Publications

Critical Issues in Hospital and Health System M&A

Critical Issues CoverSince 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.

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Authors:
Rex Burgdorfer & Jordan Shields, Juniper Advisory
John Callahan, Michael

September 2nd, 2014|M & A|

The Governance Institute Special Section: The Expanding Range of Strategic Alternatives Available in Hospital System Mergers and Acquisitions

Expanding Range of Strategic Alternatives Cover

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,

The Expanding Range of Strategic Alternatives Available in Hospital System Mergers and Acquisitions

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, foreign

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.

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Authors: Joseph Cerreta, Jordan Shields
Date: April 2014
Source: HFM Magazine

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 obligations incumbent
March 19th, 2014|Role of the Board|

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 other

October 15th, 2013|M & A|

Parallel Paths to Realignment: 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.

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Authors: James Burgdorfer, Stephen Morrissette, Jordan Shields
Date: October 2013
Source: Trustee

October 1st, 2013|M & A|

Hospital Merger and Acquisition Transactions: A Focus on Retiring Liabilities

Hospital Merger and Acquisition Liabilities CoverThe 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) transactions for both buyers and sellers. These challenges typically include:

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?

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Author: Barry Sagraves
Date: September 2013
Source: The Governance Institute

September 1st, 2013|M & A|