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Staying Independent and In Control

​It’s widely recognized that the hospital landscape has profoundly changed in the last 10 years due to extensive hospital consolidations. The rise in local hospital systems and the drop in independent community hospitals through mergers and acquisitions have dramatically shifted the makeup of the hospital sector.

​Although the merger and acquisition deal volume in the hospital sector fell to 84 transactions in 2013 from 100 in 2012, the overall pace was still above 2009 and 2010, with 52 and 72 transactions respectively, and slightly below 90 in 2011, according to Irving Levin Associates. Many independent hospitals are finding that affiliations with stronger health care providers are able to provide the benefits and efficiencies necessary to navigate the recent changes in the industry. (See “Thinking About Merging? Considerations for Your To-Do List.” )

What’s Happening?

Specifically, community hospitals are taking advantage of these efficiencies created by using the resources and knowledge that an affiliation within the larger health system can provide.  Because of the volatility with health care industry, independent hospitals are constantly facing the challenge of retaining key physicians and the threat of reimbursement cuts. This has driven many to look for cost-driven savings and partnerships to help allocate resources. As indicated in the chart, the trend for hospitals to merge or be acquired by a system continues to persist despite the slight decrease in transactions for 2013. From 2008 through 2012, the number of independent hospitals decreased by 243, demonstrating the challenge to stay independent.

 
Community Hospital Overview
Source: American Hospital Association Annual Survey

The main drivers for a potential merger or acquisition include the location of the hospital, its complementary services to the acquirer and whether there are efficiencies or economies of scale to be achieved. Most recently, health systems are assessing opportunities in neighboring markets due to familiarity or previous interaction with the candidate’s physicians or senior leadership.

While the merger and acquisition environment continues within the hospital sector, independent hospitals can still thrive and provide the necessary health services within their community if the right steps are taken.  There are several factors that have helped shape the key strategies for community hospitals to keep their independence:

  • Maintaining a long-standing presence and reputation for quality health care that is well known within the community.
  • Possessing and retaining a strong management team and physician staff.
  • Partnering or affiliating with other local hospitals through a less competitive and more cooperative mentality. 
  • Gaining access to capital for maintaining and improving property, plant and equipment.

Recently, many community hospitals are finding that through affiliations or partnerships, they are able to provide additional services and reach efficiencies they could not otherwise achieve. An affiliation or partnership in regards to community hospitals means an opportunity to work with another hospital or hospital system to benefit in educational, administrative and clinical opportunities. The hospitals maintain their own identity and no changes in ownership occur. 

Pat Schou, the executive director of the Illinois Critical Access Hospital Network (ICAHN), a nonprofit association created to share resources, provide education and promote best practices for member critical access hospitals (CAH) in Illinois, weighed in on the ever changing landscape for community hospitals.  “The strategy for community hospitals has shifted to value-based care where smaller, integrated systems are needed to coordinate care and have a quality-based approach,” Shou said. “Hospitals have to look past barriers of competition and align new relationships either through affiliation or partnerships for efficiencies and coordination of care. It may be in the best interest for rural hospitals to remain independent as long as they are building partnerships and finding opportunities to work together with other care providers.”  

Moving forward, Schou expressed the importance of community hospitals preserving their market share as the Affordable Care Act has changed the industry landscape. “Hospitals can’t go from volume to value in one year,” she said. “They will need to partner to provide additional services and programs.”

Marshall Browning Hospital 

A leading example of an independent hospital is Marshall Browning Hospital located in Du Quoin, Ill.  The nonprofit hospital has been a mainstay in the Du Quoin community since 1918 and is designated as a CAH. 

Marshall Browning affiliated with Southern Illinois Healthcare (SIH) in September 2011 and recently expanded its facility in 2007 with a 22,000-square-foot addition that created 25 private patient rooms, each with its own private shower and restroom along with a new wing that features a new surgical and endoscopy suite, a dedicated pre and post-op outpatient surgery area, a new laboratory, an expanded pharmacy, and an inpatient activity and rehab area. The original tax-exempt bond issuance for the project was successfully refinanced through the Business and Industry Guaranteed Loan Program (B&I) in 2010.  

The management team, led by the CEO Ed Gast, has positioned Marshall Browning in a way that provides a number of opportunities in the future. Gast explained, “Through our affiliation with SIH, we were provided with the oversight and assistance for the implementation of lean daily management in our hospital along with support for installing a new electronic health records system using Meditech. These are both services that we couldn’t have implemented alone.”  

These services are just the beginning in what many community hospitals are realizing in regards to the resources and opportunities a strategic partnership can bring. In addition, the relationship with SIH is consistently providing a more seamless means of making referrals to SIH’s tertiary care facility while helping with utilization by way of new specialty clinics in the community hospital setting, according to Gast.  All of these have been critical to fueling the bottom line of Marshall Browning.  

Furthermore, the relationship has developed to where Gast is involved in SIH annual strategic planning and monthly executive meetings. While many community hospitals have gone the route of acquisition, others such as Marshall Browning are finding that there are several intermediate opportunities that still allow for local control. Still, there is the opportunity for a more formal relationship in the future, such as contract management or joint venture.  

What Lies Ahead

According to both Schou and Gast, independence is critical in preserving the local infrastructure of the community along with the control to provide the necessary health services to thelocal population.  The largest threat to independent community hospitals is if a dramatic change in reimbursement or regulation were to occur. For instance, there have been proposals to cut critical access hospitals’ Medicare reimbursement.  Currently, CAHs are paid for most inpatient and outpatient services to Medicare patients at 101% of reasonable costs. However, proposed legislation could cut the reimbursement to 99%. This provides even more incentive for hospitals, such as Marshall Browning, to seek partnerships with other hospitals or health systems like SIH in order to leverage their purchasing power and experience to gain cost efficiencies.  

Access to capital is critical; therefore, hospitals that cannot access debt because of financial hardship are the targets of merger and acquisition activity. The importance of having updated facilities and technology is essential to the success of community hospitals since they typically do not have the resources and credit profile a health system possesses. Through successful financings using nontraditional structures (FHA, USDA, community bank placements), independent hospitals are able to gain access to capital for improvements and enhancement of their product offerings, a critical part of remaining independent.  

Creditors are viewing the management teams, physician staff and the hospital’s current and future partnerships as critical characteristics to their ability to perform and remain a strong credit. Minimal turnover in board members, management and physician staff is indicative of dedication to the community and the success of the hospital. 

Partnerships or affiliations typically demonstrate the hospital’s ability to work with others to expand their capabilities as well as the potential for support in the future if needed. Merger or acquisition is not always the necessary outcome for community hospitals. Through similar steps taken by Marshall Browning, other community hospitals can build strategic affiliations and partnerships to maintain their independence and control.  

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