, including:
- Are there limitations on the types of suitors with whom the hospital is willing to engage, e.g., must the potential partner be a not-for-profit, secular or faith-based facility? Or is the door open to all interested parties?
- What cultural elements are essential in a suitor (e.g., community engagement, clinical excellence, altruism, humility, collaboration)? This is a critical question, since the long-term importance of cultural compatibility between the affiliating organizations cannot be overstated.
- What are the expectations of both entities regarding:
- Operational leadership and management
- Access to shared information technology
- Knowledge transfer — particularly in areas such as clinical quality improvement
- Capital infusions
- Collaborative strategic planning
- The creation of a continuum of care for patients with chronic or advanced needs
- Assistance with physician recruitment and retention
- The protection of the combined facility as a community asset
- Critical contractual covenants to safeguard the interests of the community and the hospital
In today’s environment, the need to pre-plan for a potential merger or acquisition may be among the most important agenda items facing independent hospitals and their boards. The extent to which leadership is able to approach this task in a comprehensive, dispassionate and forward-thinking manner will obviously determine the trajectory of any new relationships that may result.
Adequate time and resources must be allocated to this process. It cannot be rushed, and all participants must feel that the questions and resulting answers were given the appropriate level of consideration. It also makes sense to seek the counsel of respected colleagues whose previously independent institutions were merged or acquired. Asking them what they might have done differently could produce valuable – maybe even pivotal input and insight that would otherwise be missing from the merger equation.