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GE Healthcare Camden Group Insights Blog

10 Do’s and Don’ts for a Smart Transaction as a Healthcare Provider

Posted by Matthew Smith on Dec 15, 2016 11:22:35 AM

By Brian Hackman, MBA, MSIS, ASA, Manager, GE Healthcare Camden Group 

10-dos-and-donts.pngMany, if not most, healthcare organizations have been involved in a transaction with another business entity within the past several years, whether with a physician practice, outpatient center, hospital, or health system.2014 and 2015 saw record numbers of healthcare M&A transactions, and the desire and pace of healthcare organizations to complete deals will likely remain strong even in light of the recent presidential election results.

Now more than ever, it’s important to reemphasize the fundamentals of a successful transaction. Below is a list of ten “do’s” and “don’ts” for a smart transaction as a healthcare provider. In the current environment, it is imperative that healthcare organizations properly prepare and execute a prudent transaction process. Otherwise, a lot of time, money, and attention can be diverted from managing core business operations.

Do

  1. Identify a strategic vision for the transaction. A strategic vision lays the groundwork for the transaction. Be able to articulate and defend the vision of the transaction and the environmental factors and business rationale leading to it. Draft a post-transaction governance, transaction, and organizational structure and outline any preliminary terms and conditions. Finally, confirm the transaction is consistent with your strategic plan. Two questions to contemplate: (1) Does the transaction better position the organization for a value-based environment and (2) does the transaction add a competency or resource necessary to succeed?
  1. Seek an independent, third party to perform a business valuation and anti-trust assessment. Transactions in the healthcare industry involve a number of legal, regulatory, and tax considerations. By engaging with an independent third party, you gain a greater level of assurance that the purchase price is fair. It also limits your exposure to potential compliance and regulatory issues (i.e., Stark Law, Anti-Kickback Statute), and provides proper documentation if ever audited by a governing body, such as the Centers for Medicare and Medicaid Services, the Internal Revenue Service, or the Federal Trade Commission. Outside counsel to inform potential anti-trust or other regulatory risks is also crucial.  A market assessment to determine the potential market impact, as well as potential consumer benefits of the transaction should be performed to assure that all parties are informed of the opportunities, requirements of the transaction, as well as potential risks.
  1. Complete thorough due diligence. The purpose of the due diligence phase of a transaction is to gain a greater understanding of your target company. Use this process to research and evaluate any potential issues, liabilities, or concerns. An analysis of the target company typically includes, but is not limited to, a review of its operations, such as revenue, expenses, volume/productivity, and coding and documentation; its finances, including the cash flow and strength of the target’s balance sheet; and any legal considerations, including pending litigation that could impact future profitability. In addition, pay keen attention to the cultural fit between the two organizations. If the cultures are too divergent, or the cultural integration is back-burnered until after the transaction, it is unlikely that a deal will work out. Depending on the findings of the due diligence, it may be necessary to renegotiate the proposed structure of the transaction. Don’t be afraid to walk away from the transaction if the risk profile of the target company exceeds the risk tolerance of your organization.
  1. Develop internal financial projections. Based on the information provided during the due diligence process, develop financial projections for the target company or combined entity. It is likely these internal financial projections will differ from those generated during the business valuation, as the projections will incorporate contract rates from your organization and any prospective synergies to be gained from the transaction, which the business valuation may not include. Depending on the type of transaction, a business plan of efficiencies (“BPOE”) can be a useful guideline to articulate where and how operational and structural efficiencies will be created. Use these financial projections to understand the impact of the transaction on your current financials and cash flow. These are also good ways to measure future performance versus targets. Calculate the return on investment to ensure it is consistent with your organization’s goals..
  1. Understand the impact of the transaction on your balance sheet. Take into account and plan for how the transaction will affect your balance sheet. Will the transaction be financed with cash, debt, or a combination of both, and what are the advantages and disadvantages of each? How will the purchase price be allocated on the balance sheet? Be sure to understand how or whether the transaction will impact any debt covenants or key balance sheet ratios, which can influence your credit rating.  

Don’t

  1. Be bewitched by the shiny rock. At some point, an opportunity may arise to pursue a transaction with a top organization in your market. At first glance, the concept of joining forces may be compelling. However, in this situation, it is particularly critical to follow the steps outlined above and evaluate the financial and operational merits with clarity and objectivity. Ensure it isn’t too good to be true and really is in the best interest of the organizations and their patients.
  1. Buy into overly optimistic integration synergies. Rosy projections can make any potential transaction seem like a no-brainer. Run various scenarios (e.g., expected, best case, and worst case) to test the primary assumptions or question the main drivers of the projections for reasonableness. It is advisable to hash out and understand the operational and financial risks during the due diligence process rather than after the transaction closes.
  1. Assume the integration process will be 100 percent seamless. While the transaction process can be long and time consuming, don’t assume that once the transaction closes, the hard work is over. In fact, the hard work is just beginning. The integration of two organizations can involve numerous operational and cultural hurdles, including blending corporate cultures, information technology systems, human resource systems, operating mechanisms, etc. Successful integration requires thorough pre-transaction planning and consistent ongoing communication. Consider employing change acceleration processes to facilitate the integration process.
  1. Lose focus on what you do well. Most organizations typically have a small number of core strengths. Acquiring business lines outside of this portfolio of expertise can sometimes dilute management’s ability to run each efficiently. In such situations, a higher level of due diligence may be required to ensure you have the internal capability to manage that business line. If not, consider bringing in outside expertise through a management services agreement or hire the required talent from outside. Alternatively, consider other types of transactions, such as joint ventures or joint operating agreements, where the day-to-day management can be handled by partners who specialize in that particular space.
  1. Engage in this process alone. Outside third party expertise can help ensure a higher probability of success. Form a team of advisors to create a sounding board for your thoughts and ideas. Legal, financial, and operational support can not only mitigate potential compliance and regulatory risks, but also assist in validating the rationale for the transaction to the various stakeholders in the respective organizations. Post-transaction, advisors can help navigate the inevitable challenges that will arise during the integration process.

Hackman.jpgMr. Hackman is a manager with GE Healthcare Camden Group and specializes in healthcare finance. His focus includes fair market valuations and strategic planning for both nonprofit and for-profit healthcare organizations. He also has experience in reimbursement analysis, service line planning, and financial forecasting. He may be reached at brian.hackman@ge.com.

 

 

 

Topics: Hospital mergers and acquisitions, Mergers and Acquisitions, Brian Hackman, M&A

5 Steps to Achieve System Integration

Posted by Matthew Smith on Nov 17, 2016 4:03:24 PM

By Brandon Klar, MHSA, Senior Manager, GE Healthcare Camden Group

integration.pngAn effective integration plan not only aligns operations and maximizes the collective system resources, it also serves as a roadmap and a vehicle to cultural integration. Recognizing the need to balance both quantitative and qualitative inputs in the identification of the ideal strategies for each unique system integration plan, leadership should follow a proven5-step methodology to create a plan that is realistic, achieveable, and sustainable for the system.

To position the system integration planning process for success, an effective governance structure and Integration Management Office (“IMO”) should be established to guide and facilitate integration initiatives.  Capitalizing on the organizational knowledge and expertise from operational, clinical, and medical staff leaders throughout the system, the governance structure should be positioned to make critical system decisions and be nimble to adjust planning efforts in an uncertain world. With the support of an unbiased IMO to facilitate and manage integration initiatives throughout the system, communication surrounding planning and implementation should be frequent and broad band.


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Step 1: Vision for System Integration   

The vision and design of an integration plan should reflect the system’s core strategic goals and objectives, and be grounded in the unified mission of the integrated healthcare delivery system. Balancing meaningful integration initiatives that are designed to enhance value with the system’s tolerance to culturally accept and adapt to change, leaders should establish clear guiding principles to harness decision making.

The integration vision and associated guiding principles will become the foundation for departmental and service line integration efforts. When organizational or personal bias arises, the guiding principles will focus leadership and their teams on the system as a whole, break down both organizational and departmental silos, and position teams to be innovative and progressive as they plan to drive quality and control costs throughout the system’s administrative, support, and clinical services.

Steps 2: Efficiency Opportunity Assessment

Opportunity to improve operational efficiency, enhance quality, maximize existing resources, and control varies within each system. Factors including the geographic distribution of care sites, the scope and scale of operations, and community needs will all impact integration opportunities. To effectively identify integration opportunities, individual functional area work teams should be established to assess current performance both quantitatively and qualitatively. With the help of the IMO, these work teams will assess historical and projected data, utilize industry benchmarks, and gather team operational insight to catalog operational variation.

Capitalizing upon industry experience and their own internal analyses, the work teams will identify a range of integration opportunities available to the system. These opportunities should be organized by the IMO and shared with the integration governance team to ensure the opportunities have been properly vetted and do not conflict with the mission or vision of the system.


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Step 3: Operational Efficiency Plan Development

Once a preliminary listing of integration opportunities has been identified, the work teams will commence building operational efficiency plans to drive system integration. Utilizing a blend of proven horizontal and vertical integrations strategies, the work teams should build tactical plans with clearly defined action items, potential barriers, necessary resources, financial impact, implementation timeframes, and interdependencies with other departmental plans. 

Recognizing that individual departmental and service plans may conflict, the governance committee and IMO will serve as a central repository for draft plans and must identify integration plan interdependencies as well as potential strategic and political complications with implementation. Once plans have been reviewed and refined, the IMO will develop a master system integration plan for approval and adoption.

Step 4: Implementation and Communication

As the system begins implementation, broad and frequent communication to both internal and external stakeholder is essential. Communication of the overall integration plan at a system level and open dialogue regarding departmental plans with their respective teams will provide the best chance for the plans to be accepted and adopted by the workforce and the community.

Implementation of the integration plan should commence upon final approval of the plan or when permitted by regulatory agencies. With the governance committee and IMO team coordinating initiatives system-wide, both positive and negative feedback should be monitored closely. With the proper mechanisms in place, work teams can modify their plans as needed to ensure the successful achievement of the system’s integration goals.

Step 5: Plan Monitoring and Refinement

Concurrently with plan implementation, the IMO should establish an integration dashboard to monitor progress and barriers to implementation. The dashboard will serve as a tracking tool for the governance committee and system executive leadership, in addition to a communication mechanism to the system to illustrate progress and success.

It is also during this step that the governance committee will identify barriers to implementation. As all healthcare systems operate in an evolving market these changes are to be expected. It will be up to the governance committee and the work teams to adjust their plans to overcome the impediments and stay on course.

This is Part 2 in our 4-part System Integration blog Series. Parts 1 and 2 may be found here and here. Part 4 will examine common challenges experienced during a system integration process and solutions to overcome those challenges.

For more details surrounding health system integration planning, please download our PDF via the button, below:

Health System Integration


B_Klar.jpgMr. Klar is a senior manager with GE Healthcare Camden Group with over 12 years of experience in healthcare management. Mr. Klar specializes in strategic and business planning advisory services, including service line planning, master facility planning, and transaction work (e.g., mergers, acquisitions, affiliations, joint ventures). He has extensive experience in the creation of strategic partnerships, the facilitation of inaugural health system strategic plan development, as well as the creation and implementation of business plans of operational efficiency, system-wide integration plans, and clinical programmatic alignment plans. He may be reached at brandon.klar@ge.com.

Topics: BPOE, Hospital mergers and acquisitions, Brandon Klar, Mergers and Acquisitions, Health System Integration

Top 10 Pivotal Factors for Successful Mergers and Acquisitions

Posted by Matthew Smith on Oct 28, 2015 3:32:11 PM

Mergers and acquisitionsAs the healthcare landscape moves further down the tracks along the transformative shift towards accountable, value-based care, healthcare providers find themselves inundated with news and rumors of major players and competitors engaged in discussions surrounding acquisitions or affiliations. From the potential merging of three sets of health plan giants, to private equity players venturing further into the health system (e.g., hospitals, imaging, and physician practice) and post-acute space, the changing climate is undeniable and may prove for many to be inescapable.

Healthcare executives are surveying industry change, their market position, and their ability to meet organization goals and mission as they evaluate opportunities while simultaneously protect the well-being of their own organization. However, for a variety of factors, from operational to financial to cultural, not every consolidation is the right one. Before savvy leaders dive headfirst into the current merger and acquisition frenzy, they need to take a measured step back and assess the following ten factors that will prove pivotal to a successful merger or affiliation.

1. Define your mission, vision, and objectives. In a constantly evolving and unclear environment, it is critical to thoroughly articulate the ambitions of any significant change your organization is contemplating. Why is your organization considering this alliance, and will this arrangement help achieve desired goals? The reasons for mergers are plenty. Acquiring economies of scale, achieving geographic expansion, increasing access points, and enhancing access to capital are among the primary motivations in the current transformative climate. Gaining consensus among your board and executive leadership early will contribute to a unified search process, enhance communication, and align your key stakeholders.

2. Timing is everything – determine the right time. In a period of high consolidation activity, it is easy to get wrapped up in the excitement. Do your organization’s current position and situation necessitate a move right now? Many organizations rush to the negotiating table without fully assessing whether the timing is optimal, or if they are ready for the transition. Conversely, the market today does not look like the market did six months ago, nor will it look like the market six months from now. As the market evolves, so do options both available and unavailable to your organization. Potential targets or acquirers may align with competitors, or market activity could force your organization’s hand to the point where consolidation is the only option. A keen awareness of your organizational strength and market position is paramount when evaluating potential maneuvers.

3. Know the market – what is your outlook for the future, and what is its effect on your organization? The shift towards value-based payments and accountable care means that now more than ever healthcare providers are forming “tightly aligned” networks to reduce costs and improve the quality of patient care. Are other major players expanding their population base through additional access points, developing accountable care organizations (“ACOs”) and exclusive contracting arrangements, and creating a full continuum of care into the post-acute arena? The organizations with critical mass are going to come out on top. Failing to adequately assess your competitors and their situations could portend a situation where your affiliation options become limited and your market share eroded.

4. In a value-based environment, size matters. How can you increase your defined population? As mentioned above, for thriving and financially sustainable providers, it will be crucial that they grow, fortify, and protect the defined population that they serve. It is becoming increasingly crucial that organizations provide sufficient access points to coordinated provider networks through both traditional mediums (emergency departments and physician offices) as well as innovative entry point alternatives found in the new competitive provider environment that exists today (health plans, urgent care centers, m-health, and retail clinics). Consider alternative points of care to acquire or affiliate with in order to expand access and improve the coordination of care for your population – your competition likely is.

5. Choose the right affiliation structure – there are more options than just mergers and acquisitions. Today’s healthcare environment provides an increased number of innovative alignment options for organizations contemplating integration. Gone are the days where organizations needed to complete outright sales or mergers with full change-of-control. Instead, many organizations are pursuing affiliations to meet organizational goals and strengthen financially, including joint ventures, clinically integrated networks, sales to real estate investment trusts, or joint operating agreements. Affiliating can be an attractive option to maintaining a degree of organizational independence while propelling the organization’s mission and fulfilling its defined objectives. Just be clear that the affiliation structure will be the best option to meet your goals.

6. Evaluate cultural alignment to protect against breakdowns once the transaction is complete. Easily the most overlooked aspect of any potential merger is the eventual fusion, and potential friction, of combining two organizational cultures. Post-transaction success requires more than diligent financial analysis and combined market share. More and more transactions are stumbling out of the gates because leadership underestimated the difficulty of one or both organizations adopting new protocols and systems, blending the governing boards, or understanding management styles and philosophies. Assessing the history, mission, and cultural aspects of each organization is imperative to develop the understanding required to construct the mutually beneficial and shared vision necessary to achieve the future entity’s operational efficiencies and full potential.

7. Ensure that both boards and communities are behind the transaction and mission. Good communication is required to ensure as smooth a process as possible with any transaction. It is vital that all key parties, from the boards and medical staffs to employees and patients, have a firm grasp of why the organization is pursuing this action, and how they will benefit from it. Achieving alignment and understanding among the community will confirm the necessary parties are in sync while addressing and relieving any anxieties the deal may foster.

8. Conduct effective due diligence to ensure that the efficiencies and business justifications support the transaction. During the due diligence process, it will become clear how your potential partner is performing: their vision, goals, actions, and composition of the C-suite and board. The due diligence process is the appropriate time to ask as many questions as possible; it is imperative that you get the answers you need. A high frequency of meetings and discussions, particularly face-to-face interactions, and transparency with financial and quality data are strongly encouraged to generate the necessary levels of understanding to ensure the transaction remains compliant with antitrust legislation and that the market benefits desired and proposed are feasible.

9. Consider the partners’ “whole being” as an organization that can meet your needs. As an organization, identify how future industry changes will impact your needs across the care continuum. This may include bundled payments, ACOs, clinical integration, patient-centered medical homes, ambulatory delivery sites, payment changes, access to capital, new care models, and health plans, etc. Physician alignment models, recruitment, and research are also opportunities that should be addressed. Projecting future industry developments and the impact to your strategy and needs could put your organization ahead of the game in the years to come.

10. Once the merger is complete, execute the business plan of operational efficiencies (“BPOE”) to position your organization to achieve the gains that were the reason for the merger. The BPOE serves as a great tool to define the financial, operational, and clinical opportunities that will be gained through the merger before it happens. After the transaction is complete, use the BPOE to measure and manage progress on the implementation actions necessary to achieve the intended goals and efficiencies. These may include program and service consolidation, elimination of service duplication, and infrastructure integration. Theoretical synergies mean little without implementing and actualizing them. The BPOE should serve as the blueprint to follow in order to propel your organization to enact the clinical, operational, and financial benefits that compelled the transaction in the first place.


Mr. Valentine is president of The Camden Group, one of the nation’s largest healthcare management consulting companies with offices in California, Illinois, New York, and Massachusetts. With more than 35 years of healthcare consulting experience, he has considerable expertise in the areas of strategic planning, business transactions, mergers, hospital-physician relationships, and financial analysis. Mr. Valentine authors the annual “Top 10 Trends in Healthcare” for Trustee. He is a nationally recognized author and speaker on healthcare issues. Mr. Valentine is often quoted in Payers and Providers, Modern Healthcare, Los Angeles Times, and HealthLeaders, as well as other publications. He may be reached at svalentine@thecamdengroup.com or 310-320-3990.

Mr. Juberg is a manager with The Camden Group and focuses on clinical integration, transactions, and strategic and business planning for healthcare organizations. He has extensive experience with the development of ACOs (financial planning and funds flow modeling), managing Medicare Shared Savings Program applications, and implementing clinically integrated networks. He is also experienced in master facility planning, CMMI Innovation Center grants, medical group valuations, and community needs projections. He may be reached at djuberg@thecamdengroup.com or 310-320-3990.

 

Topics: Steve Valentine, Mergers, Acquisitions, Daniel Juberg, Mergers & Acquisitions, Mergers and Acquisitions

Mergers and Acquisitions: Key Considerations for Creating Efficiencies Through Consolidation

Posted by Matthew Smith on Aug 11, 2015 4:36:39 PM

By Tawnya Bosko, DHA, MS, MHA, MSHL, Vice President, and                                                                      Brandon Klar, MHSA, Senior Manager, The Camden Group

Originally published in the August 2015 issue of Compliance Today. Used with permission.

As a result of the Affordable Care Act ("ACA"), healthcare mergers and acquisitions ("M&A") have increased dramatically as providers attempt to consolidate to achieve economies of scale and provide a full continuum of services in support of population health. However, at the same time, there are specific anti-trust regulations that must be considered when contemplating a merger or acquisition ("M/A"), and recent compliance and enforcement activity shows that it is not just hospital-to-hospital consolidation that creates a concern; acquisition of physician practices can also be subject to anti-trust enforcement action. Healthcare providers must conduct effective due diligence and analyses to ensure that the efficiencies and business justifications for the M/A support the transaction, and that the benefit to the market in terms of quality and cost of care are apparent and fully achievable. Integrating anti-trust compliance into the due diligence phases of M&A considerations is imperative.

Incentives associated with the ACA, growing financial pressures, and infrastructure needs have led hospitals and other providers to seek partners in order to survive in the new healthcare delivery system. As shown in Graph 1 (below), hospital transactions have risen significantly during the post-ACA years. In this period, hospitals have attempted to align in order to provide the full continuum of care and capture the maximum patient population needed to transition to population health-based methodologies, all while seeking to create greater efficiencies from consolidation.

At the same time, hospital acquisitions of physician practices have increased for many of the same reasons, but particularly because of the financial needs of the practices and the desire of hospital systems to employ physicians as an alignment strategy in the population health transition. According to the American Medical Association, as of 2012, 53 percent of physicians were self-employed as compared to 76 percent in 1983.1 Simultaneously, the Medical Group Management Association reports that annual financial losses per provider (all multi-specialty) have increased from $143,834 in 2013 (based on 2012 data) to $235,866 in 2014 (based on 2013 data), representing a 64 percent increase in annual losses per provider. Historically, hospitals have not excelled at managing physician practices. Concurrent with the rapid increase in hospital-hospital M&As and hospital-physician group acquisitions is the evolution of healthcare antitrust laws in the post-reform era. Long-standing evidence shows that consolidation of hospitals reduces competition and drives up market prices in a fee-for-service environment. This effect is counter to the goals of the ACA and thus has received increasing scrutiny from the Federal Trade Commission (FTC). In fact, Edith Ramirez, Chair of the FTC, recently stated:

The success of health care reform in the United States depends on the proper functioning of our market-based health care system. The current consolidation wave could have substantial consequences for health care reform efforts that depend heavily on competition to control costs and improve quality.… Consolidation risks upsetting this competitive dynamic and harming consumers.2

In line with the FTC’s concerns, there have been more challenges to consolidation activities, including the Promedica-St. Luke’s case in which the U.S. Court of Appeals for the Sixth Circuit upheld the FTC decision to block the hospital merger of ProMedica and St. Luke’s Hospital in the Toledo, Ohio market due to the reduction in competition and likelihood of increasing prices in the way of premiums and copays for consumers.3 Further, in a historic case the FTC challenged the acquisition of Saltzer Medical Group ("Saltzer") by St. Luke’s Health System in Idaho based on the tenet that it would violate federal and state anti-trust laws. Although St. Luke’s argued that the acquisition created better coordination of care and supported the goals of the ACA, they could not show that the efficiencies would decrease the overall costs of care while improving quality.4

Although consolidation by way of M&As may be the best alternative in some cases in order to succeed under value-based payment and population health based models, it is imperative that hospitals and medical groups are able to demonstrate the efficiencies of the consolidation outweigh the risks under reduced competition. Ultimately, these systems must show not only the improved quality and reductions in costs associated with the M/A, but also illustrate how the efficiencies and cost reductions are translated to reduced cost of care that is passed on to consumers, and why these efficiencies can only be gained through M/A. Key considerations when considering new mergers or acquisitions include:

  • In hospital-hospital transactions, what efficiencies can be created between the entities that will reduce overall costs, and how can that translate to reduced costs of care for consumers?
  • In hospital-medical group transactions, what efficiencies can be created between the hospital and medical group that will reduce overall costs, and how can that translate to reduced costs of care for consumers?
  • Is the merger or acquisition the only way to accomplish the stated goals? Is there another structure that can produce similar results while keeping the organizations independent?

Hospital-Hospital Transactions

Efficiencies associated with hospital-hospital transactions are regularly cited by the organizations’ boards and senior leadership as a fundamental driver to formally merge operations, yet many newly formed firms are ill prepared to achieve and sustain these savings without significant planning or external consultation. It is for this reason that the FTC has increased its scrutiny of submitted Business Plans of Operational Efficiency ("BPOE") associated with proposed transactions as a means by which to overcome the potential anticompetitive effects of the transaction.

Successfully merged firms have achieved efficiencies across the myriad of administrative, support, infrastructure, and clinical hospital functions while demonstrating their ability to enhance quality through care model redesign and clinical programmatic alignment. Efficiency plans for such integrations were framed and constructed pre-transaction with the support of external healthcare experts, respecting each party’s inability to share competitively sensitive information. The plans were further refined and enhanced post-transaction with dedicated multidisciplinary teams composed of representatives of the transacting parties focusing on specific functional integrational plans. These efficiency plans were built around a clearly articulated vision for the merged firm and maintained well-defined action plans specifying how and when each efficiency would be achieved, the likelihood of achieving each efficiency, the associated quantifiable savings, and any related capital or operating costs of implementation. When well-constructed plans are developed and implemented, the operational and financial benefits are often the first advantages illuminated. But with time, these efforts drive cultural alignment that regularly translates into further collaboration and efficiencies beyond those previously highlighted.

Short-term efficiency savings opportunities can be achieved by integrating back-office functions such as finance, human resources, and legal services. Full consolidation of staff and contract services will lead to substantial savings, because these efficiencies can be clearly achieved and sustained through a merger. The centralization of management and joint contracting for services and supplies represent efficiencies in the support and infrastructure departments that can be achieved in the shortto mid-term range post-transaction. These efficiencies are often challenged by regulatory agencies, because hospitals are frequently unable to provide reasonable means to verify or quantify efficiencies savings pre-transaction. Clinical efficiencies have been proven to yield the largest efficiencies of merged firms, but the likelihood of achieving such efficiencies varies greatly, because they will often require further vetting and stakeholder support that is unattainable pre-transaction, leaving these efficiencies speculative to a degree.

Despite the challenges with identifying and quantifying efficiencies associated with mergers, BPOEs have been able to translate to lower costs of care for patients in two principle ways. First, the alignment of both administrative and clinical operations of two previously independent hospitals into a merged firm has provided a platform by which to reduce unnecessary, duplicative testing. Integrated electronic health records (EHR) and alignment of clinical programs across locations can reduce unnecessary utilization and subsequent out-of-pocket expenses for patients. Second, the merged firm’s efficiencies, driven by the cumulative effect of lowering the per-case costs of services by way of achieving multiple efficiencies, can be significant enough to prevent commercial plan price increases in a market that may be sought if the existing cost structures of the two independent hospitals were to remain in place.

Hospital-Medical Group Transactions

When hospitals acquire medical practices, it is often done with the good intention of fully integrating the practice(s) and supporting the transition to population health-based models. However, it is common practice for the acquired medical groups to continue to operate autonomously, with limited integration into the hospital system for efficiency gains. In fact, acquired medical groups frequently perform worse under a hospital-employed structure than when they were independent. Part of the reason is that integration is not easy, and most hospital systems are either in the early stages of population health transition or have not started, and thus put medical group acquisition at the forefront of their population health strategy. Consequently, acquisitions are occurring and often driving up prices in the market, because competition is being reduced. Larger systems have greater leverage to negotiate favorable reimbursement in the market, and the benefits of population health and value-based contracting are not yet realized.

The economics of medical practice change significantly when a physician transitions from independent practice to hospital employment. Not only are payer contracts negotiated by the hospital, which often has greater negotiating power, but cost structures may rise from more robust benefits structures, staff wage ranges, and physician compensation. Additionally, when operating as an independent practice, physicians have to cover their overhead expenses—there is no subsidy. When they are employees, their salary is negotiated with the hospital and may not reflect their productivity or contain incentives to keep expenses in check. Changes in reimbursement related to the site or type of service also occur when medical groups are acquired by hospitals— specifically, hospitals are able to charge facility fees or move ancillary services from medical practices to the hospital, thereby increasing costs. And, historically, hospitals have not efficiently managed physician practices overall.

Furthermore, the St. Luke’s-Saltzer decision shows that even when systems are taking initial steps toward value-based care, such as sharing an integrated EHR, it is not enough to justify an acquisition. And, although systems need aligned primary care physicians in order to grow their patient base and capture attributed lives under value-based contracting, the St. Luke’s-Saltzer case also shows that is not reason enough to promote acquisition of medical groups, because other alignment structures could produce similar results without harming competition. When considering an acquisition of a medical group in the post-reform era, hospital systems and their compliance team need to have a clear plan for how the acquisition will increase quality and reduce costs. This proposal must include consideration of not only how the action will reduce operating costs of the medical practice and make it more efficient, but also how the acquisition will reduce overall costs to the consumer. For that, a much more detailed financial impact analysis, managed care strategy, and operational implementation plan are necessary.

Merger and Acquisition Alternatives

Although M&As once dominated healthcare transactions, today many healthcare entities are looking for innovative affiliation models that do not require fully relinquishing their independence, but still offer operational efficiencies. Accordingly, new models are becoming more prevalent that allow these entities to seek partners that can satisfy their unique financial, operational, and quality needs, while still maintaining a level of control, in an effort to meet their key strategic objectives.5 The details of these alternative affiliation models will vary from transaction to transaction, but the basic principles of three increasingly common models will remain consistent.

Joint Operating Agreements

Within a joint operating agreement ("JOA"), the assets and governance of the two partners are not merged, but considerable management and financial authority is transferred to the joint operating entity. This model provides the platform for the partners to achieve significant efficiencies by way of the integration of operational and financial results, while also protecting the partners’ rights to religious directives and major corporate decisions, including the sale of assets. This model is highly complex in nature, but allows the joint operating entity to collectively borrow to satisfy the capital needs, undertake care model redesign to enhance quality, and achieve operational efficiencies that will drive cost savings for the partners. Operational efficiencies within a JOA can, in some instances, reach levels attainable through full mergers or acquisitions. In addition, the FTC does not deem these arrangements to be anti-competitive and thus, the two partners may be able to contract jointly.

Joint Ventures

In addition to JOAs,non-profits are also looking to pursue joint ventures to attain needed capital infusions and operational expertise while maintaining a reduced level of control. With the non-profit contributing its assets and business operations to the joint venture, a partner organization contributes capital to ascertain a majority share within the joint venture. The joint venture is then overseen by the majority stakeholder by way of a management contract, while the non-profit provides clinical services to the joint venture. This model yields moderate operational efficiency outside of consolidated administrative services offered by the majority stakeholder, and gives the non-profit the ability to ascertain the expertise and capital required to sustainably maintain operations to fulfill the community need.

Clinically Integrated Networks

Another model being pursued more frequently in light of the ACA are clinically integrated networks ("CINs"). This model provides the platform for healthcare entities to develop collaborative networks that support care coordination throughout the continuum while sharing in the infrastructure costs associated with managing a defined population. In a CIN the partners do not merge their assets or relinquish control of their organizations. Instead, the partners establish an alliance that maximizes the existing clinical expertise of their independent organizations, while sharing the costs of infrastructure and information technology required to participate in new accountable care payment plans and in preparation for population health. This model often maintains its own board and management team, which is directly responsible for clinically integrating the two partners and reducing cost (both operational and capital) through the achievement of clinical and operational efficiencies.

Conclusion

As health systems prepare for success in the new value-based world, M&As are often a major part of their strategy. However, federal anti-trust laws must be considered, not only in hospital-hospital transactions, but in hospital-medical group transactions as well. The BPOE and assessment of efficiencies must demonstrate the need for the M/A and how those efficiencies will lead to reduction in the cost of care, not just improvement in the system’s cost structure and bottom line or overall improved quality of care for the market. There are significant opportunities to improve the cost structure when organizations come together—those must be explored, verified, and ultimately, have a succinct implementation plan as well as a plan for translating savings to consumers. Further, alternative structures must be reviewed to determine if the stated goals and efficiencies may be accomplished in another manner. These considerations should be included in the due diligence phase of planning to assure ongoing compliance in a rapidly consolidating environment.

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Hospital Consolidation, Mergers and Acquisitions, The Camden Group


  1. Carol K. Kane and David W. Emmons: “New Data on Physician Practice Arrangements.” The American Medical Association. Available at http://bit.ly/1dbtuoP
  2. Edith Ramirez: “Anti-trust Enforcement in Health Care — Controlling Costs, Improving Quality.” The New England Journal of Medicine, December 11, 2014; 371:2245-2247. Available at http://bit.ly/1QM65q5
  3. Marlene Harris-Taylor: “Promedica ordered to drop St Luke’s: Court declares merger anticompetitive.” Toledo Blade, April 22, 2014. Available at http://bit.ly/1RpDR62 
  4. Jonathan L. Lewis, Lee H. Simowitz, and Sean T. Hartzell: “In the Wake of the FTC’s St. Luke’s Victory in Idaho, What Does the Future Hold for Hospital-Physician Acquisitions?” ABA Health eSource, vol 10, no.7. Available at http://bit.ly/1Je71Gg
  5. Jonathan Spees: “Choosing the Right Affiliation Structure.” Hospital and Health Networks Daily, October 9, 2014. Available at http://bit.ly/1Lw59WP

Ms. Bosko is a vice president with The Camden Group and specializes in designing and implementing clinical integration, high growth medical service operations (“MSO”) and finance, physician hospital organization and MSO development, managed care strategy, and physician alignment. She may be reached at tbosko@thecamdengroup.com or 310-320-3990.

 

 

Mr. Klar is senior manager with The Camden Group with over 12 years of experience in healthcare management.  He specializes in strategic and business planning advisory services, including service line planning, master facility planning, and transaction work (e.g., mergers, acquisitions, affiliations, joint ventures). He may be reached at bklar@thecamdengroup.com or 617-936-6905

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Topics: Clinically Integrated Network, Tawnya Bosko, Mergers, Acquisitions, Hospital mergers and acquisitions, Brandon Klar, Mergers and Acquisitions

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