M&A Strategies for Small Hospitals

Philip Betbeze, for HealthLeaders Media , December 18, 2012

Lawrence says at $90 million in annual revenues, and with about 1,000 employees, LERHSNY had no choice but to affiliate somewhere, because bigger institutions, at half a billion dollars in annual revenue, are forming relationships with insurers, investing in EMRs and increasing transparency to compete in the intermediate- and long-term. The agreement will improve his staff's ability to recruit physicians, invest in equipment and new technology, and provide clinical and operational expertise, Lawrence says.

"From a strategic standpoint, you need to leverage scale," he says. "In this environment, size is really important. You need volume to drive quality and efficiencies and that is leading this train."

Business reality is also a reason behind the affiliation, he says, adding that he needs more leverage in negotiations for third-party payment contracts.

"Every year as a purchaser, we experience anywhere from 10% to 35% increases in premiums," he says. "Practically in the same breath, insurers are saying we're only going to see a 4% increase in our rates."

Through Hamot's relationship to UPMC (which owns it), LERHSNY can eliminate red tape that put limits on the number of foreign physicians it can recruit, for example.

Take charge of your destiny

The pressure is ratcheting up, but the deal with UPMC Hamot shows local control is highly negotiable, even though Hamot, which is four times as large as LERHSNY, gave up that control when UPMC bought it in 2010.

Time is of the essence, Lawrence says he tells fellow CEOs. Being halfway between Buffalo and Erie makes LERHSNY highly desirable, which allowed the system to take its time to craft a deal, he says, but others may not have such advantages.

"Because we're almost equidistant, we're something of a battleground area," he says. "We're essentially like the independent voters. We're who the candidates are fighting over."

Still, don't move in desperation, he says.

"You need to come at this from a position of relative strength—not that you don't have problems, maybe some serious ones," he says. "If you don't have an effective, credible leadership team, and you're not able to bring something unique to the table, there's no reason for a larger, more capable entity to partner with you. They'll just come in and take the volume away and let chips fall where they may."

Newpoint's Lupica says small hospitals and health systems need to take charge of their own destiny in the same way that people are in charge of their own careers.

"I had an old boss tell me that once and it shocked me," he says. "The hospital is in the same place. They need to define themselves for the next decade. What do you want to be outside the deals? Put a face on it."

One chief concern from smaller hospital and health system chief executives is that affiliation will eventually kill their hospital as the larger parent exerts increasing levels of control and removes volume locally.

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