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To Merge or Not to Merge: Informing the Conversation
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To Merge or Not to Merge: Informing the Conversation

by Scott Stuecher and Daniel Grauman
January 4, 2019

“Everyone in the industry is merging. We should be too.”

“We’ve always been independent, and we should stay that way.”

Independent hospitals continue to merge or affiliate with other hospitals or with health systems. However, independent hospitals still have company. In 2016, the latest year for which information is available, there were about 1,600 independent community hospitals remaining in the US, approximately a third of the total.[1]

If your hospital is one of those 1,600, the chances are high that you have had at least some discussion about your ability to maintain your independent status. Informal conversations on the topic may even be in the background during board meetings and decision-making. Quite likely, however, the idea of looking systematically at whether it makes sense to consider a merger or affiliation raises very unpleasant emotions. After all, your hospital has always been independent, and that has always worked.

Feelings of loyalty, of responsibility to the community, of maintaining one of the town’s largest employers, of not wanting to break a long tradition—all valid and understandable feelings—make it hard for board members to look directly at the situation. And it’s an emotional challenge to look straight at possibly the most important decision in your organization’s history. Yet by taking a step back, and letting data as well as qualitative information inform your considerations and decisions regarding continued independence, you will be better positioned to stare that decision down.

Do We Have to Look?

In the last five years, some independent hospitals have shown reasonably strong performance, while others have been less successful. The National Rural Health Association estimated that about a third of rural hospitals, a particularly vulnerable group, were at risk of closure in 2017.[2] Both government and private insurers are placing increasing emphasis on value-based care; according to the Healthcare Payment Learning and Action Center, 34% of total U.S. health care payments were tied to alternative payment models (APMs), (an increase from 23% in 2015), and another 25% of payments occurred in pay-for-performance or care coordination models.[3] Smaller organizations often lack the resources to succeed in these initiatives. As cost increases outpace payment rates (which is likely to occur no matter which party is in power or who their standard-bearer is), even the most stalwart independent hospitals are likely to face increasing challenges over the next three to five years.

Amazon, Google, and CVS-Aetna are seeking to take advantage of many of the existing inefficiencies in the healthcare market with new healthcare technology initiatives and models of care. For leadership of independent hospitals, these initiatives are most likely a distraction, not a focus, at least for the next few years. But these leaders do need to understand those trends and their implications, because the large systems will react to those disruptors.

When is the right time to call the question and take that uncomfortable, fact-based look at your situation? First, don’t wait until you are in a position of obvious weakness. If you are merging or affiliating, you want to do it while you still have leverage to get the best deal possible for your organization and community—retaining/obtaining the widest range of services and staff, improving facilities and data infrastructure, etc.

It’s certainly time to take a hard look at your situation if the hospital’s financial performance is deteriorating. While a one-year margin decline could be an anomaly, two years of decline may well be a trend. Given the payer environment, there’s little reason to think it’s going to turn around. You could be looking at a loss of a half-percent margin a year for the foreseeable future. That will deplete the resources of most independent hospitals pretty quickly.

Taking a Look Without Taking Forever

You may have been reluctant to look at this because you’ve seen similar hospitals spend months and months doing that. But there’s another way to approach this, using an expedited analysis.

Focusing on core evaluative criteria, several weeks is all you need to complete an assessment that will serve as a jumping-off point for a broader conversation on whether you should explore an affiliation, and if so, with what degree of urgency. This relatively inexpensive process can benchmark your organization across market, financial, and resource indicators, including:

  • Market position
  • Supply and demand of healthcare services
  • Physician alignment
  • Clinical quality and service
  • Leadership capabilities
  • Public perception
  • Financial position and performance (income and net assets, liquidity, debt, cash on hand, cost structure, payer mix, average age of plant, etc.)

Once this assessment is completed, your organization will be ready to decide whether you need to move forward with exploring an affiliation.

[1]https://www.aha.org/statistics/fast-facts-us-hospitals (total community hospitals minus total in systems).

[2]https://www.theatlantic.com/business/archive/2018/01/rural-hospitals/549050/

[3]Healthcare Payment Learning and Action Center, Measuring Progress: Adoption of Alternative Payment Models in Commercial, Medicaid, Medicare Advantage, and Fee-for-Service Medicare Programs, October 2018. https://hcp-lan.org/2018-apm-measurement/