M & A

Santa Clara County Succeeds in Securing the Future of Endangered Local Hospitals

The County of Santa Clara (Calif.) assumed responsibility for the operation of O’Connor Hospital in San José, St. Louise Regional Hospital in Gilroy, and De Paul Health Center in Morgan Hill on March 1, 2019. This transaction advances the County Board of Supervisors’ strategic goal to grow the size and scope of the County’s public healthcare delivery system. Juniper Advisory advised Santa Clara County on this transaction.

The two hospitals and health center were acquired from Verity Health, a health system that filed for Chapter 11 protection in late August 2018, triggering the potential sale of all six of its hospitals and other related assets in California. The County purchased the three Verity Health facilities located in Santa Clara County for $235 million.

“We are excited to bring these community hospitals into our health system as we expand and enhance the high-quality care that so many Santa Clara County residents have come to rely on,” said County Executive Jeffrey V. Smith, M.D., J.D. “Our new partners share our mission, values, and passion to serve. We expect O’Connor and Saint Louise

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|

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

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

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

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|

What Hospital Leaders Can Learn From ‘Downton Abbey’

Downton Abbey - March 2016In its final season, “Downton Abbey” captured audiences by exploring a healthcare phenomenon set in rural England 100 years ago — and one still playing out across America today.

The phenomenon is hospital consolidation, and historical period drama “Downton Abbey” tackled it with the same gusto with which it took on the deterioration of class hierarchies, the emergence of the women’s liberation movement and many other social issues over six critically acclaimed TV seasons.

At the beginning of the 20th century, hospitals in both England and America were much different places than they are today. They offered basic nursing services to keep patients as comfortable as possible and not much more. These institutions were most typically standalone facilities largely underwritten by local philanthropists.

During this period, modern medicine began to take hold. Sophisticated organizations, often associated with universities and generally in urban areas, began to adopt new ‘technologies’ like operating rooms, pathology, electrocardiograms, X-rays and others. These advances changed the nature of hospitals and healthcare. Hospitals shifted from warehouses for recovery, and often decline, to early examples of what hospitals became in the

March 17th, 2016|M & A, Publications|

Responding to the HIT Imperative: A Guide for Independent Hospitals

Responding to the HIT ImperativeIndependent hospitals and small health systems face a daunting challenge in developing their healthcare IT capabilities to meet the requirements of value-based care. But they must carefully weigh their options and proceed cautiously in meeting that challenge.

Health systems that lack the financial wherewithal to develop an electronic health record system on their own, and that are seeking an alternative strategy, should keep in mind five lessons learned by organizations that have faced a similar challenge:

  • Review the full range of options.
  • Be realistic; Acknowledge the importance of strong management.
  • Adhere to a budget.
  • Reach out to peers.
  • Be wary of competitors’ offers to help.

As recently as 2008, only 9 percent of acute care hospitals had adopted an electronic health record (EHR) that could provide such basic functionality as the ability to view patients’ medications or test results. By 2013, this number increased to 59 percent.

Congress prompted this growth in technological investment by passing two important pieces of legislation: the Health Information Technology for Economics and Clinical Health (HITECH) Act, in 2009, and the Affordable Care Act (ACA) of 2010. The HITECH Act

February 1st, 2016|M & A|

Affiliations: Matching Objectives and Risks

Affiliations_Matching Objectives and Risks - January 2016Affiliations are contractual arrangements between two or more hospital partners in which they agree to work together on projects. No ownership or control is exchanged in affiliations; however, the term is sometimes used euphemistically, or incorrectly, to describe business combinations. These sorts of agreements have existed for many decades as non-profit hospitals have pursued contractual approaches to improve qualitative, operational, or financial performance. Most often, they represent an effort to share ideas and resources with an objective of economic efficiency and improved health while remaining independent.

Non-profit hospitals are actively considering their strategic financial options due to the economic and medical care implications of the Affordable Care Act (ACA). This activity has not, at least to the present, resulted in a meaningful increase in the number of completed business combinations. It has, however, resulted in a sharp increase in the number of affiliations that are being entered into. Despite the scant empirical support and bubbly atmosphere behind many affiliations, independent hospitals are actively pursuing them in an effort to access the benefits of increased scale without ceding ownership.