M & A

3 Compensation Structures for a More Successful Transaction

Three Compensation Structures for a More Successful Transaction CoverEighty-seven percent of hospitals are considering alignment with another hospital or system as a part of their overall strategic planning, according to Dixon Hughes Goodman. This interest is primarily attributed to structural factors in the industry, including the shifting reimbursement environment and issues related to new healthcare regulations that place independent hospitals at a competitive disadvantage.

The business of governing acute care hospitals and health systems has become increasingly complex.

At the same time, there is tremendous opportunity due to the expanding range of strategic alternatives available to independent hospitals. Despite these market realities, many boards have failed to implement protective structures that incentivize senior management to objectively assess opportunities free of personal contractual distractions. This article reviews the types of safeguards that hospital system boards should have in place to promote senior management objectivity.

Hospital systems should position themselves to evaluate strategic alternatives on their merits without succumbing to the unintended consequences of misplaced management incentives. Organizational alignment is among the most significant career inflection points that hospital executives can face. Boards that recognize these competing factors and structure

November 11th, 2015|M & A|

Continuing a Non-Profit Hospital’s Charitable Mission through Mergers and Acquisitions

Continuing a Non-Profit CoverBusiness combinations between acute care non-profit hospital companies continue at a pace not seen since the 1990s. Participants are proactively entering the market for corporate control in an effort to forge partnerships that will position them to be successful in the future era of healthcare delivery.

This is not just a response to “Obamacare” or healthcare reform, but rather, critics say, is reflective of a system that delivers mediocre quality care at a high price, compared to other industrialized countries. Some cite the level of ownership fragmentation as one of the leading causes. Improving a hospital’s root business fundamentals is more often the impetus for considering consolidation opportunities rather than the broader policy issue.

The 2000s were dominated by two trends: first “the bear hug” and second “the need for capital.” “The bear hug” is a common phenomenon whereby small Hospital A prematurely arrives at the decision that it makes sense to combine with Hospital System B, usually the closest sizable partner. While this conclusion is a natural inclination of the board, experience has shown that such outcomes are less favorable to Hospital A than for Hospital System B. Absent

April 1st, 2015|M & A|

Critical Issues in Hospital and Health System M&A

Since the enactment of the Affordable Care Act, the pace of hospital and health system consolidation has accelerated to a level not seen since the late 1990s, when hospitals were reacting to the formation of HMOs. The year 2013 saw a total of 87 consolidation transactions, following 105 in 2012. This volume represents a significant increase over 58, the median number of transactions completed each year between 2001 and 2011.

Unlike the last wave of consolidation, which was driven primarily by financial and reimbursement considerations, today’s hospital mergers are just as likely to be between financially strong partners as they are to be in response to challenged operations or economics. Hospital companies increasingly are turning to mergers and acquisitions as a tool to improve quality, manage risk, access capital and contend with the changing regulatory environment. The articles in this collection explore the drivers of the current wave of consolidation, address the causes of transaction failures and review the range of structural alternatives available in the marketplace.

Preparing a Hospital or Health System for Sale or Partnership Transactions

Currently, horizontal consolidation (hospital-to-hospital combinations) is keeping pace with vertical consolidation (hospital acquisitions of ancillary providers

September 2nd, 2014|M & A|

Developing a Hospital Transaction Strategy and Process

Developing a Hospital Transaction Strategy and ProcessPursuing a transaction is among the most significant actions that a hospital board and management team can undertake in the life of an institution.  It also is the riskiest.  Economic and non-economic stakes are high, including preserving the hospital’s mission and charitable objectives, safeguarding access to care, ensuring quality and protecting employees.  A well-run merger process maximizes board objectives and avoids critical missteps.

This article identifies the key components of an effective transaction process.  Successful organizations start with their mission and clearly articulated medium- and long-term objectives.   They then complete a comprehensive options assessment, identifying the full range of strategic financial alternatives.  By pursuing an organized transaction process, organizations can devote attention to pursuing alternatives best suited to fulfill their mission and meet their objectives.

Developing Objectives
The first step for a non-profit hospital board considering any hospital transaction is to clearly articulate its charitable objectives and goals for a potential transaction. Not only does this process help focus the board; it can be critical for approval of the transaction. In many states, hospital transactions are subject to state attorney general or

October 15th, 2013|M & A|

Consolidation in Commercial Banking Offers a Glimpse of Health Care’s Future

Parallel Paths to Realignment CoverPayment reform poses a seemingly endless list of complex, interrelated questions. For the trustees and executives responsible for guiding their institutions through this unfamiliar terrain, the best answers to those questions often can be found in another industry.

The commercial banking and hospital fields have much in common. Both are service providers in low-margin, capital-intensive, commercially challenging and technologically complex industries that are among the country’s most heavily regulated. Their greatest similarity, however, is the central role that each plays in the community. Both are visible, influential institutions that elicit strong emotional attachment from community members. Additionally, banks and hospitals often share trustees and it is common for bank executives to serve on local hospital boards and for hospital execs to serve on local bank boards.

Despite these commonalities, surprisingly little thought has been given to the parallels between the two industries. Reviewing banking’s recent history reveals lessons that can be applied to hospitals.

Patterns of Consolidation

While the commercial banking industry continues to consolidate, it is already significantly more concentrated than the hospital industry. The 10 largest bank holding companies have more than 80 percent of all banking assets. By

October 1st, 2013|M & A|

Hospital M&A Transactions: A Focus on Retiring Liabilities

The volume of business combinations involving non-profit hospitals is at the highest level of the last decade. The macro-economic forces spurring industry consolidation and rationalization are weighing heavily on management teams and boards around the United States. There is broad consensus that the fragmented ownership structure of the acute-care industry is, in part, responsible for the ineffectiveness of medical outcomes. The presence of a large number of small hospital companies has contributed to the widely held view that our hospital industry, in aggregate, delivers mediocre quality care at an extremely high cost. For these reasons, hospitals are attempting to form larger enterprises to create scale, expand geographically, manage risk, access capital, contend with the changing regulatory environment, improve operating skill, and to more effectively manage the health of the populations they serve.

Despite these strategic and financial imperatives, completing change-of-control transactions has become increasingly difficult. This is due, in part, to the level of financial liabilities found at many selling institutions. Regardless of transaction structure, satisfying liabilities has become an onerous part of completing merger and acquisition (M&A) Hospital Merger and Acquisition Transactions- Retiring Liabilities – Oct 2013 transactions for both buyers

October 1st, 2013|M & A|

Preparing a Hospital or Health System for Sale or Partnership Transaction

Preparing a Hospital or Health System Icon 2The consolidation trend in hospital and health systems continues. At this time, horizontal consolidation (hospital to hospital combinations) are keeping pace with vertical consolidation (hospital acquisitions of ancillary providers and physician groups). To address perceived inefficiencies and quality of care issues, hospitals are attempting to form larger enterprises to create scale, expand geographically, manage risk, access capital, contend with the changing regulatory environment and to more effectively manage the health of the populations they serve. Despite the trend toward consolidation, completing hospital consolidation transactions is more challenging than ever as demonstrated by an alarmingly high failure rate. Over the past several years, about 25 percent of announced partnerships have failed after the signing of a letter of intent and before close. A “busted deal” may cause economic harm and operating disruption to all involved.

One of the keys to assuring that a hospital transaction can be successfully completed is advance preparation. Advance preparation mitigates two key risks. First, preparation mitigates risk of delayed closing or a sidetracked deal due to the discovery of a regulatory issue during due diligence. Second, preparation can help mitigate against the

September 30th, 2013|M & A|

Multi-State Non-Profit Health Systems: Why There Are Not More, but Soon Will Be

Multi-State Non-Profit Health System_Cover_9.2013After several years of enthusiastic merging and acquiring, multi-hospital systems now own approximately 70 percent of all U.S. hospitals not owned by a government entity. There are more than 400 systems, of which over two-thirds are secular non-profit systems. However, unlike their religious and investor-owned counterparts, almost all of these systems have remained small and local. In an era where scale seems to be more important than ever, these 284 secular non-profit systems average only five hospitals per system, and boast only five systems that can be argued to be significantly active in more than one state.

Are these small, local non-profit systems anomalous dinosaurs, destined to be swallowed up by larger systems, or simply to wither away? Or are they financially and (maybe more importantly) culturally able to change their focus and join the game everyone else is playing? Will they be able to form larger, financially strong systems to rival those already extant, and which are themselves increasingly merging into ever-larger competitors?

The hospital industry is uniquely structured among U.S. industries, particularly in its complete lack of dominant players. HCA, the largest system, has less than a 4

September 1st, 2013|M & A|

Consolidation in the Commercial Banking and Hospital Industries

Consolidation in the Commercial Banking and Hospital Industries CoverBanks have become so large that many critics view them as unmanageable, too large for government bailout, or too big to fail. Alternatively, the highly fragmented hospital industry is accused of contributing to the excessive cost and mediocre effectiveness of the healthcare services industry. This article considers the disparate approaches taken to industry consolidation by commercial banking and hospital companies over recent decades with an eye toward aiding future decision making by hospital boards.

We focus here on the business segment of the non-profit hospital industry (the “hospital business”; i.e., exclusive of Veterans Administration and government owned safety-net hospitals). Non-profit hospitals represent approximately 85 percent of the total industry, and consist of 501(c) (3) community-sponsored hospitals (50 percent of the hospital business), religious sponsored hospitals (mostly Catholic and 15 percent of the hospital business), and government-owned hospitals (20 percent of the hospital business); investor-owned companies represent the remaining 15 percent. We believe the impact of structural change is likely to be felt most prominently by 501(c)(3) community-sponsored companies; much of our review centers on these.

Banking has consolidated dramatically over the past 30 years. Many

June 1st, 2013|M & A|

Current Trends in Hospital Mergers and Acquisitions

Healthcare reform will result in more consolidation and integration among hospitals, reversing a recent trend in which hospitals tended to stay away from such transactions. Regardless of the ultimate fate of the Affordable Care Act, healthcare reform is becoming a powerful catalyst for consolidation and integration in the hospital industry.

At a Glance:

Healthcare reform will impact hospital consolidation in three key areas:

  • Payment rates will decrease, indirectly encouraging consolidation by forcing hospitals to find new ways to reduce costs and increase negotiating clout with suppliers and payers.
  • The cost of doing business will increase as hospitals spend more on compliance, technology, and physician employment.
  • The ACO model will encourage hospital network formation by rewarding integrated healthcare systems that can reduce costs and improve quality.

Regardless of the ultimate fate of the Affordable Care Act, healthcare reform is becoming a powerful catalyst for consolidation and integration in the hospital industry. We are seeing a significant number of mergers between hospital systems and cases of integration with physicians and other providers.

Consolidation activity has picked up considerably compared with the overall trend for the hospital industry in recent years. In the mid-1990s, the external threat of

March 1st, 2012|M & A|