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6 Overlooked Hospital M&A Concepts and Trends

Textbook terms and best practices are useful in theory, but can leave gaping holes in hospital mergers and acquisitions. To prevent unanticipated consequences that can unwind deals, leaders need to examine problem areas that might be overlooked or underestimated in board room discussions.

Alan Zuckerman, FACHE, FAAHC, is president of Health Strategies & Solutions, a healthcare management firm with offices in New York, Pennsylvania, Florida, Michigan, Virginia and Colorado. He says certain best practices that seem like common sense in the day-to-day are pushed to the backburner when healthcare leaders meet to negotiate a deal. Here, Mr. Zuckerman discusses some national trends worthy of notice, along with best practices for hospital leaders as they pursue or structure a transaction.

1. For-profit companies are more aggressive in pursuits for urban non-profit hospitals. For-profit acquisitions of non-profit hospitals are not only on the rise, but also expanding from their traditional rural and suburban markets into American cities. Vanguard Health System's acquisition of Detroit Medical Center and Steward Health Care's purchase of Caritas Christi Health Care in Boston were two of the largest transactions of late, signaling a trend that these deals are on the move.

"I think the for-profit activity is also a little different than it was previously, in that the two big deals in the last year have both been in urban areas that have historically not been of interest to for-profits for obvious reasons," says Mr. Zuckerman. "Spurred by healthcare reform, they believe they can make sufficient returns on those investments, whereas historically they didn't believe that."

2. The quieter trend: hospitals buying physician practices. Hospital acquisitions of physician practices are also on the rise, albeit these deals do not elicit as much coverage or press as hospital-hospital transactions. Still, Mr. Zuckerman says these "under-the-radar" deals have been on the upswing for a few years now, and continue on that track.

"It looks like there will be very few small, independent practices remaining when this is done. There might be large group practices, but it looks like the day of the voluntary private physician or small group is waning," says Mr. Zuckerman. "It looks like the physician practice side will be consolidated before hospitals."

3. Small deals don't necessarily mean small risks. Hospital-physician deals generally see less coverage because they're smaller in scale, not because they're less risky. "All things being equal, those deals with physicians are actually more risky, says Mr. Zuckerman.

Hospital-hospital deals are horizontal transactions, while hospital-physician deals are vertical. "When you have a horizontal deal, there are more economies of scale to be realized," says Mr. Zuckerman. "It's much harder to realize the benefits going forward with a vertical deal, and it's more risky. They tend to be smaller, so they're less risky in that way, but on a risk-adjusted dollar basis, they're more risky. If you look outside of healthcare at vertically-integrated deals, they don't do as well." This might mean a hospital overpays for a practice, and then tries to run a business the practice doesn't understand.

4. Concern for cultural compatibility is often thrown to the wayside. Despite how frequently the term "cultural compatibility" is used in M&A discussions, it seems to take a backseat in board room discussions as parties discuss more tangible concepts, like capital improvements. This topic is especially crucial in deals where a hospital is transitioning from non-profit to for-profit status, and discussions should address cultural differences immediately from the start.

"We make a point to raise [cultural compatibility] as an issue from the get-go. It's really more a question of how incompatible they are. Can those incompatibilities be overcome? Are the organizations potentially different but complementary? This is a big deal that can be subtle," says Mr. Zuckerman.

Certain differences, like a decentralized management vs. hierarchal management, might be fairly obvious, but should still be discussed. "What happens is [parties] tend to talk about tangible issues they have. One might need financial improvement, another might need capital, another might have programmatic needs. But the issue of culture, unless broached and addressed, comes up in negotiations but it's not really addressed," says Mr. Zuckerman. Excluding this hefty topic from board room discussions can be the largest reason a deal dies later on.

5. Effects on physicians can be underestimated. Non-employed but affiliated physicians can be affected by a merger or sale in ways that may not be immediately obvious. Whether cultural or tangible, hospitals should anticipate the subtle ways in which a transaction might influence other physicians in the marketplace.   

"When a hospital merges with another hospital, they talk about things relating to hospitals. Yet, on the sidelines, there are large groups of voluntary physicians who are affected. How you deal with those large groups says a lot about whether you'll be successful going forward," says Mr. Zuckerman.

He offered an example, in which two merging hospitals might decide to combine their cardiology programs and locate the merged program in one hospital facility. "Well, it could be that the cardiologist from hospital B own condominiums in an adjacent medical office building. Now, all of a sudden, their practice has moved down the road or 20 miles across town and they're expected to move there. Nobody has addressed the fact that they own office space that they now don't need anymore," says Mr. Zuckerman.

Hospital executives, board members and physicians can share delicate and intricate ties, which can sometimes make a disagreement even more complex. Related to the previous point, disgruntled physicians might detour hospital administration and bring their problems straight to board members. A merger is challenging in itself, but managing indirect parties affected by the deal can also be testing.  

"Typically, physicians have relationships with board members that transcend management relationships. When they get mad, they go right around management. They go to the board member and say, 'Listen. I'm your doctor. I don't like this,'" says Mr. Zuckerman. "It can get pretty contentious."  

6. A nervous CEO can wreak havoc on a deal. Unfortunately, a CEO's future employment with a merging hospital might feel like a great unknown, which can have major repercussions on their ability to lead and negotiate. To help CEOs lead to the best of their ability, hospital boards should clarify what will happen to them or their position after the merger closes.

"You want CEOs to be constructive advocates," says Mr. Zuckerman. "If they're concerned about their position, they're not effective advocates. You have two hospitals negotiating, and the CEOs don't know what will happen to them. That's not going to work."

The worst thing a board can do is release no information about the CEO's position. "That's the worst of all possible worlds," says Mr. Zuckerman. "The board really has to try to deal with it directly." While most contracts contain termination provisions, those might be enhanced under these conditions, and board members should communicate that with the CEO to prevent their own self-doubt or panic from impeding management efforts.

Related Articles on Hospital M&A:

Calling it Off: Why Some Hospital Mergers Fail and Others Don't
Varying Degrees of Consolidation: Why Creativity Matters in Hospital Transactions
13 Recent Hospital Transactions

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