Executive Roundtable: A High-Level Look at Hospital Affiliations

Hospital mergers, acquisitions and affiliations are popping up across the country as the nation's healthcare leaders react to their industry's changing landscape. Here, three CEOs and one chief strategy officer from hospitals and health systems of different sizes weigh in on their views of hospital affiliations, including what hospitals look for in a partner as well as words of advice for other leaders.

Note: Responses have been edited for length and clarity.

Question: Do you see hospital affiliations becoming more popular? If so, what do you think is driving that popularity?

Michelle Conger, senior vice president and CSO of OSF Healthcare System (Peoria, Ill.): Absolutely [they are] becoming more popular. There are many reasons people seek an affiliation, but a large part of it is the transformation going on in healthcare in terms of payment models. It's really difficult to build all of the things necessary to support pay for value independently. I think hospitals are looking for partners to really be able to share in those types of capabilities. There are a million kinds of affiliations, all perhaps driven by something different. Smaller hospitals are looking for partners, not a full acquisition necessarily, but a partner who can help them access those capabilities.

Wayne Griffith, CEO of Princeton (W.Va.) Community Hospital: I believe affiliations in some form will continue to be popular. The ever-changing healthcare landscape will most likely draw healthcare leaders to look seriously at affiliations. The basic survival instinct will cause some organizations to seek affiliation opportunities. The oversupply of healthcare resources in some areas, coupled with changing delivery models, may necessitate affiliation exploration. Still others may focus on affiliations as a means of quality improvement.

I believe that a lot of the past activity has been tied to mergers and consolidations, including the activity in our state. Clinical affiliations are an alternative to mergers, providing a low level of integration. Also, clinical affiliations provide a vehicle for the enhancement and integration of healthcare services. We are all trying to meet the needs of our community. Affiliation arrangements can be successful when both parties have the same goal of preserving community-based healthcare.

Dean Gruner, MD, CEO of ThedaCare (Appleton, Wis.): Popularity ebbs and flows, but is more on the uptick right now. I think in times of uncertainty, people are driven to look at bigger decisions [like affiliations].

In the past, the motivation has been to leverage with payers. If you think about that, to leverage payers to pay them more, that increases costs to the community. If you believe the value equation is quality divided by cost, then that decreases value to the community. It does make it easier to run our organizations if we're paid more, and that's sort of the challenge for all of us: It's a good thing for us to have more revenue, but that is somebody else's cost.

Doug McMillan, CEO of West Park Hospital (Cody, Wyo.): I'm definitely seeing an increase in rural hospitals looking to affiliate with larger facilities. It's driven by number of issues; the biggest being the lack of resources available in rural communities. It may be driven by not having access to a larger group purchasing organization that can lower their purchasing cost, or not having access to specialty physicians. For some looking to affiliate, the big issue is access to capital. Because of what's happening in the industry, that's a major concern right now.

From our experience here, we have not chosen to affiliate; we have not seen a need. We have good working relationship with other larger hospitals, depending on the service line. We can reach out to them without any formal affiliation. We've had a management contract with Quorum Health Resources for 27 years. It's proven to be extremely beneficial and thus is the reason we have chosen not to seriously affiliate with a larger entity. It provides us with resources we might not otherwise have.

Michael F. Stapleton, President and CEO of Thompson Health (Canandaigua, N.Y.): Our local environment is going through several affiliations; it will likely hit its peak pretty soon. As we look at the risk-based contracts we are all heading towards, it is too much risk for a community hospital to enter into one. We need to be part of a larger system that can have a risk-based contract for 2 million to 4 million covered lives. That was part of our goal [when we affiliated with UR Medicine (Rochester, N.Y.)  two years ago].

We were and continue to be a very strong community hospital with growth potential. It was the right time to negotiate, as opposed to negotiating from a bad financial position. Well-performing community hospitals are starting to see the light [and realize] the time to negotiate is when you are in a strong position.

Q: What do you see hospitals looking for and what should they be looking for in an affiliation partner?

Ms. Conger: I think they're looking for people who really do have the IT, care management or health analytics capabilities — services that are hard to build — built in the system already and have the ability to extend those capabilities beyond their own health system. I think a lot of organizations are looking for analytical expertise, [which is] difficult to build if you don't have some sort of scale to build it. A lot of people are looking for a like culture, making sure they have the right cultural fit with the organization they choose as a partner. A lot of organizations, too, are looking to sustain care in the community [they're in] at an affordable cost. So there are some opportunities to share or reduce the cost of care by sharing some services.

Mr. Griffith: Frequently, some hospitals are just looking for a quick solution to a deteriorating situation. That could very well lead to a lose-lose result. Hospitals should be looking for partners with similar cultures, missions and values. The culture of organizations affiliating must be similar to facilitate meaningful and open dialogue among participants. We sought a partner that also had a reputation for high quality.

A high level of trust is also a key ingredient. Our level of trust and respect was built over a number of years. Lastly, the current financial strength of both organizations is a big plus in that it will allow the focus to be on improving patient care.

Dr. Gruner: They look at lots of things. Some of the left-brained issues include financial strength or the ability to improve capital for infrastructure. Looking at the partner's ability to manage their cost structure or reduce supply expenses. They probably should be looking for data or the quality systems a partner can bring to the table. In our case, people have been looking for some of our expertise with lean.

My sense is you can look at the wish list of the things you might want to get, but you should probably start with the people side of things. If the two organizations have different approaches to people or the management-level people really don't get along, it's likely that conversation [will] fall apart. It's the unstated part of affiliations, if two leadership teams don't hit it off, it's not likely to work out when you try to put it into a legal document. Leaders have to find a way to work together for these things to work.

Mr. McMillan: They should be looking for leadership alignment. In affiliations, the mission and vision of the larger hospital should be similar to the smaller facility's values. That's what's most important in my mind. There are too many tertiary facilities' values are not aligned with rural hospitals' values: Their goal is to pull patients out of smaller communities, which is not what smaller communities are looking for in an affiliation. Keeping patients close to home is what's important.

Mr. Stapleton: First and foremost is to find a partner you can build trust with and one that can evolve into a reciprocating relationship. [UR Medicine] recognizes benefits of partnering with us: It allows them to be a larger regional player and to deliver the highest quality care in a cost-effective way. Thompson Health benefits from cost savings on medical supplies and expanding specialty services in our community. We are learning from each other through sharing best practices and interacting on the board level. I find it difficult to believe leaders would talk to someone about affiliations and mergers without an existing relationship. We had great clinical relationships established that we could build trust upon, which is one of the reasons we've been so successful. It's all about trust.

Q: What words of advice would you share with hospital leaders considering an affiliation?

Ms. Conger: Never ignore culture. Regardless of the type of affiliation you're considering, a traditional merger and acquisition or independent affiliation, success is largely defined by shared culture and vision for where healthcare is going in the future. Understand where healthcare is leading and you have cultural compatibility, [which] makes a huge difference.

More particularly, if you're looking at a traditional merger, you really can't ignore the integration process. Recognize it's going to take effort and has to be mutually successful. We created an integration office that has helped us stay focused on getting the value out of what we both agreed to at the beginning of a relationship.

Mr. Griffith: First and foremost, you must trust and respect your potential partner. The organizations must share a common vision of the affiliation and what it may become in the long term. You must have open discussions with your own stakeholders — the board, management, medical staff and community — to educate them on the purpose of the affiliation and solicit their input.

Also, in planning for the future, we constantly hear from "experts" that we need to be part of a larger system to survive. I would suggest everyone take a deep breath, take your time and carefully consider various affiliation options. As Princeton Community Hospital and Charleston Area Medical Center decided: It may make sense to start at the lower end of the integration continuum with a clinical affiliation and a trusted and respected partner.

Dr. Gruner: I think you can save yourself a lot of frustration if people do the culture compatibility part of [the affiliation] early to really see whether they all get along. The other things are a little easier to measure.

Mr. McMillan: Plan carefully and wisely. It gets back to making sure that your organization's mission and values align with those you're considering affiliating with.

Mr. Stapleton: The words of advice I give to my peers who think they can do it on their own is to reevaluate your thought process. It's such a changing environment, we hear about it with every email we get or report we read. If you think you are the outlier, it would be worthwhile to consider the possibilities of affiliation.

Also, it's important to get medical staff buy-in. Our physicians were engaged in discussions about these concepts. We have strong medical representation on our board, so they were heard throughout the process. You cannot just take it to them at the end. We were not looking to replace the great physicians that are already here; we were looking to supplement them and their input was greatly valued during the process.

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