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Think Strategy Before Partner During Hospital Transactions

It can be easy for hospital executives to focus on the structure of a transaction — whether they want to pursue a joint venture, a sale or a consolidation — as well as what organization will be the right partner. However, James Fox, director and senior CFO consultant for Warbird Consulting, believes the strategy — the goals of the hospital — are more important. Most acquisitions are driven by strategy, and if they are not, they should be, says Mr. Fox.

"I tend to believe that form should follow function. You have to decide what goals you are trying to get to first and then what form best gets you there. To me, the structure of a deal is what enables the hospital to accomplish the goal rather than being the sole focus of deal," says Mr. Fox.

A hospital might pursue a transaction to gain more geographic presence for risk distribution, to gain more market share or to add new capabilities and resources. Therefore, the right partner and structure is a factor of that strategy. Here, Mr. Fox discusses those three strategies and the factors they entail.

1. Geographic presence. Many hospitals pursue a merger or acquisition with hospitals in different communities so they can grow their geographic footprint and distribute their risk. Geographic presence can also increase efficiency for a hospital by allowing it to consolidate administrative or back-office functions.

From 1994to 2010, Mr. Fox served as CFO of Minneapolis-based Fairview Health Services. During his tenure, he oversaw numerous acquisitions of hospitals and clinics. According to Mr. Fox, Fairview Health used a geographic presence strategy when merging with a hospital in Des Moines, Iowa.

"The strategy was: 'How can we spread our risk out of the Twin Cities market space so that our assets are exposed to different markets to diversify and lower the risk?" explains Mr. Fox.

However, hospitals need to remember compatibility between hospitals when pursuing a geographic presence strategy. It is not always advisable to partner with hospitals in markets that are too dissimilar — in terms of distance, capability and market fit.

"Fairview ran hospitals in Saudi Arabia at one point. That geography becomes harder to bridge and centralize for efficiencies. So, we moved out of international services to hospitals with cultures that aligned more easily," says Mr. Fox. "You are trying to spread risk to different geographies [with the transaction] but you can also gain back-office operations to make each hospital more efficient and effective.

2. Market share. According to Mr. Fox, another strategy behind mergers and acquisitions is to increase market share. For instance, a hospital may look to merge with or acquire another hospital to move from number three to number one in market share.   

When pursuing a market share strategy, culture and compatibility are very important to consider in a partner, says Mr. Fox. Furthermore, the strength of the partner's market share is important as well. When looking to increase its own market share, a hospital would have more leverage to impact costs and other capabilities by partnering with another strong hospital, says Mr. Fox.  

3. Adding new service capabilities. A third strategy commonly pursued by hospitals considering mergers and acquisitions is to gain service capabilities and other resources that would be additive and strategic for the hospital.

"This strategy allows the hospital to integrate more things through a merger from an operational point of view," says Mr. Fox. "When choosing a partner guided by this strategy, it would be wise to choose a partner with different capabilities. If it had similar services, they would have to be rationalized."

"[Choosing a partner under this strategy] involves similar sets of criteria as the strategies above. For instance, what is the distance and compatibility? Obviously you can share more services if you are geographically adjacent," says Mr. Fox. "In addition, if the partner were right next door it might be good if you needed space to accommodate a high capacity. However, it might be bad if you are duplicating assets in a very tight region that aren't needed long term. It goes back to what you are really doing — what are the real drivers of your strategy?"

Mr. Fox mentions the Yale-New Haven (Conn.) acquisition of the Hospital of Saint Raphael in New Haven as an example. By acquiring HSR, Yale-New Haven was able to address its need for capacity at a potentially lower cost. "It goes back to what strategies are driving the hospital to look for merger or acquisition partners. It could cost Yale less to invest in HSR's facility than to build a brand new wing. Plus, it is better for the community — making use of an asset already in existence," says Mr. Fox.

While each strategy differs, the factors to consider overlap greatly, meaning partnership decisions come down to what will give the hospital the best opportunity to achieve its goals. Partnership decisions should derive from a strategic point of view so that the entity and structure ultimately chosen is one that satisfies the strategy.

More Articles on Hospital Transactions:

Albany Medical Center, Glens Falls Hospital Explore Partnership
14 Best Practices for Communicating During, Before & After Transactions
4 Common Steps in Beginning Hospital M&A Discussions

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