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Who Needs to Own? Alternatives to Hospital M&A

 |  By Philip Betbeze  
   November 07, 2014

When it comes to creating an accountable care network based on population health, some organizations believe ownership is overrated; contracts to share accountability may work just fine. But will insurers play ball?

As healthcare reform has begun to mature, many top leaders and boards are finding that for one reason or another—they can't get access to capital, they don't have scale, they don't have accountable care partners to bridge the continuum of care—they need the help and negotiating heft that a bigger partner can bring. Most often, this means selling to a larger enterprise, a trend that has raised suspicions of monopolistic behavior and fears of much higher healthcare costs.

But besides mergers or acquisitions, there are many ways to find your place in a future where organizations are accountable for outcomes and can earn financial reward for efficient care, or get hit with penalties for inefficient care. Which of these options is right for your organization is perhaps your most critical leadership challenge.

While acquisitions of smaller hospitals and systems by bigger ones is continuing at a strong pace, many other, more creative deals are also taking place in which assets are not merged. Just one example is the recently announced partnership between Ochsner Health System and St. Tammany Parish Hospital in Louisiana.

So the question before leaders is not necessarily whether you can remain viable as an independent organization. Independence can be relative. You will be forced to develop business relationships with areas of the healthcare continuum that are missing from your system, but you don't necessarily have to own those pieces and they don't necessarily have to own you. The real issue is whether you can find the right recipe for your organization's unique circumstances.

Keep sight of the genuine goal

Some of these crucial strategic decisions can be made simpler. Many CEOs (and boards) are convinced their hospital or health system doesn't have the tools, the expertise, or the scale to participate meaningfully in a future where reimbursement is determined more by outcomes and health maintenance and improvement than by services rendered. More cynically (or more realistically), they're also motivated by knowing that they don't have the market clout to obtain the same reimbursement rates as their bigger competitors. So they proceed almost automatically to the conclusion that they need to sell before all is lost. But selling the hospital is not the real goal. Improving health is.

There are many options to go about improving care. Selling out, or buying up, is one possibility. But it's far from the only one, says Joe Lupica, chairman of Newpoint Healthcare Advisors in Phoenix, who works on strategic alternatives with mostly independent hospitals and health systems in nonurban settings.

No need for ownership?

There are other tools besides ownership to make the shift to value and transform care, he says.

"I'm not saying the people who own don't do it right, but you don't have to," says Lupica.

On paper, ownership is without question the simplest approach, but governance and a share of revenues can be arranged through other structures. Hospitals and health systems can enter into joint operating agreements, where governance and assets remain separate but operations and financial results are shared. Another option is a clinical affiliation, where the costs of population health management and infrastructure are shared, IT costs, equipment, and tools are integrated, and clinical pathways are agreed upon by both organizations. Further, joint ventures allow creation of new businesses in which both organizations have an agreed-upon share of governance and profit and loss sharing.

"If you're properly aligned with proper value attribution, and you are aligned by a well-designed, actuarially sound risk-sharing network, that's alignment, and it doesn't matter if you don't own them," says Lupica.

Creative arrangements mean taking risks. But isn't that what all of this is about anyway?

"Psychologically, people believe ownership is permanent," says Lupica. "But you can design a definitive agreement with a network and joint venture, for example, to last longer. It is harder for the investment banker and the lawyers though, I admit."

Potential poison in the well

One problem that has recently surfaced is a reluctance from health insurers to negotiate with so-called clinically integrated networks if both organizations are separate in terms of assets. Basically, that means that although you can coordinate care and coordinate incentives between organizations, you can't necessarily count on the cooperation of commercial insurers when it comes time to negotiate contracts.

This might seem to be an insurmountable obstacle if other insurers follow the intentions of Blue Cross & Blue Shield of Illinois. This particular decision by a major commercial insurer to ignore affiliations when negotiating stemmed from a clinical affiliation that Advocate Healthcare reached recently with the much smaller Silver Cross Hospital. Both are in Chicago. While it's the smaller hospitals that will be hurt by such a decision, it could have a chilling effect on any cooperation between partners short of asset transfer or "change in control" deals.

Even "change in control" deals may be impossible because of potential antitrust scrutiny that could follow, which would reduce smaller hospitals' options even further.

Even so, small hospitals likely still have attributes that bigger healthcare organizations covet.

Your challenge, as the leader of the organization large or small, is to be creative and make the most effective use of these options.


Philip Betbeze is the senior leadership editor at HealthLeaders.

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