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Varying Degrees of Consolidation: Why Creativity Matters in Hospital Transactions

In midst of heightened scrutiny, a three-system merger in Kentucky has exemplified innovative strategies to meet public, regulatory and religious approval in the past year. The deal, while not finalized, has managed to break the mold in a few different ways and has sparked a discussion over the importance of creativity in healthcare transactions.

Last November, University Hospital in Louisville; Louisville-based Jewish Hospital and St. Mary's Healthcare; and Catholic Health Initiatives and its Lexington, Ky.-based operation, St. Joseph Health System, announced plans to form a statewide Catholic health system.

The deal initially presented potential complications to the boundary between church and state by pairing an academic institution with a Catholic system. Recently, University of Louisville officials said there's been too much attention focused on possible problems with the merger rather than its benefits. They say the merger would improve the state's health and dramatically expand medical teaching programs at U of L.

The deal that initially seemed highly-complex and controversial has made remarkable progress, earning FTC approval Aug. 31. State and religious officials have yet to sign off, but experts have said this merger exemplifies why and how hospitals need to approach mergers and transactions with a spirit of innovation, creativity and forward-thinking.

Tension between religious and public needs
With the FTC's sign-off, the deal still awaits the approval of two archbishops: Lexington Archbishop Ronald Gainer and Louisville Archbishop Joseph E. Kurtz, along with Kentucky Gov. Steven Beshear. Earlier in August, Archbishop Kurtz said he would only sign off on the merger if all three participants agreed to follow Catholic Ethical and Religious Directives for Healthcare, as produced by the National Conference of Catholic Bishops. Days later, Gov. Beshear clashed with the archbishop when he called upon University Hospital to maintain its public mission and offer a full range of services.

In a unique move, University Hospital solved part of this glaring setback when it transferred tubal ligations and reproductive services to a nearby provider: Baptist Hospital East in St. Matthews, Ky. The arrangement helped address the conflicting demands put in place by Gov. Beshear and Archbishop Kurtz, or how University Hospital could maintain a public mission while abiding by Catholic health directives.

University Hospital CEO James Taylor said women in need of reproductive services will still have their physician and an available facility, thanks to the deal with Baptist. "We compromised only a location, not a population," Mr. Taylor told the local press.

Creativity and forward-thinking strategies in mergers
"Baptist stepping up to perform services for the community showed regulatory authorities that the merger will continue to serve the community without harming other providers," says Ted Gavin, principal of NHB Advisors in Wilmington, Del. "I don't know that there's much on the books when it comes to this type of arrangement," says Mr. Gavin, referring to a hospital's relocation of services. "I think they've addressed some pretty large challenges creatively."

This creative approach may become more of a norm for hospitals as providers continue to merge or consolidate and regulatory approval is increasingly stringent. It's an exciting time in the industry, as experimentation emerges in more transactions and hospitals try new forms of affiliation. Still, despite this fresh approach to care coordination, the FTC is investigating more than a dozen healthcare consolidation arrangements, according to a recent report.

A merger between ProMedica Healthcare in Toledo and St. Luke's Hospital in Maumee has been put under "a virtual microscope," according to the report, as FTC lawyers have taken hundreds of hours of testimony to show the merger would stifle competition. The merger between Phoebe Putney Health System and Palmyra Hospital in Atlanta has attracted their scrutiny, and the FTC has expressed "serious concerns" over plans by a Spokane, Wash.-hospital to acquire competing cardiologist groups.

"The FTC is much more active than it has been in the past," says Patricia Wagner, JD, an attorney with the healthcare practice of Epstein, Becker & Green. "It's an interesting dynamic. At the same time, we're seeing a lot of organizations trying or thinking about trying different ways to coordinate their care together. It seems everybody is striving to figure out how to coordinate more closely, and [organizations] are experimenting with a variety of arrangements."

Varying degrees of transactions
Hospitals have not only become creative in how they move deals forward, but how they design them in the first place. Patient-centered medical homes, accountable care programs, accountable care organizations, clinical affiliations, management or leasing agreements are just a few of the options available.

"There are many physician groups working with hospitals or payors to create different ways to coordinate care," Ms. Wagner says, citing these as "not traditional" mergers. "Still, that doesn't mean there aren't traditional mergers or acquisitions going on," she says. "It's a buffet right now."

How might a merger that seemed to have the odds stacked against it make it so far to gain FTC approval? Community need is still the largest factor, according to Mr. Gavin. "If a need exists, then that need trumps predispositions," says Mr. Gavin. "When hospitals are in distress, they have to decide what is critical to the vitality of their business."

This means separating needs from wants — a task much easier said than done, says Mr. Gavin. Distressed organizations do not always have the best perspective to identify necessities, which is why the additional perspective from a three-system merger may help all parties involved in Kentucky. A major need, for instance, is the provision of healthcare services to a community, while a "want" may be as significant as a religious affiliation or as small as a logo.

Related Articles on Hospital Transactions:

Hospital and Health System Transactions (September 2011)
FTC Clears Pending 3-System Merger in Kentucky
6 Trends and Observations on Healthcare Transactions in 2011

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