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, and tobacco companies, for example, the 50 largest companies hold market shares in excess of 75 percent. Yet 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—commercial paper markets, equity markets, debt markets, synthetic markets, foreign listings, etc.—like major manufacturing companies do.
Healthcare reform and other macroeconomic initiatives are designed to promote efficiency, in part, through the stimulation of larger healthcare companies that can deliver higher-quality, more cost-effective care. Meaningful consolidation will be challenging and take time. Of the roughly 4,500 total acute care hospitals in the U.S., there are well over 2,000 “companies” delivering care. With such fractured ownership, population health, as well as standardized, coordinated care, has been an elusive goal.¹
Boards around the country are grappling with these issues and evaluating business combination opportunities more than ever before. In our experience, most receive good input on the general trend of consolidation, but weak input on the full range of strategic alternatives that exist and the processes and tactics that can identify and realize the board’s desired outcome—typically the long-term security of high-quality, efficient care across a broad range of desired services for the community.
The focus of this special section is to describe the types of structures that hospital systems are utilizing in business combination transactions where some portion of ownership and control are exchanged. While we cover the full range of structures, we have focused on those where significant innovation has occurred. From our experience, most management teams and boards nationally are not well informed of the availability, implications, or nuances of many of these structures, which include:
- Seller joint ventures
- Buyer joint ventures.
- Multi-party joint ventures
- Minority joint ventures
- Consolidation transactions
- Membership substitutions
- Creative asset sales
For each structure, we will provide a description of the model, list common applications, the types of companies that have entered into the transaction form, and review the associated pros and cons. Within the description, attention will be devoted to the extent to which some or all ownership and some or all control have changed. While it is important to develop an understanding of these structures and their relative merits, we caution that it is usually a mistake to pursue a structure instead of a set of well-defined objectives. Our clients regularly expect to prefer one structure over another at the outset of a process, only to be surprised later that another structure better meets their needs. The most common error in hospital transactions is solving for a partner or a structure from the boardroom instead of keeping an open mind and pulling the best partner and structure from the market.
1. For more information, see James Burgdorfer, et al., Hospital Consolidation Trends in Today’s Healthcare Environment (white paper), The Governance Institute, Summer 2010.