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To Be or Not To Be Independent: 5 Considerations for Community Hospitals

In today's healthcare industry, it may seem as if there is a merger or acquisition announced every single day and that every hospital in the United States is affiliating or partnering with one another. However, that is not the case.

Yes, many hospitals — particularly smaller, community and/or rural hospitals — are considering transactions to meet industry initiatives, offer high-quality care and lower costs. And, many hospitals are exploring different variations of transactions, ranging from governance and ownership transfers to business management deals and clinical partnerships. However, with that said, of all 4,900-plus community hospitals in the nation — according to the American Hospital Association — not every single one has a partner.

For instance, in the far west suburbs of Chicago, Edward Hospital in Naperville, Ill., remains a standalone hospital. While Edward Hospital has formed clinical and physician group partnerships — such as its deal with Northwestern Medical Faculty Foundation to bring neurointerventional care to patients in the Naperville area or its clinical integration arrangement with Dupage Medical Group — the hospital does not have any operational or governance partners.

Often, there are certain characteristics a hospital embodies, which allow it to remain operationally independent despite increasing pressures to offer high-quality care at lower costs. According to Mike Williams, president and CEO of Community Hospital Corp., which offers consulting and management services to hospitals, factors correlated with independence include: size and demographics of the community, payor mix, strong finances (i.e., accumulated cash) and strong clinical relationships with physicians and institutions.

Edward Hospital has many of these characteristics. It is strong in its market position, leadership, physician relationships and finances. Yet, hospital officials do not negate the possibility of a partnership in the future. "We are always willing to partner with physicians and other healthcare providers to bring the best services to our community," says Brian Davis, vice president of marketing and government relations for Edward Hospital.

Edward Hospital is not alone in its current state of independence. However, in today's healthcare industry, is independence something other hospitals should strive for?

Is it advisable for hospitals to stay independent?
As to whether community hospitals should or should not remain independent, it depends entirely on the hospital.

"We are seeing that more and more consolidations are occurring across the country — some sort of relationship is being created. It is too general to say that every hospital should seek a partner since every hospital is unique. The market it serves is unique. Its history, mission and culture are unique," says Mr. Williams. "A board would need to evaluate those factors to determine whether the hospital needs or wants a partner. There is nothing that could say one hospital versus another should seek a partnership or not," he adds.  

Rather than deciding one way or another, many experts recommend that hospital leaders keep an open mind. "My father used to say: 'Never turn down an offer before you hear it.' If [a board member] has made up his or her mind that the hospital needs to partner or stay independent, that becomes the goal and the driver. The mission and purpose of the hospital — to make communities healthier — is lost," says Brian Browder, attorney with Waller. "Sometimes the hospital can serve its community best by staying independent; other times the best way is through innovative partnerships or outright sales. However, the goal should always center on the community."

5 ways hospitals can assess the necessity of a partnership
Above all other questions and considerations, leaders of a historically independent hospital should ask themselves: What do we need to do to allow the hospital to offer the highest quality results at the most cost-effective price? According to Mr. Williams, this question should begin a discussion between hospital leaders, which will hopefully lead them to a conclusion for pursuing or foregoing a transaction.

Some of the dimensions hospital leaders should consider when answering the above questions include the following five areas.

1. Market position. If a hospital does not have a strong position in its market, it may look to find a partner who can offer strength and clout it may not achieve independently. "If [a hospital] does not have a great deal of market clout, and the leaders believe they are being underpaid by payors compared to other hospitals in the market, it may drive the leaders to consider a partnership," says Akram Boutros, MD, president of BusinessFirst Healthcare Solutions, a consulting company and executive vice president and chief administrative officer of Roslyn, N.Y.-based St. Francis Hospital-The Heart Center. "However, if a hospital has high market clout and a good ability to integrate with physicians in the area, it may not need to partner."

2. Finances, profits. Hospitals may look to a partnership if they have significantly unprofitable services and believe a transaction can help them combine and/or shed services to be more efficient, says Dr. Boutros. In addition, if a hospital can optimize revenue through a transaction deal, that step may be a good idea.

"Many times a large urban-based hospital will have more managed care clout with a payor than an independent hospital. Sometimes this difference in managed care reimbursement is significant and the sole driver for an independent hospital to enter into merger or common shared governance relationship with another institution," says Mr. Williams.

Mr. Williams adds that other, more predictive considerations, for whether a partnership is necessary for a hospital, include:

• How has the hospital been managed in the past?
• What are its financial ratios?
• Does it have a "war chest" of money to depend on as things get more financially challenging?
• Has it sought outside consultative opinions to evaluate its cost structure and operational efficiency?
• Have the physicians networked with peers around the country to make sure they understand how the hospital's outcomes compare to other similarly positioned institutions?

3. Industry transformation. According to Mr. Browder, hospitals need to be mindful of events and initiatives in the industry that are drivers for change — local competition, declining reimbursement rates for Medicare and Medicaid and increased regulatory scrutiny. A hospital's situation in relation to these factors should be part of the transaction decision process.

"[Hospital leaders] need to be open. They do not know what the future holds. They do not know that things are or are not going to stay the same. The financial side of the hospital business is changing. How each hospital and its board choose to address that will be different," says Mr. Browder.

4. Clinical services. Many times the pursuit of better clinical outcomes drives hospitals to consider transactions. It does not mean that the hospital is weak in a service area or has quality problems, but it is recognizing and trying to address the best the way to serve a patient population. "In those cases [the hospital] is recognizing what it is good at and where someone else may better to give patients the benefit of that expertise," says Mr. Browder.

5. Infrastructure. For a hospital that needs to cut costs but needs to build infrastructure, a partnership may be the solution. Sometimes working with others is the best way to lessen expenses. "We are seeing lots of independent hospitals asking: How can we work with other hospitals to share infrastructure? Usually they are looking to share business office or information system infrastructure — things a hospital may not need in multiple locations. Ultimately, they are looking for effective ways to cut cost," says Mr. Williams.

For many community hospitals, the decision to remain independent or explore a transaction — one involving governance and operational negotiations or just sharing expertise and services — will depend on a variety of factors, including the five above. As a whole, the industry is seeing a lot more collaboration and consolidation. However, this does not mean a standalone hospital cannot be successful. There are lots of different choices for affiliations. A hospital can stay independent if it wants to, has the financial resources and if that's the best way to serve the patients. The ultimate goal is to keep individuals healthy.

More Articles on Hospital Transactions:

5 Tips for Clinical Consolidation in Hospital Transactions
8 Strategies Behind Hospital Transactions
5 Tips to Avoid Issues Between Hospital Boards During a Transaction

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