Joining forces in healthcare: what to know and how to prepare
In the first half of 2016, alone, the healthcare industry saw 52 mergers and acquisitions – a 6.1% increase from the first half of 2015.
With the state of the healthcare landscape, there’s a lot of appeal in market share consolidation. Today more than ever, healthcare organizations are facing stronger competition and more pressure on their topline revenue. By merging with or acquiring another hospital, a provider can get a leg up on both.
In the same sense, providers struggling with capital, technology, or regulatory requirements put in place by the Affordable Care Act may be able to find refuge in a larger system. It’s simply more feasible for larger organizations to invest the necessary capital to pursue new and innovative forms of healthcare, such as value-based care and Accountable Care Organizations.
Many non-profit providers are turning to a mergers and acquisitions-driven growth strategy after several years of increased expenses outweighing revenues. “They are recognizing that one of the ways to best position themselves is to have economies of scale, decrease expenses and gain better reimbursement levels and rates with payers by joining bigger systems,” said Ken Marlow, chair of the healthcare department at the law firm Waller Lansden Dortch & Davis, in a statement to Modern Healthcare.
If you think a merger, acquisition or strategic partnership may be in your practice, hospital, or health system’s future, you have to be prepared.
Start by doing your research.
- Choose a model that best fits the financial and sustainability needs of both parties.
- Seller Joint Venture – Typically, this is when an investor-owned company acquires a majority interest (60-80%) in a community hospital, but the hospital retains control with 50% governance on the joint board. The seller should have modest future capital needs, because it would have to pay its share (20-40%) of future capital investments.
- Buyer Joint Venture – A clinical partner holds a minority interest (3-20%) and is responsible for overseeing medical safety and quality, while the investor-owned partner provides capital (80-97%) and operational and management capabilities.
- Multi-Party Joint Venture – Community hospitals combine their characteristics and financial proceeds to support research, education, training, etc. The parties share the annual earnings.
- Consolidation Transaction – Two parties combine and create an entirely new parent company with its own board.
- Membership Substitutions – When a nonprofit hospital transfers ownership to another nonprofit acquirer. The seller’s corporate structure usually does not change, but the new parent gains ownership and control and also becomes liable for the seller’s debts.
- Asset Sales – This is usually between a nonprofit hospital and an investor-owned system. The seller uses its cash and the set purchase price to retire its liabilities and transfer assets to the new owner. Additional assets after the liabilities are paid typically go towards creating a community foundation. The buyer will typically invest in the facility and staff for a certain time.
The deal between Ascension and Presence Health will consist of a joint venture, which may attribute to its success. Ascension, a large non-profit organization, plans to buy the 12-hospital Presence Health, but operate it within another joint venture – AMITA Health – that Ascension already has in place with Adventist Midwest Health.
- Do your due diligence. A thorough review must be performed to ensure that each party has all the information regarding the other’s operational functions. Without full investment from both parties in doing your due diligence, key information could go unnoticed or be presented inaccurately, with potentially harmful results down the road. It is also recommended to involve experienced financial and legal advisors to assist during the due diligence process. Know the deal breakers beforehand and be prepared for any number of issues that may arise.
- Make sure all parties are culturally aligned. Cultural compatibility between the two groups is key to a merger’s success. Consider all aspects of culture, including the operational models, history and core mission of each organization, their strengths and weaknesses, personalities of each department (i.e. senior leadership, clinical, and nonclinical staff), etc. Determine whether you will be able to smoothly bridge the leadership and organization styles of both boards – having alignment between leadership is imperative for a successful transaction.
- Know and understand the Federal Trade Commission (FTC) regulations. This is a critical step in the information gathering to ensure that your plan does not put you at risk for anticompetitive conduct. NorthShore University HealthSystem had to scrap plans to merge with Advocate Health Care after being stopped by U.S. antitrust regulators. The court argued that the new health system would control too much of the area’s general acute care inpatient services.
Once you’ve completed the information gathering phase, you’ll need to begin preparations for the merger or acquisition.
Then, do your due diligence to prepare for a merger or acquisition.
- Secure merger and acquisition insurance. This insurance will help to cover the risks associated with regulatory compliance, tax, litigation, environmental risks, and other contingent liabilities. It can also protect against inaccurate financial statement representations.
- Align each party’s vision. Understand your potentials, and don’t let your integration weaken the capabilities or potential growth of either party. Start by asking these questions:
- How do you see your organization in the future?
- What are your short-term and long-term goals?
- What will be the key aspects of your culture?
- How do you plan to structure the business of your organization and what are your plans to get there?
- How will you position yourself in the market?
Henry Ford Health System and Beaumont Health System did not merge because the two had very different perspectives for the new organization and they were not aligned on how to achieve their vision due to differences in structure and business models.
Establish plans that will guide immediate integration and communication.
- Develop an integration strategy. In order to be successful, you have to have a plan. Dive into specifics on how you will standardize policies and procedures, combine staff and resources, utilize your facilities, equipment, and supplies, choose and implement systems, and combine processes and assets. Construct a detailed timeline with assigned roles and responsibilities that map out each phase of the integration.
- The CEO of RegionalCare referred to its $550 million merger with Capella as a “combining of equals.” Both parties operated in distinct markets with no geographic overlap, and were so diverse that they did not risk violating anti-trust laws. They also had a solid strategy on how to grow the company in a healthy and profitable way.
- Prepare a strategic communications plan. Word of your potential merger will travel fast. Employees, patients, the media, and the general public need to stay in the know about what’s going on to reduce concerns and keep morale and support strong. Be sure your messaging is clear and remains steadfast throughout the process. Employees, especially leaders, need to fully understand your messaging and be confident answering questions. Develop and schedule your communications for internal and external audiences from initial media statement throughout the entire integration.
As competition within the healthcare industry continues to rise, it can become increasingly difficult to hold your market position and stay competitive. If mergers or acquisitions may be part of your organization’s growth strategy, take all of the steps necessary to ensure you are fully prepared. Revive can build a strategic marketing and communications plan that will support the success of your merger or acquisition and position your organization competitively in your market.