M&A Strategies for Small Hospitals

Philip Betbeze, for HealthLeaders Media , December 18, 2012

Such clinical collaborations are most importantly addressed in the new world of affiliation agreements, says Newpoint's Lupica.

"Whether they own or don't own each other doesn't matter as much as coming up with a structure for sharing those value-based purchasing points together," he says. "What matters is you win or lose together."

That's a sea change compared to prior affiliations or mergers. In the past, such deals were driven by traditional aims around increasing market share and increasing bargaining power, which is very different, for example, from the July announcement of a partnership between Minnesota's prestigious Mayo Clinic and Dartmouth-Hitchcock, a highly regarded New Hampshire system whose flagship, Dartmouth-Hitchcock Medical Center, has 371 beds. In the past, any collaboration between the two would have made little sense, says Gregg Meyer, MD, Dartmouth-Hitchcock's chief clinical officer. 

"The old iron triangle of running a healthcare enterprise had three levers: volume, rates, and the ability to decrease unit costs," says Meyer.

By contrast, the new model, announced in late July, is really much more about influencing—you guessed it—the care of populations. Under the agreement, Dartmouth-Hitchcock (which will remain independent) is a member of the Mayo Clinic Care Network. This type of arrangement involves no ownership changes, and Dartmouth-Hitchcock is the latest among several top regional health systems that have joined Mayo's network. 

So why did a health system more than a thousand miles away, with a great reputation of its own, partner with Mayo?

"Not because it's going to gain us market share," Meyer says. "Not for higher rates, because there's no consolidation of vendors. And not because we need to control the marketplace. It's about our ability to improve our value and help us take care of populations."

But why Mayo?

"Because we know that patients who come to us for care will often seek a second opinion," says Meyer. "In the past, that meant going to Boston or New York, and we lost out on that because we lost the ability to keep that care local. Now we can have a virtual second opinion with arguably the most famous health system in the world."

Know your disadvantages, too

New York is the 49th most profitable state in the country for hospitals, says Jonathan Lawrence, president and CEO of Lake Erie Regional Health System of New York, a two-hospital system located in Irving and Dunkirk, N.Y., about halfway between Buffalo and Erie, Pa. Only about half of New York's hospitals are breaking even or better. The state's population, especially in rural areas outside New York City, is declining and aging.

"Those are margins that are insufficient given our aging infrastructure and medical staff and difficulty in physician recruitment, where 90% of new residents are seeking to be employed and the investment needed to employ them outpaces the revenue they can generate in most models," Lawrence says. That's why LERHSNY is trying a new model with UPMC Hamot in Erie. Announced last May, it's not a merger, but it assures the two systems will work collaboratively to determine the service needs of the area.

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