Regulatory Implications for Change-of-Control

Often, one of the chief terms to be negotiated during a hospital merger is who will govern the hospital post transaction. Will the existing hospital board retain control through an affiliation? Will the acquiring system assume control? Or will a new board be created—and if this is the case, how will it be constituted and perpetuated?

The consolidation we saw in the healthcare industry in the 1990’s often entailed straightforward merger transactions with a clear change in control. However, in more recent years, we have seen increasingly varied structures with unique outcomes and governance solutions. Many hospitals, particularly those that are well resourced, find looser affiliations (e.g., joint ventures, joint operating agreements, and the like) to be the best of both worlds—providing access to a partner’s high-quality clinical services, scale, expertise, and access to capital while retaining their identity and local governance.

The Federal Trade Commission (FTC) has provided new guidance on non-profit hospital business combinations that will result in more hospital transactions being reportable under the Hart-Scott-Rodino Act (HSR). Any affiliation that may result in a change in a hospital’s beneficial ownership, not just a

February 20th, 2019|Publications|

Analysis: Hospitals Buoyed by Tenuous Investment Income

Investment income resulting from a strong stock market has propped up many standalone hospitals’ balance sheets over the past two years, according to a recent evaluation by Juniper Advisory. In analyzing a sample of independent hospitals’ financials, Juniper Advisory found that investment income accounted for nearly half of the hospitals’ net margin. Hospitals that depend heavily on investment revenue could struggle to keep their doors open in the next economic downturn.

“Like any business, hospitals should not consistently rely on investment income to support their day-to-day operations,” said David Gordon, Principal, Juniper Advisory. “We’ve been watching the ongoing economic growth, which is good for both hospitals and their patients, but the economy will not always be as strong as it has been the last few years. When that time comes, hospitals will have to demonstrate that they can provide care much more cost-efficiently.”

Juniper Advisory reviewed the most recent audits available for a sample of 90 independent hospitals in California, Florida, Illinois, Indiana, Iowa, Minnesota, Ohio, Texas and Wisconsin. The average annual revenue of the sampled hospitals was $437 million.

Key findings of Juniper Advisory’s analysis include:

  • 61% of hospitals had operating
December 12th, 2018|News & Events, Publications|

Demonstrating Fairness in a Market Approach to Hospital M&A

Last year, we noted that the majority of hospitals and health systems are exploring their options when it comes to potential partnerships. We are starting to see more multi-state transactions that join non-profit health systems across state borders. This comes as organizations look to achieve the scale and geographic reach necessary to make a meaningful impact on population health and operational efficiencies.

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
September 26th, 2018|Publications|

Our Take: Considering Quality in a Business Combination 

Of the umpteen elements hospital leaders evaluate when considering the viability of a potential partner, quality is generally at the top of the list.

A larger partner can bring the scale, resources and expertise many smaller hospitals and systems seek to improve care quality for their community. This can include enhanced clinical protocols and standards, facility and equipment investments, deployment or recruitment of highly-skilled medical staff, patient support programs and more. Integrated delivery systems are also better positioned to address population health and health inequities, offering new approaches to keeping communities well and synergies with readmissions reduction strategies.

A partnership can provide a host of opportunities to improve care quality and patient outcomes, but in the early stages of exploration there is limited ability to dive deep into tactics. Instead, hospital leaders look for succinct ways to ascertain a potential partner’s quality of care.

Countless measures can be equated to quality, from objective metrics like infection and readmission rates, to the more subjective, like noise levels at night. And there is no shortage of options for comparison: CMS Hospital Compare, Leapfrog, Consumer Reports, US News & World Report, the Commonwealth Fund. Many states

Our Take: A Case Study of Rural Success

Rural providers have been somewhat insulated by the transformation in the health care market over the past decade. Caught between understanding and implementing population health strategies, they are still heavily reliant on fee-for-service reimbursement models versus value-based care.  Rural hospitals are fighting for their margins, with few resources available to pilot innovative care strategies or make capital upgrades. Recruiting physicians is expensive and difficult and rural populations are increasingly aging and less affluent.

Modern Healthcare’s recent in-depth feature on rural health care outlines the clinical and economic drivers acutely impacting rural hospitals today. While the series points to many challenges and risks, there are promising examples of success that show us there is hope for the future of access to care in rural areas.

One such example highlighted by Modern Healthcare was CHRISTUS Good Shepherd in Longview, Texas. Juniper Advisory was engaged by Good Shepherd Health System, an integrated health system with two hospitals, in 2016 to conduct a strategic partnership exploration process aimed at helping the system continue to deliver on its mission.

At the outset of the process, the GSHS board put forth a set of objectives for a partnership, including:

    July 25th, 2018|Publications|

    Valuing the Troubled Hospital

    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.

    Key Board Takeaways

    • Don’t allow value to erode. A hospital’s value, in the eyes of a partner, is mostly a function of: a) the market it serves (demographics, payer mix), b) its share of that market, and c) the trend of those metrics
    June 22nd, 2018|Publications|

    Multi-State Health Systems: On Their Way at Last

    As mid-size health systems seek growth and meaningful scale, the most effective way to achieve this will be system combinations, and these will include those across state lines. The recently completed combination of Advocate Health Care of Chicago and Aurora Health Care of Milwaukee is an example of this kind of transaction cross-border combination.

    Most of the other system mergers to date have arguably been more about size than scale. Size connotes the ability to buy in bulk, to centralize some functions and spread overhead. Scale adds the ability to operate more effectively as well as efficiently, improving an organization’s ability to execute as the industry changes. This might be by combining skills or relevant markets that provide additional strategic or financial value. A number of studies have indicated that there is significant additional value created by the integration of partners over and above that derived from merely combining.

    Key Board Takeaways

    Boards of healthcare organizations considering multi-state partnerships can take the following steps:

    • Assess your own situation to see what you need and what you have to offer. By defining your strengths, needs, and objectives as clearly as possible, you will be in
    June 13th, 2018|Publications|

    Acquisition Currencies in Non-Profit Hospital M&A

    We note how health systems will likely “pay” for their newfound acquisition appetite, and review techniques that are being utilized. The potential for an increased pace of change is focusing greater attention on the terms, conditions, and value exchanged (financial and otherwise) in business combinations.

    Regulators are placing a heightened emphasis on “fairness” and “thoroughness” in board decision-making processes. Historically, there was a large divide in the approach taken by for-profit companies, non-profit systems, and independent hospitals. Those differences have narrowed substantially.

    Many “currencies” in non-profit business combinations are non-financial in nature. Transaction features to which value is often ascribed by non-profit sellers in M&A transactions include:

    1. Debt obligations of seller assumed by buyer
    2. Capital commitments—typically over a 10-year horizon, including both routine and strategic projects
    3. Local input and control retained by seller via board seats on parent board
    4. Retention of certain rights by seller over local operations
    5. Board composition and mechanisms for local input
    6. Creation of enforcement bodies to ensure compliance with terms
    7. Mission, vision, and values continued by buyer
    8. Commitments to religious or related ethical directives by buyer
    9. Retention of existing

    April 24th, 2018|M & A, Publications|

    Public Hospitals and Partnerships

    Hospitals and health systems face an array of compounding pressures. Chief among these is a shift to population health and value-based care models that require health systems to not only continue to make investments in information technology, administration and care, but also take on additional financial risk.

    At the same time, other challenges abound: slowing revenue growth, increasing expenses, outright reimbursement cuts, migration from inpatient to outpatient services, yawning pension gaps and others. As a result, hospitals are examining ways to position themselves to improve quality, decrease costs, increase scale, improve their position relative to vendors, service providers and payers, and become the preferred health system in their respective region.

    Although these pressures are common to virtually all hospitals and health systems, regardless of ownership or tax status, governmental hospitals often perceive that these pressures are perhaps more acute for them because of their patient populations, restrictions on capital, complicated governance structures and disclosure requirements. As a result, many public hospitals are participating in discussions with prospective partners, whether they be other governmental, 501(c)(3) or investor-owned health systems.

    The range of governmental hospitals and partnership options is broad and

    February 12th, 2018|M & A|

    A Year of Change for Community Hospitals

    As 2017 comes to an end, we thought it would be helpful to The Governance Institute membership to provide some observations regarding the state of health system merger and acquisition (M&A) activity, and specifically its impact on independent non-profit hospitals.

    First, the industry remains among the most fragmented in the U.S. economy. It comprises over 6 percent of GDP, is capital intensive, regulated, and complicated. Despite this, there are more than 2,000 “companies” nationally that own and operate the roughly 4,300 acute-care hospitals. As described in our previous article in Hospital Focus,¹ hospitals also operate with significant capital market limitations. These constraints combined with intense industry pressure has proven difficult.

    Most health systems are now of the belief that the cost and quality equation could be improved by hospitals organizing into more effective regional networks. This holds the potential to coordinate care, share best practices, raise capital, implement IT systems, recruit physicians, and the like. Our team of investment banking professionals has yet to come across a hospital (whether a large system, prestigious academic medical center, or a small rural sole community provider)

    December 15th, 2017|M & A|