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The Merger of Two Hospitals: 7 Key Issues

What should hospitals consider when they approach a decision to sell or merge?

We often see community hospital transactions structured in one of a few key manners. First, the community hospital may sell to a national for-profit chain. As an alternative, the hospital may merge with another hospital. The merger may be a true merger or may be structured more along the lines of a joint operating agreement model. Here, we briefly discuss several issues that will be negotiated as part of the merger.

1. Bestowing funds for the community hospital foundation. Whether the transaction is a merger or sale, a certain amount of money is often left with the community hospital foundation to use for charitable and community purposes. With a true sale, this amount may be very substantial, or equal to the value of the hospital. In a merger situation, where the existing hospital retains some controls or membership in the combined entity, this is more often a token amount.

2. Commitments to the hospital and community. Depending upon the status of the hospital in the community, there is often serious concern as to how the hospital will operate after the sale or merger. For example, in many small communities, a lot of time and negotiation is given to whether the buyer or merging party will commit to keeping the hospital open as an acute-care hospital or retaining services.

3. Shared authority. In a true sale, the seller often has limited, if any, long-term controls, voting or rights to how the asset is operated. In a merger, the selling hospital seeking a partner will often have extensive board and control rights. These may be articulated in the documents through member reserved rights or board supermajority rights.

4. Government approvals. Issues that can complicate transactions include whether the combined entity will have market dominance in an area, giving rise to antitrust scrutiny. Another issue that can give rise to scrutiny includes the sale of a nonprofit to a for-profit. Here, the attorney general or similar office may focus on the fairness of the price and the nonprofit's use of the proceeds.

5. Essential services in religious-secular mergers. When a religious entity merges with a secular or nonreligious entity, an effort often needs to be made to assess how to keep providing services that the secular entity provided. This may not mesh with the ethical and religious directives of the religious entity.

6. Transitional matters. The parties have to assess what activities they can undertake during the period of time between the letter of intent and closing. The core concept is each party wants to both operate its business intelligently in the interim but doesn't want to be merging with an entity that has substantially changed.

7. Number of suitors or partners. Whether the intent is a sale or merger, we often see boards limit the number of partners too early. Considering the financial unpredictability of many buyers and the difficulty in assessing the intent of a party to close, we consistently urge boards to look more broadly and include a few more parties than they may have initially outlined. We often see boards that have developed a long-term dislike for their local competition. While we understand this comes from competition and is often a significant factor, the local competitor may often be the partner with the most synergy. We advise boards expand the pool of possible partners and don't ignore the local players.

More Articles on Hospital Mergers:
Moody's: Hospital Downgrades Have Surpassed Upgrades Every Quarter This Year
CFOs as "Chief Flight Officers": CHE Trinity Health's Ben Carter on Financial Leadership Today
How Hospitals Should Handle Pension and Benefit Plans During Transactions

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