Back to the Future With Consolidation

HealthLeaders Media Staff, May 11, 2009

Are we riding the next wave of consolidation? Most likely we are on the cusp, according to Kathleen Henchey, principal at Noblis Center for Health Innovation, a nonprofit consulting firm. The economy is stalled, reform is already happening, and one thing we know for sure is that reimbursement is heading south. These three factors create fertile ground for consolidation. And, with bundled payments a possibility, "it is like back to the future again with capitation," says Henchey. "This is what drove the last wave of mergers back in the 90s."

Henchey says Noblis is seeing increased interest in affiliations, so much so it decided to survey its current customers last month. The Noblis survey of 84 healthcare leaders at provider organizations found that nearly one-third of hospitals were "much more interested" in doing some type of affiliation than they were a year ago. The survey also showed that those most interested in an affiliation with another organization were either already in some type of partnership or had poor operating margins.

Henchey says she's surprised to see the increased interest in affiliation compared to a year ago. "It was significant to us because affiliation can be a last resort for some organizations."

At the same time, the Noblis survey found that 71% of organizations with an existing affiliation had better than break-even operating margins compared to only 43% of those with no affiliations at all. "You can probably make the case that affiliation actually is achieving what it is supposed to do, which is economies of scale and reducing fixed costs," she says.

While affiliation can range from anywhere from a joint purchasing alliance to a full merger, Henchey says she is seeing more mergers than in recent years and attributes this mainly to the struggling economy. "There is a growing sense for many that we can't go it alone anymore. We are getting more requests to do board education sessions on what it means to affiliate," she notes.

There is also more interest in clinical affiliations. Moreover, Henchey says, physicians are playing a larger role in affiliations today than in the past.

"One of the drivers of affiliation that is different this time around is the sense of affiliating to get physicians on board." With organizations having trouble recruiting docs and shortages predicted in the future, Henchey notes that Noblis is doing a lot of physician strategy work. Similarly, the HealthLeaders Media annual survey of hospital executives shows that the physician shortage is one of the top three trends that will strongly negatively impact their organization in the next three years.

Lessons learned from the past: As we look at the possibility of increased consolidations and affiliations, organizations should heed lessons from the past. Namely, just because market conditions are pushing organizations to come together doesn't mean the leadership or cultural problems that torpedoed affiliations in the past aren't just as important today.

Do you really have a compelling case for change? The pressure to affiliate has been turned on, but that doesn't make it right for your organization if resistance is high. "You need the organizational will to make it happen and that is usually more of a stumbling block than figuring out whether it is a good idea or not," says Henchey.

Know what you are willing to give up. In some cases you might have to give up relationships with vendors or other parties if you form an affiliation with another hospital. "That is one of the things to think through," says Henchey. "If I affiliate with this organization what does it mean for my partnership with this other group?"

Be honest about your cultural readiness. "It can't just come from the C-suite or the board," says Henchey. Even when there is a rational case for affiliation, it doesn't mean there will be a cultural fit if two organizations come together.

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