Publications

Building a Hospital Joint Venture: A Blueprint for Success

Building a Hospital Joint VentureThis is the third and final article in a series examining the uses of health system joint ventures, the process of developing a joint venture, and expected trends related to these transactions.

In the first two articles, we looked back into the history of joint ventures (JVs), the factors leading to their emergence, and the potential benefits of a JV to a non-profit hospital or health system. We then looked at emerging trends in JVs and speculated as to the future directions that these models could follow to solve for rapidly evolving healthcare challenges. In this article, we will explore the “nuts and bolts” of considering and creating a hospital JV, which will allow us to bring the hypothetical and theoretical into the practical. If you are a hospital or health system considering forming a JV, there are some important factors to think through before embarking on this complex process.

JV partnerships have the ability to address many challenges faced by hospitals and health systems today. However, it is easy to “default” to a joint venture structure without thinking deeply about whether that is in fact the

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|

Assessing Independence

Assessing Independence CoverSeveral recent surveys indicate that nearly 80 percent of non-profit hospital boards are assessing their independence. This means they are determining whether to affiliate, combine, or remain independent. Only 15 percent of boards were considering this a few years ago. This is the Affordable Care Act’s (ACA) greatest impact on non-profit hospital boardrooms today, and much more so than the “flood” of mergers widely described in periodicals.

In September 2014, a New York Times article described the FTC’s wariness of mergers amongst hospitals.¹ In this, an economist suggested that the ACA has “unleashed a merger frenzy” and that she saw antitrust enforcement as a tool to slow the “march toward conglomeration.” Perhaps these assertions were intended to be forecasts. In any event, they are very common misstatements. In fact, mergers are being completed at a tepid rate of 70 to 80 small transactions per year, far below the annual rate of nearly 150 in the early and mid-1990s. The hospital industry remains the most fragmented major industry in the U.S.

This article focuses on the disconnection between the much-discussed and presumed impact of the ACA, or the “merger

January 15th, 2015|Role of the Board|

New Frontiers in Hospital Joint Ventures

This article is the second in a series examining the uses of joint ventures, the process of developing a joint venture, and expected trends related to these transactions.

In our first article, we examined the history of joint ventures (JVs) and summarized some of the potential benefits to a non-profit hospital or health system considering a JV.

In this article, we will speculate as to the directions this flexible yet complex organization structure may take in the future and solutions it may provide to the healthcare industry. We will also cite some recent examples of joint ventures and other affiliations and assess the circumstances under which success is more likely than not.

Seller and Buyer Joint Ventures

There are many examples of hospital joint ventures. These are often referred to as “seller JVs,” where a hospital that otherwise would have been sold retains a minority stake in a new company. These JVs usually involve a non-profit as the minority partner and an investor-owned company as the majority and managing partner. The benefit to the “seller” is that it remains involved in the governance of the JV and

November 13th, 2014|Transaction Structures|

The Rise of the Hospital Joint Venture

Rise of the Hospital Joint Venture CoverSince the enactment of the Affordable Care Act in 2010, more and more hospitals and health systems have entered into some sort of affiliation, whether through acquisition, membership substitution, joint venture, or clinical affiliation. This trend is a result of the mounting pressures hospitals and health systems face in the current healthcare environment. Yet, fundamental change in the makeup of the hospital market also paves way for innovation, which includes new ways that organizations may partner to confront these challenges. The joint venture structure is one such innovation.

For those hospitals and health systems that are financially sound and have sufficient capital, entering into an affiliation allows them to best position themselves for future success—to thrive rather than just survive. Evaluating strategic alternatives from a position of strength allows the board of a hospital or health system to take its future into its own hands and identify affiliation partners that complement and enhance its operations, capitalization, compliance, and quality functions. Exploring a range of joint venture alternatives has been found by many systems to be a “best of both worlds” approach—combining the installed market presence and

September 15th, 2014|Transaction Structures|

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|

The Expanding Range of Strategic Alternatives in Hospital System M&A

Hospital and health system boards are in a difficult position. The business of governing acute care health systems has become increasingly complex in recent years as board governance and industry structure have lagged.

The sector has evolved from a strictly charitable function to a major industry that comprises 5 percent of gross domestic product (GDP). The business is capital-intensive, highly regulated, technology driven, and, most importantly, its outcomes impact people’s lives.

The United States spends a multiple of what other industrialized nations do on healthcare, and yet our system is subpar. The World Health Organization ranks the U.S. first in spending but 37 overall. The index used is a blend of life expectancy, speed of service, quality of amenities, and other elements that we like to think of as readily accessible in the U.S. Countries that rank ahead of the U.S. include Greece (14), Colombia (22), and Dominica (36).

Some point to the level of ownership fragmentation as one of the causes of our over-priced, underperforming system. The hospital industry is composed of tiny companies compared to similarly sized sec¬tors of the economy. In other industries like managed care, airline, auto, food and beverage,

The Expanding Range of Strategic Alternatives in Hospital System M&A

The Expanding Range of Strategic Alternatives_JuniperThe business of governing acute care health systems has become increasingly complex in recent years as board governance and industry structure have worked to keep up with the pace of reform and consolidation.  The sector has evolved from a largely charitable function to a major industry that comprises 5 percent of the gross domestic product.  The acute care health system business is capital intensive, highly regulated and technology driven.

Some industry observers point to the level of ownership fragmentation as a challenge to managing and improving acute care services in the United States.  The hospital industry is composed of very small companies compared to similarly sized sectors of the economy.  In other industries like managed care, airline, auto and food, beverage and tobacco companies, for example, the 50 largest companies hold market shares in excess of 75 percent.  The 50 largest hospital companies together command less than 25 percent market share.  The hospital industry has no “large” companies and none have full access to capital like major manufacturing companies have—e.g., commercial paper markets, equity markets, debt markets, synthetic markets,

Protecting Corporate Value in Affiliation Transactions

HFM April 2014 CoverHospital leaders are increasingly interested in affiliations, or relationships with other healthcare organizations that do not involve ownership changes. Affiliations can take many forms, including management agreements, clinical affiliations, purchasing cooperatives, and joint operating agreements. But they also pose unique risks. Community hospitals often pursue affiliations rather than mergers or outright sales, for instance, to access the benefits of increased scale without ceding ownership. However, this strategy often can result in a shift of control and transfer of the community hospital’s ownership without any reciprocal economic or noneconomic benefit. Clear and consistent affiliation objectives—among other strategies—may enable participants to avoid such risks.

Affiliation Drivers

Organizations pursue affiliations to maintain independence while improving qualitative, operational, or financial performance. The objective of affiliations usually is to maximize near-term control while enhancing integration,scale, quality, capital access, or other benefits associated with partnership. Successful affiliations focus on narrow, clearly identified improvements, allowing organizations to maximize the benefits of affiliation while retaining as much control as possible.

As organizations respond to healthcare reform and the shift toward value-based payment models, affiliations can facilitate the exchange of best practices, reduce costs, and provide access to tools necessary

The Role of the Nonprofit Hospital Board in Consolidation Transactions

The Role of the Nonprofit Hospital Board in Consolidation TransactionsAs the hospital consolidation market continues to grow, most consolidation transactions involve nonprofit health systems.  Nonprofit boards of directors should prepare well in advance to evaluate consolidation opportunities in a timely and informed manner, consistent with their fiduciary duty.

The hospital consolidation market continues to gain steam.  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.  Consolidation transactions offer the possibility of achieving economies of scale, better access to capital, geographic expansion, and improved quality and clinician expertise.  The vast majority of consolidation transactions involve a nonprofit health system.  In such cases, ultimately it is the nonprofit board’s decision whether, and under what terms and conditions, a hospital pursues a consolidation transaction.

It is critical for a nonprofit board of directors to prepare in advance to evaluate a consolidation opportunity in a timely and informed manner, consistent with its fiduciary duty.  Doing so requires the board to, at a minimum, undertake the following preparation:

  • Be informed about the fiduciary
March 19th, 2014|Role of the Board|