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The magic number: How many partners should a health system consider before merging?

Last year was a record year for acquisitions across all industries, especially in heathcare. According to a report released by Kaufman, Hall & Associates, the number of hospital transactions increased by roughly 70 percent from 2010 to 2015. In 2015, 112 hospital transactions were declared, up from 95 in 2014 and 66 in 2010.

Analysts at Kaufman, Hall & Associates say a similar pace of hospital M&A has continued in the first half of 2016. The consulting firm identified a 6.1 percent increase in M&A activity in the first six months of the year, roughly 52 hospitals and health system transactions. Auditors at PwC say healthcare companies are still attracting buyers. With the record-breaking deal volume totals in the healthcare sector over the past two years, a number of private equity firms looking for new investments and a variety of assets are still available to strategic buyers with access to capital, according to a report issued by the firm.

While the data illustrates the pace at which health systems and hospitals are pursuing transactions, it doesn't explain how these deals come to be. From the bevy of hospitals and health systems in the nation, how does one first choose a partner with which to affiliate?

The key, as Robert Wolleben says, is to "cast as wide a net as possible."

Mr. Wolleben is CEO of Massena (N.Y.) Memorial Hospital, a facility currently in the midst of procuring an affiliate to partner with once the hospital privatizes. The hospital is considering proposals from 17 organizations across the U.S.

"There is no magic number —you should consider as many systems and affiliations as possible," says Mr. Wolleben. "It's not uncommon for far-away institutions to partner, [because] there are [a] number of factors to consider."

His thought process reflects a broader industry trend toward open, honest communication between health systems regarding M&A activity.

Vice President of Chicago-based Juniper Advisory Jordan Shields acknowledges that the trend didn't crop up until recently. For a long time, healthcare executives feared that their organizations would be harmed if news leaked that they were considering affiliation alternatives. They worried that physicians and employees would leave or community members would view discussions unfavorably.

"Ten years ago, executives were concerned that talking to more than one or two of the most-likely partners increased the chance of a leak. They believed a leak would be construed as a sign of weakness. That fear isn't there today, and it is not uncommon for systems to announce that they are proactively reviewing their full range of strategic alternatives," says Mr. Shields. "There has been a shift, a change in mindset. Now physicians and employees are concerned if hospital executives and boards aren't vetting multiple partners."

Given the sheer volume of organizations in the industry, conversing with a large number of systems allows a hospital to learn what it is they want in a potential partner.

Though still relatively early in the process, Mr. Wolleben says Massena is looking at an array of factors, including a potential partner's finances, mission and long-term goals. But these are just three of the many questions his team poses.

"How complex [of an affiliation] is your hospital looking for? Do you want a partner with multiple sites? What kinds of resources does [the system] have access to? What sorts of characteristics or issues will the affiliation resolve or improve? Those are all things a system should consider," says Mr. Mr. Wolleben. 

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