1. Understand your needs from the start.
If a hospital doesn’t consider and clearly understand its economic, community and management needs from the beginning, a decision to bring in a capital partner could hurt the organization, as a whole, later.
“There are lots of variables that the board has to take into consideration when considering whether to take on a partner,” says Mr. Hawkins. “One is the amount of cash they have, the competition and how the competition is funded. For example, if it’s part of a local nonprofit chain, it could erode your market position.”
Mr. Hawkins suggests hospitals should consider other issues such as whether a majority of your board of directors would be receptive to a capital partner; your current infrastructure and capital needs and whether a capital partner can provide you with the funding necessary to move ahead with these projects; and if your hospital is nonprofit organization, it is important to understand that bringing in a partner could potentially change your status to for-profit.
2. Recognize the benefits of a partner.
Finding a good capital partner can place a hospital in a better position — making it more profitable, secure and attractive to employees and patients.
By being part of a “bigger buying unit, the hospital can option better rates when purchasing things like equipment and medicinal supplies,” says Mr. Hawkins. “It’s easier to spread cost such as health insurance for employees. An organization with more stability will also have an easier time recruiting physicians and then keeping them.”
A merger can benefit everyone involved, he says.
For-profit “buyers are required to pay the community fair market value for its hospital’s assets”
Mr. Hawkins says. “So, a potential outcome is the community hospital gets a new foundation, which they can use for other community healthcare needs, and still have a hospital that is run by professionals who have expert management skills.”
All of this strengthens a hospital and makes it more efficient, and therefore more successful — increasing the cash flow can allow hospital to further improve itself by making renovations, expanding, upgrading their information systems and equipment, and introducing new services and specialties. The new capital partner reaps the rewards with a strong return on the investment.
3. Gaining a partner does not mean loss of all freedom.
One reason why hospitals hesitate to bring in a partner is the fear of losing control of their organization and making concessions to their partner. They want to retain their decision-making power and avoid becoming dependant. But if a hospital wants the influx of capital that comes with bringing in a partner, then it needs to expect to give up some control.
“Everyone has someone who is looking over his or her shoulder,” says Mr. Hawkins. “No one is safe from outside influences. It’s the Golden Rule: He who has the gold makes the rules. When you bring a partner in, whether for-profit or not-for-profit, if they invest in the hospital they (will) want control.”
But this doesn’t mean your hospital will necessarily have to sacrifice all of its freedom. Finding a good balance can just be a matter of communication during sale negotiations and having a strong local board in place after the partnership is formed.
“It depends on who you pick as a partner and if they will work with you,” Mr. Hawkins says. “We keep a local board [and try to encourage] a lot of community involvement — United Way, Little League and numerous other organizations. That way, it doesn’t appear that they’ve lost their community hospital. The biggest issue that people perceive is maintaining local control, and we keep community involvement without hurting our investment.”
4. Bringing in a capital partner may be a necessity.
With the current strain on community hospitals, Mr. Hawkins doesn’t see many alternatives to a capital partner.
“The whole issue revolves around reserves,” he says. “Without a huge trust fund or proceeds from philanthropy, most hospitals should be looking for a buyer or capital partner.” A strong capital partner can more successfully secure funding and manage an ailing facility back to health.
Mr. Hawkins foresees that in the next few years many hospitals will be seeking a capital partner.
“Due to the economic problems, healthcare organizations will not have access to capital sources and next year the new President will probably seek Medicare cuts to pay for his healthcare plan,” he says.
— Mr.Hawkins (ken_hawkins@chs.net) is vice president of acquisitions and development at CHS, one of the nation’s leading operators of general acute care hospitals. He has more than 20 years of healthcare experience and is an expert in hospital acquisitions, development and finance. Learn more about CHS at www.chs.net.
