M&A Strategies for Small Hospitals
This article appears in the December 2012 issue of HealthLeaders magazine.
Small systems and standalone hospitals are frequently in the news announcing a new affiliation agreement. Typically, these agreements are about seeking partners with deep pockets and strong reputations. That's nothing new in healthcare, where a merger and acquisition market has always existed. But any link to previous eras of consolidation is difficult because the creativity surrounding partnerships among hospitals and health systems is expanding rapidly.
"What really exists is a long spectrum of affiliations," says Joseph R. Lupica, chairman of Newpoint Healthcare Advisors, who works out of the Phoenix office of the Denver-based company that has locations across the country. "A lot of that is motivated by local hospitals getting smart and realizing they don't have to give up control entirely—they can do the least necessary to accomplish their goals and keep the most possible control."
Even so, that's easier said than done. As healthcare incentives slowly turn toward a focus on keeping groups of populations healthy rather than treating their immediate illness, a host of forces is applying partnership pressure. The good news is that the strategic and operational tie-up options are endless. A few recent examples are extremely different, and can prove illuminating for leaders seeking the best partnership option to ensure their organization's long-term viability.
Know your advantages
First, dispense with the contention that the smaller entity is necessarily at a disadvantage in negotiations with a bigger system. For one, smaller facilities often can deliver care at lower costs.
"If you're a community hospital, the variable costs of providing care can be a lot lower in that local setting," Lupica says.
Second, they're often better at patient engagement.
"A patient might feel more engaged because his or her sister-in-law works there," Lupica says, by way of example. "Or patients remember that their primary care physician is right down the street."
Third, their quality scores may be just as good as the larger system that's courting them. They may have worse quality as well, and in that case, resources at a system level can bring value, but meeting two of the three categories of the Institute for Healthcare Improvement's so-called "triple aim" isn't a bad place to start.
In most cases, the smaller system is suffering from a lack of capital resources. Capital feeds some capabilities that, generally, bigger systems are good at, including depth of clinical knowledge, rate negotiations, quality monitoring regimes that utilize technology, and high-level specialized labor. Otherwise, hospitals or small systems may be thriving, but unsure of how they fit in to narrowing commercial networks, for example, especially if a local competitor already has scale.
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