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6 Things Health Systems Look For When Acquiring a Hospital

Hospital acquisitions by health systems are increasing as hospitals find it easier to survive as part of a larger organization. Here Mark Bogen, CPA, vice president of finance at South Nassau Communities Hospital in Oceanside, N.Y., discusses six things health systems should look for when considering an acquisition.

1. No skeletons in the hospital's closet.
A health system looking to acquire a community hospital should look closely at the hospital's legal and financial records to "make sure there aren't any skeletons in the closet," Mr. Bogen says. "In my career, through working on a number of potential mergers, acquisitions and takeovers, I've seen situations where [a hospital] appears to be fairly healthy, but if you don't get your fingernails dirty, you might miss some large issues." He says even though hospitals undergo regular audits, there are many areas where auditors may not get involved.

He says "skeletons" might include a history of fraud and abuse cases that might have been missed by hospital audits. He says health systems should also look closely at hospitals that are self-insured for malpractice insurance to make sure no coverage gaps exist. "One of two major malpractice cases could really put a financial hit on the organization," he says.

2. Good physical condition and sound technological investment.
Part of the future financial success of a hospital resides in the physical condition of the building and the presence of technology, Mr. Bogen says. A building in poor physical condition may not be able to adapt to the future needs of the organization or require a significant investment to reflect the image the health system wants to project.

"The health system needs to look at whether it would have to invest a significant amount — whether in bricks and mortar or in technology — to raise the hospital's value," he says. Although a community hospital that lacks up-to-date technology may not be attractive to a health system, the presence of "the latest and greatest toys" doesn't necessarily bode well either. "It should also concern you if the hospital buys every toy available and then doesn't use the technology in the way it should be used, both from a financial and clinical standpoint," he says. Again, the hospital should strike a good balance in technology investment between purchasing necessary, up-to-date equipment and not catering to every physician desire.

3. A diverse medical staff.
When a health system is evaluating a community hospital for a potential acquisition, Mr. Bogen says the medical staff is an important factor in deciding the hospital's appropriateness. He says the medical staff is evaluated on a number of factors, including:

• Shared responsibility for medical specialties.
He says an attractive hospital will have several major physicians who take responsibility for a particular medical specialty. "If you have one doctor who does 35 percent of surgeries in a major area and he or she leaves, that takes away a lot of revenue," he says. "You want to have more than one doctor driving the physician train or the surgical train."

• Academic credentials. If the health system is involved with a medical school or an academic medical center, Mr. Bogen says the system might want to extend faculty positions to physicians in the community hospital. "In that case, you want them to have credentials and be able to make that transition," he says.

• Healthy succession rates. If the medical staff of the community hospital is aging, a health system will look at succession rates to determine if younger physicians are ready to take the place of those who will soon retire. "You always worry about that," he says, especially with the impending provider shortage. "If you've got a fairly aged staff that's not being replaced, that's a problem."

• History of legal issues. If a community hospital has a history of malpractice issues, that should raise a red flag for a health system looking to acquire, Mr. Bogen says.

4. Potential financial success for internal reasons. In a down economy, it can be difficult to know whether a community hospital is failing financially because of unavoidable economic factors or because the hospital is poorly managed. Mr. Bogen says one of the most important steps in evaluating a hospital for an acquisition is to understand why the hospital has or has not been successful. "There are a lot of metrics you can examine," he says. "You look at length of stay, case mix, adjusted FTEs per occupied bed. You look at revenue cycle issues and days in A/R." He says a health system should examine the hospital's coding team for quality. "Coders these days are like gold — you can't get them and you can't keep them, especially the good ones," he says. "Even though they may come with the appropriate letters after their name from a credentialing standpoint, you don't know what you're getting from a quality standpoint."

He says health systems should look at both internal factors — revenue cycle issues, staffing, quality metrics — and external factors — local economy, patient volumes, reimbursement rates — to determine why the hospital is succeeding or failing. He says the "why" is important because only looking at the hospital's success or failure doesn't tell you much. For example, a stand-alone community hospital may be able to perform much better when associated with a large health system. "If the hospital hasn't had a lot of leverage and success in negotiating managed care contracts, your system could bring a 15 to 20 percent increase to the managed care side of the business with no investment required," he says.

5. A good balance of inpatients and outpatients.
According to Mr. Bogen, the days when a hospital could market itself effectively with an inpatient/outpatient split of 90/10 are over. "In the world today, I think a hospital needs to have a 60/40 split inpatient/outpatient, "he says. "I know some organizations that are close to 50/50. Nowadays with [reimbursement] cuts on free-standing ASCs, many physician groups are coming to the hospitals and offering full or partial ownership to bolster revenue as a result of the cuts in Medicare rates."

6. Strong hospital management.
When a health system acquires a hospital, the financial situation of the hospital often determines whether the hospital administration stays. But even if the hospital is struggling financially, administrators can be kept on board if they communicate well with hospital staff, have strong connections to the community and present a clean history of legal issues. "The health system should talk to the doctors and find out what kind of relationship the doctors have with the senior administrative team," he says. "The system should also look at a history of legal issues and compliance issues and whether the hospital has been successful in litigation attempts."

He says a strong management team should be active in the community "beyond the four walls of the hospital." Looking at empirical data will give some idea of whether hospital administrator should be replaced, but talking to hospital staff and community members can reveal those hidden factors that might sway a health system's decision.

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