Consolidation in the Commercial Banking and Hospital Industries: Parallels and Contradictions

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.

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Authors: James Burgdorfer, Stephen Morrissette, Jordan Shields
Date: June 2013
Source: The Governance Institute

June 1st, 2013|M & A|

New Models for Community Hospital Joint Ventures

New Models for Community Hospital Joint Ventures CoverJoint ventures between investor-owned and nonprofit health care organizations are not new; in fact, they have occurred for at least 25 years. Until recently, nonprofits were employing this type of transaction to address their need for capital without “selling out” and losing control over a vital community asset. The joint venture structure provided nonprofits with an influx of capital while allowing them to retain both a governance role and an economic interest.

In the past few years, however, two new growth-oriented models have appeared. In these models, the nonprofit partner is involved more as a buyer-partner than a seller.

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Author: Barry Sagraves
Date: November 2012
Source: Hospital & Health Networks

Hospital Joint Ventures Between Non-Profit and Investor-Owned Companies: Uses and Future Applications

Hospital Joint Ventures_Uses and Future Applications CoverA joint venture between Duke University Health System and LifePoint Hospitals, Inc., Duke LifePoint, recently completed the acquisition of Marquette General Health System in Marquette, Michigan. This combination represents the most significant use of the rapidly evolving buyer joint venture (BJV) structure. Most investor-owned hospital companies are currently attempting to form similar arrangements with non-profit partners.

Non-profit companies, both large and small, should consider the significance of these sorts of arrangements as they contemplate the impact of healthcare reform on their businesses. This article explores the practical and market features of BJVs, reviews the objectives of non-profit participants, and considers potential future applications of the structure.

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Author: James Burgdorfer
Date: November 2012
Source: The Governance Institute

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 managed care had prompted many transactions.a According to one source,

March 1st, 2012|M & A|

Protecting Corporate Value During an Ownership Transition

Much has been written about the fiduciary responsibilities of hospital boards that are considering business combinations. Another important issue that has received less attention is leadership continuity throughout the transaction process. Increasingly, there has been harmful senior management and board member turnover during the consideration and pendency of transactions.

Hospitals typically have rolling terms for board members, along with employment contracts and policies for their executives. However, these are often inadequate in the context of transactions involving ownership change. The elephant in the room for most boards exploring a transaction concerns only the post-closing impact of the transaction on the executive team. Juniper has observed the serious disruption that board and management dislocations during the transaction process can have on transaction outcomes. While this is a sensitive topic, failing to address it can diminish value. Management and board turnover has frequently led to lost partnership opportunities, lost vision for the future of local healthcare, lost consistency of organizational objectives, lost time (which is never good for sellers), and, on occasion, millions of dollars in lost consideration.

This topic is increasingly relevant as consolidation pressures mount in the healthcare industry. More hospitals, both independents and systems, are (or will be) considering fundamental decisions

January 15th, 2012|M & A|

Community Considerations for Hospital Transactions

When evaluating change-of-control transactions, hospital boards need to be cognizant not only of their fiduciary duties to the corporation, but also of how their decisions will impact the broader community. Selling a hospital, especially to an out-of-town buyer, is a politically charged issue that frequently brings emotional responses from the community. If not handled correctly, public concerns can gain momentum and derail transactions that boards have specifically structured to meet the long-term healthcare needs of their communities. There have been repeated public relations disasters in which communities rightly or wrongly concluded that their hospital was sold out from under them without adequate disclosure or community input. To ensure a successful outcome, it’s important to design a transaction process that anticipates community concerns and addresses them proactively and transparently.

This article suggests a number of strategies to ensure that community concerns are appropriately addressed in the design and implementation of a process, before they put transactions at risk. Within the context of the board’s fiduciary duties, we will review the role of community leaders (including the often conflicting objectives of boards, management, staff, local government, physicians, and business leaders), securing investments in the community, the provision of charity care, and local control.

September 1st, 2011|Role of the Board|

Consolidation Transactions: Will They Make a Comeback?

Consolidation Transactions_Will They Make a Comeback CoverThe recent combination of two suburban Chicago hospitals represents the reappearance of a transaction structure that has been rarely used since the 1990s. Central DuPage Hospital and Delnor Hospital have combined via a consolidation transaction, each becoming part of a newly created parent company. This transaction is similar to many business combinations that occurred in the late-1980s and 1990s. In fact, nearly half of the 40 largest 501(c)(3) systems, and most of the large Catholic systems, resulted from these sorts of arrangements. These include such well-known companies as Advocate Health Care, Aurora Health Care, Banner Health, BJC HealthCare, Iowa Health, North Shore-Long Island Jewish Health System, Sentara Healthcare, Spectrum Health, Texas Health Resources, and UPMC.

This article explores consolidation transactions in an effort to consider the role they might play in the current merger market. Characteristics of hospital companies that entered into these kinds of combinations in the past are also reviewed, along with their corporate development subsequent to the consolidation transaction. We also describe the business objectives and social and economic circumstances that caused the parties to select this transaction form. These transactions, and their possible

Why Are So Many Merger Transactions Failing to Close?

During the past year, a startlingly-large number of announced merger agreements were terminated. These transaction failures represent a phenomenon that has great significance for many non-profit boards and managements, however, very little notice has been made of them. This article seeks to explore the reasons for these failures and to suggest certain changes in non-profit hospitals’ approach to transactions.

By failure, we mean announced merger transactions that are not completed subsequent to the signing of a letter of intent (LOI). The LOI is a short, nonbinding agreement that sets forth the basic business agreement between the principals. It is often accompanied by a public announcement. These agreements are serious undertakings and should only be entered into after both parties have reached agreement on the primary terms, and fully intend to complete the transaction. Well-designed transactions rarely fail to close subsequent to the signing of an LOI. However, we estimate that nearly 25 percent of announced LOIs failed during the past year.

In addition to these failures, the volume of business combination transactions through the first half of 2010 remains unchanged and at the anemic level of the past decade. Taken together, these two factors indicate that the merger market for hospitals is confused. Ironically,

January 1st, 2011|M & A|

The Board’s Role in the M&A Process: Meeting Fiduciary Obligations

The Board's Role in the M&A Process CoverChances are that most non-profit hospital boards will be called upon to evaluate a merger/acquisition proposal at some point in the very near future. Healthcare reform is prompting hospitals across the country to reevaluate their market strength and competitive posture given the new regulatory dynamic. Local healthcare markets are increasingly fluid, as providers and physician groups are anxiously wondering whether there will be a chair remaining when the reform-styled music stops playing. Alignment with a complementary provider- whether as partner, seller, or buyer may be the favored strategic option. Whether, and under what terms and conditions, the provider pursues such alignment ultimately should be the board’s decision.

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Authors: David Gordon, Michael Peregrine
Date: December 2010
Source: The Governance Institute

December 1st, 2010|Role of the Board|

The Strategic Alignment Committee: A Ready Response to Reform

Hospital boards are encouraged to form a  “strategic alignment” or similar committee to facilitate the governing board’s ability to evaluate the many business opportunities that will arise for  provider organizations in the wake of seismic health reform legislation. The expectation is that the entire spectrum of healthcare organizations— not just hospitals and health systems, but also  insurers, specialty facilities, medical groups, and  physician networks—are actively considering both  vertical and horizontal relationships of varied sorts in order to better position themselves to respond to health reform-prompted economic opportunities.

In such a unique environment, it is incumbent upon the hospital board to shed its reputation for inertia and assert a proactive response to such unique opportunities. The purpose of the strategic alignment committee is to evaluate, on behalf of the board, business proposals and risks early in the opportunity cycle—as opposed to condemning them to the queue of the normal board agenda. The expectation is that the work of this committee will favorably position the full board to respond quickly and in an informed manner to meaningful alignment opportunities.

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Authors: David Gordon, Principal and Founder, Juniper Advisory; Michael Peregrine, Partner, McDermott Will & Emery, LLP

September 1st, 2010|Role of the Board|