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As healthcare has transformed from a nascent local patchwork of services to one of our country’s leading industries, hospitals hold steadfast to their missions that have roots going back a century or more.

The precursors of many public and non-profit hospitals were almshouses or sanitariums created by municipalities or religious orders. These institutions treated the infirm and indigent and were funded largely by benevolent organizations, local public coffers, and personal donations. Patients paid whatever and however they could for care. In detailing their institution’s history, hospitals fondly evoke early 20th-century fundraisers held by school children, women’s auxiliary groups, and the like to purchase medical supplies and equipment.

Today, hospital care in the U.S. is a trillion-dollar industry. Mega-mergers among health systems are announced with increasing frequency. New access points are springing up outside the walls of hospitals. Municipal taxpayer funding for publicly sponsored systems and for non-profit tax exemptions is tenuous. Naming rights are negotiated with endowments for select organizations able to attract big donors. All of this falls against a backdrop of unstable government- and employer-based health coverage policies, declining reimbursement, and burdensome out-of-pocket costs for consumers.

So much has changed, but the

As transactions between large systems become more common, and more strategically focused on patient concentration and needs rather than geographic boundaries, state regulators are taking a closer examination of hospital business combinations.

From California to Illinois to Florida, state attorney generals have applied increased scrutiny to recent hospital transactions, regardless of tax status or ownership type. With healthcare expenditures increasing, consumers assuming a larger burden of the cost of care, and competition between systems heating up, regulators will continue to have a watchful eye on healthcare M&A activity.

In considering a business combination, a hospital board must be sure to:

• Set goals to guide process decision making.
• Leverage a controlled competitive process to elicit the market’s most
  optimal outcomes.
• Demonstrate that proposals were objectively assessed based on how the
  terms met process goals.
• Be prepared to illustrate to stakeholders, including regulators, that the
  process was robust and the resulting terms were fair and beneficial to the
  hospital and its community.

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Financial difficulties are commonly the catalyst for hospitals to begin exploring partnership options. As Rex Burgdorfer, Juniper Advisory Vice President, outlines in his latest article “Valuing the Troubled Hospital”, court-led restructuring is an option often considered by those with liquidity constraints and significant financial liabilities.

For hospitals nearing the zone of insolvency, retiring funded debt, unwinding interest rate swaps, satisfying defined benefit pension plans and covering post-closing risks are significant considerations when negotiating terms. Debt-heavy capital structures combined with today’s difficult operating environment has narrowed the margin of error for sellers. This reality places an increased importance on a complete, accurate valuation of a hospital’s assets and liabilities to guide mutually beneficial terms of a business combination.

These considerations should also encourage Boards of struggling non-profit hospitals to begin their partnership exploration process sooner, from a stronger financial position, and not delay until it’s too late to find a partner.

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