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Community Hospitals: Why Their Futures Are More Flexible Than You Think

David Parmer is what he and many others would call an experienced U.S. hospital system executive. He has been with Baptist Hospitals of Southeast Texas for 22 years, and he currently serves as CEO of health system's Beaumont campus, a 508-bed community hospital.

Over those 22 years, Mr. Parmer has seen almost every type of community hospital affiliation possible. BHSET used to be a freestanding system, then tried an integrated delivery system model with Dallas-based Tenet Healthcare and eventually merged, and de-merged, with Houston-based Memorial Hermann Healthcare System. Today, BHSET is owned by Community Hospital Corp., which operates both of BHSET's hospitals.

It's been a long journey for BHST to reach its current position, and many community hospitals might find themselves in similar positions — unsure of their local situation and somewhat apprehensive as to how healthcare reform will play out. The current hospital merger and acquisition market has indicated that consolidation is here to stay. Although hospital M&A was somewhat down in the first quarter of 2013, the number of smaller hospitals becoming part of larger systems over the past four years has signaled a major shift in industry mindset.

This M&A activity has been driven by several forces — declines in reimbursement, high amounts of uninsured patients and charity care, an increase in the cost of care delivery and general healthcare inefficiencies.

However, Mr. Parmer says community hospitals of all geographies and sizes will play a role in healthcare reform over the next five to 10 years, and those organizations must look at all of their options carefully before moving to make a deal.

"Hospitals should be looking at all types of arrangements," Mr. Parmer says. "There is not one size that fits everyone. We're not certain that all the bricks-and-mortar mergers make much sense."

The spectrum of transactions

Mike Williams, president and CEO of Community Hospital Corp., has been in the healthcare industry just as long as Mr. Parmer. Previously, he served as president of the former Baptist Hospital in Knoxville, Tenn., COO of Children's Medical Center of Dallas and vice president of Baylor University Medical Center, also in Dallas.

He agrees there is no silver bullet for every hospital's management situation. Before hospitals consider a transaction of some sort, Mr. Williams says the entire spectrum of options must be fleshed out. The following gives a general overview of the basic types of affiliations hospitals are pursuing today.

Total independence. Sometimes the best transaction is one not made at all, as full independence represents the left extreme of this affiliation spectrum, Mr. Williams says. Despite the rise of healthcare consolidation, there are many hospitals and academic medical centers that have the financial wherewithal, volumes, resources, staff and support to forge ahead on their own.

"Community hospitals have a greater opportunity for success based upon three factors," Mr. Williams says. "One, if they are geographically essential. Two, if they are clinically strong. And three, if they are operationally efficient."

"Healthcare is local," Mr. Parmer of Baptist Hospitals of Southeast Texas adds. "Those individuals who make those decisions know what is best for their organizations, and I don't necessarily agree that [consolidation] is something everyone has to do."

Clinical affiliation. Just to the right of total independence is some type of clinical affiliation. For example, Jamestown (N.D.) Regional Medical Center, a 25-bed critical access hospital, decided in April to pursue a clinical and technology-based affiliation with Fargo, N.D.-based Sanford Health. The deal allows JRMC's local board to retain governing powers, but JRMC patients would have access to Sanford's cancer care, which offers more expanded chemotherapy treatments.

Mr. Williams says these types of relationships will give local hospitals some name and brand recognition with a larger organization, but they are not as heavily pursued today.

Joint venture. Joint ventures have picked up more steam in the past few years. These deals allow a hospital to maintain as much independence as possible, but the other organization will be put at some risk for the hospital's performance. For example, in February, Akron, Ohio-based Summa Health System and Cincinnati-based Catholic Health Partners created a "strategic partnership." Summa Health still retained majority ownership and local control, but CHP became a minority owner.

Creating a new entity. Some non-profit community hospitals could go a step further, Mr. Williams says, and create a new 501(c)(3) organization. For example, several county-owned hospitals could band together and build a new parent entity. The counties would still maintain ownership of their respective facilities, but they could lease them to the newly created organization. Mr. Williams says these types of transactions could be very beneficial if community hospitals are looking to gain managed care clout.

Total sale or full-asset merger. The last option, or extreme on the right of the spectrum, is a full merger or sale. A community hospital can sell to a non-profit organization, such as the April merger between Lehigh Valley Health Network in Allentown, Pa., and Greater Hazleton (Pa.) Health Alliance, or an investor-owned company, such as the March deal between Brentwood, Tenn.-based LifePoint Hospitals and Bell Hospital in Ishpeming, Mich.

Choosing the right path

For hospitals that decide some type of affiliation or restructuring needs to take place, both Mr. Parmer and Mr. Williams suggest leaders take a methodical, well-planned course of action. They recommend hospitals consider these five points when pursuing an affiliation.

1. Mission. First, and foremost, Mr. Parmer says any new partner — be it a health system or management company — must have similar a goal, mission and culture.

"We'd make a list of three to four must-haves, and mission and common philosophy were always right at the top," Mr. Parmer says. "Some [hospital] groups that haven't achieved all they hope to — you can see it was a noble idea, but you just had two things getting put in same box that were characteristically different."

2. Understanding from the board. When a hospital decides to create a new partnership, it must keep the board of directors in the know at all times through a transparent, public process. Decisions of this magnitude cannot be unilateral, and a well-informed board will lead to a better transition.

"Make certain your board is educated, informed and knows exactly which direction you're going," Mr. Parmer says. "Board perspective is important."

3. Physician alignment. Hospital-physician integration today is one of the top priorities for hospital executives under healthcare reform, due to varying projects such as bundled payments and accountable care organizations. However, leaders should not assume the medical staff should only be involved with clinical matters. In order to foster positive relationships with physicians, which will help future physician recruitment, hospital executives have to have open discussions with them.

"You need to think of medical staff and physician alignment," Mr. Parmer says. "There is not much autonomy in our market, and there are not a lot of clinically integrated structures. You need to have awareness of the medical staff and how to achieve that alignment."

4. Operational assessment. Hospital CEOs and CFOs have more data available to them now than any other point in their careers. Mr. Williams suggests executives use that data to understand how operationally efficient their hospital is — as well as their potential partner. For example, will financial and operational benchmarks improve if a deal is made? Will labor productivity, revenue cycle, supply chain and IT be strengthened?

5. Readiness for healthcare reform. Hospital affiliations have failed for a variety of reasons in the past, but in order for them to succeed in the future, transactions have to be centered around how this new era of reform — namely, the environment created by the Patient Protection and Affordable Care Act — will affect each party five, 10 and 20 years down the road.

"Hospitals are in a transition period of moving from being attractive to patients by their location in marketplace to competing to be selected for participation in health insurance exchanges and ACOs," Mr. Williams says. "Those are the things we have to keep in mind."

More Articles on Community Hospitals and Transactions:

Strategic Hospital Unions: Considerations for a Healthy Merger
Thinking About Merging? Considerations for Your To-Do List
4 Transaction Process Objectives Help Hospitals Select the Right Partner

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