M&A Strategies for Small Hospitals

Philip Betbeze, for HealthLeaders Media , December 18, 2012

Sometimes, it makes sense to start slowly, as MidMichigan Health did with a cancer partnership with the University of Michigan Health System.

"We actually started in an affiliation for cancer as part of the UM cancer consortium," says Richard Reynolds, president and CEO of the four-hospital system based in Midland. "That's a loose affiliation where we have access to some of their clinical protocols and some of their other resources as one of the major cancer centers in the country."

But it quickly became apparent that as health reform matured, the amount MidMichigan was going to have to increase revenues or decrease costs to get to profitability under the Medicare program (what many CEOs consider a good proxy for all future reimbursement rates) was unrealistic. The cancer collaboration would have to be built upon, if possible.

"We concluded with many other regional peers around the state that the critical mass and the competencies required are going to be different," Reynolds says. MidMichigan, which also owns urgent care centers, home care, nursing homes, and medical offices, was "very financially strong (300 days cash on hand), so we could go on just like we were and would have been fine, but as we looked at how we could gain competitive advantage, a collaborative partnership with a larger organization made sense," Reynolds says.

The process of working collaboratively with other regional health systems instead of UM, while attractive in various ways, would require a much slower and laborious process to develop the kind of clout Reynolds and his board were seeking.

"So we looked at UM," he says. "They are the preferred referral destination for physicians on our medical staff by a long shot, and were the biggest visible presence in our part of the state."

Reynolds says concerns about continuing independently centered on costs, how well MidMichigan could recruit physicians, and most important, how it could develop the expensive infrastructure surrounding management of populations. Reynolds, who will retire in early 2013, says he discussed with the board whether a full merger, which was an option, was the smartest move.

"We looked at the range of opportunities," he says. "We could continue programmatic collaboration. We took a look at a minority position. We could have gone anywhere up to full affiliation. We concluded that we're strong, well regarded, with a strong balance sheet, so we didn't have to give up local control. Give us access to needed tools for the future."

As part of the clinical and business affiliation, MidMichigan agreed to a deal that should close by the end of the year that would grant a 9% ownership stake to UM and retain local control. More important than any financial transaction was the agreement to provide preferred referral and coordination among physicians at both systems. The affiliation also enhances MidMichigan's ability to recruit physicians to the region, but most important, it allows for clinical collaborations among groups of physicians affiliated with either system to design new models of care that incorporate populations of patients.

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