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.

With industry drivers intensifying, and acquisitions by large investor-owned and Catholic systems slowing, health systems poised to grow should consider whether there is a partner a bit further afield that may be able to help vault them to the next level of scale and

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 charity care

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.

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Authors:

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|

Is Healthcare a Charity, Social Service, or Business?

Board members of independent hospital companies are in the cross-hairs. They govern during a time of intense industry and societal change. Situated at the center of a national struggle, they contend with front-page news, and tweets, daily. Directors are challenged not only by these major economic and political issues but also by the tremendous volume of day-to-day operational detail involved in running a complex enterprise.

Peter Drucker famously argued that hospitals were the most complicated form of economic organization.¹ Certainly, managing the large number of stakeholders—federal, state, and local governments, insurance companies, physicians, nurses, employees, unions, patients, local news outlets, and more—is a herculean task.

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Author: Rex Burgdorfer
Date: September 2017
Source: The Governance Institute

Note: 1. The Drucker Institute, http://www.drucker.institute/

September 15th, 2017|Role of the Board|

Membership Substitution Transactions: Why Are They So Misunderstood?

Membership substitution transactions are the most common form of business combination transaction in the nonprofit hospital industry. They are also widely misunderstood and the source of many mistakes. Many large 501(c)(3)s have become more acquisitive as a result of economic pressures of the ACA. Nonprofit health systems have been getting much better at participating in and winning competitive sale processes, resulting in an increased use of this business combination form.

In April 2013, St. Luke’s Episcopal Health System announced its sale, via membership substitution, to Catholic Health Initiatives. In responding to a suit from physician owners (a minority faction) of a St. Luke’s subsidiary, St. Luke’s Sugar Land Hospital, St. Luke’s attorney asserted: “the ownership of St. Luke’s Sugar Land Hospital is totally unchanged by the Transaction.” We have no opinion on this legal debate, but it points out something that repeatedly arises in these transactions – most participants don’t really understand them to any depth.

Given the forecasted level of nonprofit hospital M&A activity in the coming years, as well as the increased use of the membership substitution specifically, it is important that these new and

February 14th, 2017|Transaction Structures|

Hospital Industry Structure: Considering the Impact of the Affordable Care Act

In its 2010 Governance Institute white paper, Juniper Advisory described the ownership structure of the hospital industry in anticipation of the impact of healthcare reform and the Affordable Care Act (ACA) on hospital consolidation.¹ Leading up to enactment of the ACA, health policy experts had concluded that the U.S. healthcare delivery system was consuming too great a share of the economy. Essentially, the industry was viewed to be too expensive for the country and patients, and providing mediocre health outcomes. These factors were the economic rationale for healthcare reform and, eventually, implementation of the ACA.

In 2010, the ACA was viewed to have two primary objectives: control the cost of healthcare and provide improvements to the healthcare system including expanding the number of people with insurance coverage and adding safeguards for patients. The hospital industry believed that the ACA would impact the economics of the industry in two fundamental ways. First, the cost of doing business would increase as the industry moved from fee-for-service to a value-based structure. Second, reimbursement would decline as Medicare rates were reduced.

As a result, it was believed

February 1st, 2017|M & A, Publications|

Partnership Road Map: Navigating Successful Health System Integration

partnership-road-map

The decision to align with another health care organization is among the most important, if not the most important, undertakings for a hospital board. Selecting the right partner, strategy, timing and structure all play important roles in determining the ultimate success of an organization and a partnership.

In forming a partnership, choices are made (even in initial conversations) that help determine how an organization will meet the health care needs of its communities for years to come. These choices may also influence whether the organization will be successful in meeting its objectives. Complexities inherent in these choices can make the process overwhelming, akin to approaching a five-way intersection without a map. Following are a few rules of the road that can provide safe passage and aid leadership in finding the route that leads to the desired destination.

Click here to download the full article.

Authors: Jordan Shields, Juniper Advisory; Ethan Rii & Caitlin Podbielski, Vedder Price
Date: September 2016
Source: Trustee

September 12th, 2016|Role of the Board|

Do Hospital Affiliations Risk Becoming the Next Brexit?

Do Hospital Affiliations Risk Becoming the Next Brexit IconThe European Union is an affiliation. Unlike a federal government, the United States for example, where members combine into a single sovereign nation, each member state of the EU remains independent. The EU member countries gain a measure of collective strength and influence by ceding control over certain decisions, regulations and institutions to a central authority, but they remain sovereign and free to exit.

Sound familiar? This is the same type of arrangement as hospital affiliations.

Over the last several years, hospitals have rapidly formed collaborative regional partnerships. These relationships are designed to address challenges that small systems and independent hospitals are ill-equipped to efficiently navigate on their own. Hospital affiliations include accountable care, population health, purchasing, information technology, academic, management and many other agreements. In consulting presentations and at conferences, community hospitals are encouraged to pursue affiliations rather than fully combine to realize the benefits of scale without ceding ownership or control. As Britain’s vote to leave the EU, or Brexit, showed us last week, this argument is a dangerous fallacy. By definition, affiliations require participants to

July 5th, 2016|M & A, Publications|

Defending the Deal: AG Review Process in Hospital Conversions

Defending the Deal_The AG Review ProcessAs the delivery of health care continues to evolve and hospitals bear additional pressures to adapt to new payment models, more nonprofit hospitals are partnering with for-profit providers, through a sale, joint venture, or other arrangements.

Partnerships between independent nonprofit hospitals and larger health care systems (nonprofit and for-profit) have been growing over the past two decades. As more nonprofits look to the future, many have determined that to continue to offer services to their communities and remain viable under health care reform, they must consider strategies that involve partnering with a larger, well-capitalized system. This is particularly true given the unique handicap imposed on nonprofit organizations; namely, having access to only one source of external capital—debt. This is also in direct contrast with other large industries in which equity and other capital markets can be readily tapped. As a result, many nonprofit hospitals are considering conversions into for-profit entities to gain access to capital.

When undertaking a conversion from a nonprofit to a for-profit entity, most states require nonprofit hospitals to go through an attorney general (AG) review

April 15th, 2016|M & A, Publications|