Is Consolidation Right for Your Hospital?

Continual reimbursement cuts and the uncertainty of reform have many hospitals and physician groups seeking merger opportunities. There’s a lot of discussion about hospitals being unable to survive without X amount of revenue per year. $2 billion. $4 billion. Pick a number, and you can find some smart person who will tell you it’s absolutely essential to your long-term viability.

At HSG, we’re less certain. While there are clearly advantages to being big – e.g., cost of capital, greater leverage with payers – bigness can also be counterproductive when you’re trying to respond to local market conditions. Smaller hospitals and systems are more nimble, and depending on the market’s size, there may be room for success on a much smaller scale.

Other industries, such as banking, are instructive. HSG works with a local bank, and their technology lags the big players. But we can look the decision maker in the eye and get a response when we need one. Many smaller banks have carved out lucrative market positions, because they can respond. And is there any industry where being responsive is more important than healthcare?

As you ponder the consolidation decision, consider the following questions:

Should You Merge or Not?
Can your organization create the skills and expertise needed to be successful in a new market? What are the pros and cons of going it alone vs. joining a bigger team? From our perspective, a hospital needs five key strengths to go it alone:

  • Mature and Insightful Physicians who have a clue about how to improve quality and coordinate care to improve results.
  • Strong Management Team with the ability to drive this transition and the necessary resources at their disposal.
  • Financial Strength and the cash reserves to survive missteps and build the capabilities needed for success.
  • Value-Based Purchasing. If you’re already struggling to make the necessary changes, it’s more likely you’ll need outside resources in order to survive.
  • Marketplace Competition. A suburban hospital in a metropolitan area will answer this question differently than a sole community provider.

Who Will Make a Good Partner?
Though past performance is no guarantee of future performance, we recommend looking first at:

  1. Financial strength and bond ratings.
  2. Performance on value-based purchasing measures.
  3. Population management and direct contracting experience and capabilities.
  4. Revenue per adjusted discharge, as a proxy for rate negotiating strength.
  5. Ability to integrate and work with physicians.
  6. If they have other affiliates, how the affiliation has affected their performance.

The next step is to assess strategy. You need to understand your gaps and weaknesses and have a clear vision of what the winning strategy should look like. Then you need to ask potential partners the following questions:

  1. What is their strategy for the market?
  2. What investment are they making in IT?
  3. What investments are they making in population management capabilities?
  4. What do they see as their threats? Weaknesses?

The final issue is culture. Do they appear to be a good fit? Does their performance reflect appropriate priorities? Do you trust them? The challenge is that leadership and cultures change and evolve, but you have to make a judgment about who’s likely to thrive and who isn’t.

How Will the Partnership Be Implemented?
Implementation is always the hardest part and it’s natural for the acquired hospital to struggle the first few months. There are two things you can do to make it easier, if you’re the organization being acquired:

  • Reinforce That Consolidation is a Long-Term Initiative with the Management Team. It will take time and there will be bumps in the road. But this may be a critically important decision to ensure that healthcare resources the community needs will be available.
  • Ensure Key Managers Understand the Process. If your organization is being acquired by a system that has acquired others, talking to your peer hospital about that experience, and how to manage it, is useful going forward.

Conclusion. With the level of change that will be required of every hospital, and the inherent risk in these initiatives, managing this process well is crucial to the health of your community. Following the steps above will help with that process and position you for success.