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Mergers & Acquisitions: Ingredients for a Successful Union

HealthLeaders magazine, November 14, 2011

GALLAGHER: While the [quality, patient safety, and patient experience] history of the organization is important—you need to know the organization is paying attention to these areas—I don't think these scores would stop a deal. If we believe that we can help the organization improve those areas, then that's what we would consider. As long as there's a commitment to the topic and we're convinced that we can help them improve in those areas, it's not an impediment. But if they're not paying any attention to [quality, patient safety, and patient experience] at all, then that's a different issue.

HAMMOND: Generally an organization that has performed well will be more valuable to a suitor or a partner, but an organization that has not performed well is not necessarily unattractive because a potential partner or suitor may perceive it as an opportunity for value creation. Of course, it is unlikely that the buyer will compensate the seller for all of the value that it will create once it acquires the hospital.

HEALTHLEADERS: Agreement terminology can vary greatly between contracts. However, two overarching elements of these agreements are governance structure and reserve powers. What should healthcare leaders be looking for in the terms?

MOEN: It's easy to share ownership; what's difficult is sharing governance. Successful governance has a lot to do with the cultures of the two organizations. Both partners have to share cultures that are focused on taking care of patients. If your partner is in it to make a buck, then they're in it for the wrong reason and governance will be very difficult.
Not all joint ventures are created equal. You need to ask:

  • What are the reserve powers of the other party?
  • Do you value physicians and employees the same way?
  • Do you both seek community input and participation by community leaders?
  • Will you both honor the mission, vision, and values of the organization?
  • Will you continue the charity care policy?
  • Who has the authority to hire and fire the CEO?
  • Who has the power to cut a service or program?
  • What is the capital commitment?

Everybody is going to say, "We'll be partners," but what does that mean?

GARRETT: Dan's right. It's easy to share ownership with someone; what's really difficult is sharing governance, which means control and management. To me, if there is shared ownership in the operation, then it has the element of a joint venture. I really believe that the essence of a joint venture partnership is where our incentives are aligned, profits and losses are shared on a pro rata basis, and governance is shared. That means you put five people on the board and we'll put five people on the board, but you still maintain the appropriate reserve powers. You have to dig into the fine print to see what the reserve powers are for either partner—because those reserve powers can overcome almost anything.

HEALTHLEADERS: Can you offer an example of an ownership and governance structure that one of you has used?

GALLAGHER: We've done two deals now with LHP or LHP principals when they were with a prior company: Cedar Park Regional Medical Center, which is in a suburb of Austin, TX, and Seton Medical Center Harker Heights, near Killeen, TX. Both deals are designed similarly; it's an 80/20 arrangement. We own 20%, they own 80%, but we share a 50/50 governance structure.
We name the chair of the board, but they do the daily management. Seton has certain administrative responsibilities and we have a clinical integration plan in which certain things are shared together. By and large, though, LHP in the Harker Heights model is responsible for development of the hospital, construction, the management team, recruiting physicians, and other than our capital investment, our role is oversight at the governance level as well as certain limited administrative responsibilities.

HEALTHLEADERS: What can cause one of these types of deals to go south before it's completed or after?

GARRETT: Not having a clear understanding of how governance and management are going to work from the outset. Unfortunately, it's possible to go through a long due diligence process, and the deal can still fall apart in the end. We've had experiences like that. So we make it clear from the beginning of the negotiating process how governance and management are going to work.

HAMMOND: Any time you enter into a partnership you really have to anticipate something not working out. Although I believe that more due diligence can minimize future problems, since there will be unforeseen developments, what one needs to know is, How will the partners work through the difficult and controversial issues?

GALLAGHER: We've never actually merged with another organization, but back in 1995 we did a long-term lease of a city-owned hospital that was almost the same size as Seton. Although it wasn't a merger of the organizations, it was still a merger of the workforces. We had cultural challenges; they were a city department and they did things differently than Seton. It took us a number of years to transform the organizations into something in which both sides felt comfortable.

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