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Hospital Affiliations Have a Land Rush Feel

 |  By Philip Betbeze  
   June 24, 2011

No, they’re not going out of business, at least not the vast majority. But many of them have read the writing on the wall—which points to greater investments in affiliated services such as home care, clinics, physician practices, and nursing homes, among others—and are concluding that they are unwilling, and in most cases, unable, to invest in these pieces of the care continuum. Instead, they are making preemptive moves to affiliate with larger regional partners, thus sacrificing their independence. In short, standalone, independent community hospitals seem to be a quickly vanishing breed.

There are a multitude of advantages on the community hospital side of the deal. Of course, they gain the benefits of being in a larger network, which are vast. First, when dealing with commercial insurance contracts, they are able to tie into the contracting expertise of large systems, and more importantly, their market clout. They’re also able to tie into larger systems’ clinical (and financial) information technology systems, as well as their array of training expertise on these systems. In an era in which providers will increasingly be reimbursed based more on the quality of their care rather than the volume, this kind of implementation and training is essential. For the bigger partner, such affiliations expand their network and, let’s face it, give them a better stance at the negotiating table with the big commercial insurers at contracting time.

If you’re like me, you peruse the daily news looking for which hospital it will be today. Lately, if a day goes by without another announcement of some sort of affiliation agreement between a community hospital and larger regional player, it’s like something’s missing from my day.

Not that I take any joy or sorrow from reading about these deals, but they’ve become so commonplace. For those leading community hospitals, the affiliation environment is pretty good, especially if you control your local market. That won’t necessarily be the case in the future.

Although circumstances are entirely different, I see some of the same forces at play in this rush to grab market share that I saw back in the ’90’s when hospitals routinely spent millions buying up physician practices only to find later that controlling market share was hardly enough to make the acquisitions a success. Of course, the biggest difference between the buying spree of the ’90s on physician practices and the post 2010 rush to affiliate with community hospitals is the routine absence of cash in most of the deals I’ve seen. Governance issues aside, that seems to protect both parties should the deal not work out as they anticipate. That sense of caution was notably absent in the rush to acquire physician practices in the past.

Standalone community hospitals have been able to withstand big challenges in the past, but the fundamental restructuring of the reimbursement system seems to be a bridge too far. The injection of risk into the business equation for a community hospital appears to be the last straw. The last big cottage industry in America is going by the wayside, and the implications of that transformation are just beginning to be felt.

For now, patients might not see big changes. In many cases, the local hospital, despite the affiliation, is keeping its own name, and much of the work on transformation has less to do with what the sign out front says and more to do with the behind-the-scenes process and IT re-engineering I mentioned above. That’s a bright side of these changes. Another bright side is that the struggling community hospital gets to stay open indefinitely, although they are no longer in as much control over their ultimate fate.

Philip Betbeze is the senior leadership editor at HealthLeaders.

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