1. Be prudent and realistic. If a hospital takes on too much unnecessary debt in projects it is going to be a less attractive partner for an acquisition or merger. “People need to be prudent with the amount of debt they’re taking on,” says Ms. Hahn. “Why do you need empty beds you aren’t filling?”
Hospitals shouldn’t look at single project as the one and only opportunity to replace the facility and disregard all practicality, Ms. Hahn says. Hospitals must ask the hard questions of their finance team, architect and contractor. “Hospital boards must also approve and understand the planning and assure that the architect doesn’t want to build the Taj Mahal,” she says.
2. Hire the right group to represent you in the transaction. When a smaller hospital is looking to partner with a larger one, they need to work with an investment banking firm that is knowledgeable in their industry and their particular market. Large investment banks might be less interested in the smaller transactions. “Many large Wall Street firms do not want to do smaller deals, so you might not get the best structure for your hospital,” Ms. Hahn says.
Small hospitals need to find the right person or company to work on their options, and they also need to pursue realistic goals. A firm that is well suited to work with your specific facility will be able to accurately represent the facility in the transaction and set realistic expectations and plans for handling debt, says Ms. Hahn.
3. Bigger can be better. “Small hospitals don’t have access to the same type of capital as larger health systems, and that is one of many reasons why you’re going to see more merger and acquisition activity,” says Ms. Hahn. The banks are more trusting of the larger parent system.
Ms. Hahn references a recent acquisition she handled in which a small hospital had a letter of credit coming up for renewal and had a technical default on the transaction due to poor financial performance. However, when this hospital chose to affiliate with a larger health system, the bank renewed the letter of credit. “A hospital should not assume that it will be simple to renew its letter of credit,” says Ms. Hahn, but it can be expected that the resources of a parent system can present a new, more attractive picture of the small hospital.
Read Lancaster Pollard’s Health Care Finance White Paper III: Financing Options for Large Hospitals and Multi-Hospital Systems (pdf).
Learn more about Lancaster Pollard.
