Many financially strong community hospitals and small systems are feeling the pressure to merge with or sell to a larger system -- not for immediate financial reasons or even to increase financial scale, but to access skill sets that will support population health management goals and the coming payment shift from volume to value. They believe that those organizations that are among the first to learn or incorporate these skill sets -- physician practice management, clinical integration and chronic condition coordination, and payer strategies -- will have a better chance of thriving within evolving care and payment models.
It’s not surprising that so many stand-alone community hospitals still see M&A as the only alternative: Not only are the capabilities required for value-based care complex, but balance sheet transactions are big money, and they dominate news headlines and sales calls from transactional consultants. That said, only 12 percent of hospitals were involved in an M&A transaction over the past five years, according to the American Hospital Association.
The meaning of “independent” care provider is changing, but community hospitals can still gain the population health skills they need without relinquishing control of their physical assets, local cultures and missions. Forward-thinking community hospitals are making quiet, intense movements toward Partnership and Affiliation. They are choosing “P&A,” not M&A. Through partnership, they are collaborating in the creation of clinically integrated networks and the creation of regional payer strategies that facilitate population health without destroying balance sheet independence.
Unlike M&A activity, which is often prompted by financial or scale needs and generally involves a larger entity subsuming a smaller competitor, P&A activity is being pursued by strong organizations that seek to increase efficiency and improve outcomes for their populations by adding skills beyond the clinical continuum. These facilities are building networks that include data partners with resources to identify and better treat high-use patients, management partners to facilitate new payment models, and partners with varying skill sets in creating medical homes, coordinating communication among practitioners and otherwise integrating clinical care (see sidebar).
These Clinically Integrated Networks (CINs) have become the goal in select proactive community hospital boardrooms, where the question on the table has become not “how can we increase market share,” but “do we have access to every tool and skill necessary to provide efficient, effective care to the population we serve, and if not, how do we gain it?”
The answer varies for every facility, and it frames the pursuit of the right P&A relationships.
A shift in mindset, a leap forward
In Oregon, Salem Health saw the time had come to position itself for a new future. The two-hospital system added “merger” to a board retreat agenda.
The conversation didn’t go very far.
“The term ‘M&A’ has a very narrow scope that sends a very direct message. It limits your opportunities by saying ‘we’re either doing a balance sheet merger or nothing,’” Chief Executive Officer Norman Gruber says of his board’s shift to discussing P&A, not M&A. “The terminology of affiliating and partnerships gives you a much broader horizon to look at. P&A says there’s a variety of models out there, and they can still get you most of the way there, if not all the way.”
With this shift in mindset, Salem Health’s board took a hard look at its strengths, its gaps, and its future place in the evolving care delivery model. They began exploring partnership opportunities two years ago with the intent of proactively creating an efficient, clinically integrated network.
“The board has agreed this is the time to look at what’s in the best interest of the community, but in a model different from the model we’ve had in the past,” Gruber says. “We’re going to need to find partners if we’re going to play in a new world. We need to do this. We can still serve our community. We can still serve our mission. But we probably can’t do it in the framework we did before.”
Salem Health selectively approached seven organizations based on their cultures, missions, and ability to provide complementary skills and features – a payer strategy, a clinical integration strategy, a physician alignment model and scale. They are on a path to consider new, non-balance-sheet-dependent relationships.
Looking inward, reaching outward
A-rated Salem Health serves a population of 450,000 and is the primary referral organization between Eugene and Portland. It approached potential partners from a position of strength and knew its own long-term goals going into the discussions.
Besides knowing its own gaps, Salem Health knew how it could be a solution to issues faced by other health providers and businesses: Community hospitals that approach P&A with this mindset will have a better picture of where to start seeking relationships and how to position themselves in those conversations.
Identifying complementary assets can serve as a starting point to P&A, and having a starting point is key because in this new era of care delivery, endless possible partnerships exist. Alliances are being made between and among care providers, payers, management companies and other related entities within and across state lines, depending on what the network needs and who is participating. Large systems that don’t want to take on the burden of maintaining another hospital physical plant are willing to work with independent providers to gain access to their referrals and build regional care delivery systems, and commercial insurers seek delivery systems that reach areas where they sell insurance and that deliver care at lower costs and higher quality. The tertiary care center a few counties over or the insurance company in the next state may need you as much as you need them.
As hospitals think about their assets, a good place to start is with geography, skills and reputation:
- Can you provide referrals to a tertiary or quaternary system?
- Do you cover a population or geographical area that would be of interest to a payer?
- Are you experienced in a particular area, e.g. medical homes, clinical communication, or behavioral health management?
- Do you have particularly strong clinical skills in a specific area?
Hospitals should look at partnership opportunities both in their geographic area and beyond it. Consider:
- Who is doing what you need well and with measurable results?
- Who wants what you have?
- Who needs what you need? Financially strong community hospitals may not be so strong that they can buy or contract for physician management or data analytics skills on their own, but they may be able to partner for scale with likeminded providers with the specific intent of combining purchasing power and sharing a new resource. Just keep in mind that the end goal of such a relationship is the skill, not necessarily financial scale.
- How will the organization transition to new reimbursement models that pay for value and population health management versus volume?
- And most importantly, who believes in your goals and mission and is actively pursuing them?
If a large system is playing in your geography, explore the possibility of partnering with a single member of that system: In Kentucky, the five-hospital Eastern Kentucky Healthcare Coalition includes Our Lady of Bellefonte, a 200-bed member of Bon Secours Health System whose nearest sister hospital is several hours away.
The Coalition is structured as a “super Physician-Hospital Organization” with the purpose of creating a clinically integrated network of independent providers to help improve healthcare quality and reduce costs. So far its members are sharing learnings from Our Lady’s experience with its development of 10 primary care patient-centered medical homes, and from Bon Secours’ accountable care organization. They are also engaging in a physician manpower study to determine, for example, potential efficiencies in joint recruitment of needed specialists into the communities served by the providers.
“There’s no loss of individuality. We’re not telling anyone how to manage their organization. We all do our own thing – we just find ways to share efficiencies,” says Chief Executive Officer Kevin Halter, FACHE. “If I’m going to be paid in the future for efficiency and effectiveness, then this can only be helpful going forward.”
Click here to access the HFMA Spring 2014 Strategic Financial Planning Newsletter.