Healthcare Consolidation: M&A Not the Only Way
Second, Summa has a healthy balance in other divisions of care, such as behavioral health and outpatient-focused care. And finally it has extensive experience with insurance products through its health plan.
"Medicare Advantage is very critical for the future, and they have a four-star Medicare Advantage plan—one of the highest-rated in the state with close to 30,000 members—and that's a real asset," says Connelly. "Finally, they're a perfect geographic fit. They sit right where we have a hole in our markets."
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As executive vice president and chief development officer for LifePoint Hospitals, a Nashville-based for-profit chain with 57 hospitals in 20 states, Leif Murphy is in charge of its M&A activities. Most of LifePoint's hospitals are the only provider in their local area. Some such hospitals are financially stable, of course, and others not so much, leading to a variety of deal types surrounding whether the organization needs a strong infusion of capital, operating expertise, or clinical ties.
A strong balance sheet can put hospitals in a good bargaining position and could result in interest from multiple suitors, but just because you have a strong balance sheet doesn't mean you shouldn't be seeking a partner, Murphy says.
"There's undoubtedly an advantage available to the ones who have very strong balance sheets because they can reinvest or retain ownership in the hospital going forward through a joint venture structure," he says. As in Summa's case, that balance sheet strength can also afford you at least equal say in governance.
"But unfortunately," he adds, "there are many opportunities where the hospital's not capitalized well enough" for ownership to be maintained locally.
Increasingly, as mergers become less about conglomerating assets and more about transforming the way care is delivered, some acquirers have separately developed joint venture organizations featuring clinical partnerships with academic medical centers or brand-name, high-reputation clinics, such as the partnership between LifePoint and North Carolina nonprofit Duke University Health System or the recently announced partnership between the Cleveland Clinic and Nashville-based for-profit chain Community Health Systems.
Such partnerships can help ease concerns that local governance and control will be ceded to a company whose only allegiance is to stockholders, although both for-profit companies deny, with some justification, that their joint ventures with brand-names like Cleveland Clinic or Duke were created for that purpose alone. The conversations with administration, physicians, boards, and workers to ease those concerns begin well before a letter of intent is signed, Murphy says.
"The biggest misperception to overcome is that things are going to change so drastically as a new partner with a for-profit hospital company," says Murphy.
Things will change, but most of the change, he says, deals with previous underinvestment in technology, process improvement, and sometimes, bricks and mortar.
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