Coupling to Cope

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Large or small, weak or strong, hospitals are finding opportunities in mergers, acquisitions, partnerships, and affiliations.

There is strength in numbers, and that's a truth that many hospitals are beginning to heed as the slow recovery from the recession drags on. The reasons for wanting to couple with another hospital have varied over the years, with the main one being market share. However, the economic times are shifting that rationale to create a partnership for many healthcare leaders. As financial leaders look for creative ways to buoy their bottom lines—having already plugged every supply-chain leak and corrected their service-line scheduling woes—they must find economies of scale, and both large and small hospitals are turning to mergers, acquisitions, and partnerships as a way to change the direction of their facility.

In December 2009, the Association for Corporate Growth and Thomson Reuters released the Year-End 2009 Dealmakers Survey, noting 77% of respondents expected an increase in merger activity over the next six months and 94% of respondents expected strategic investments to accelerate in 2010. The survey—which polls investment bankers, private equity professionals, corporate development officers, lawyers, accountants, and business consultants—provides a pulse on what financial leaders in all industries, including healthcare, are anticipating in the year ahead.

New reasons to pair up
In the past two years, the number of mergers and acquisitions has slowed for hospitals. As access to capital dried up and facilities scrambled to get a handle on spending, purchasing another facility was low on the priority list. However, while 2008 and 2009 proved to be slow for mergers and acquisitions, industry experts say that this year may see a steady increase in these affiliations as a pathway toward creating economies of scale.

Smaller hospitals gain access to funds for capital improvement and current technologies and benefit from group purchasing power. Larger facilities gain market share and increase their patient base.

Such was the case at Haywood Regional Medical Center, now MedWest Health System. Mike Poore, president and CEO of the nonprofit MedWest in Clyde, NC, pursued a merger to help bring his ailing facility back from near financial ruin. As a rural, 189-licensed-bed hospital, Haywood faced more challenges than the recession. In February 2008, it was decertified for Medicare and Medicaid, which nearly closed the facility. Certification was restored in May 2008 but not before the hospital had drained reserves and watched top executives leave, including the CEO and board chair. The facility was in serious financial straits when Poore came onboard in October 2008 and set out to put the hospital back on track.

"We looked all over for ways to putty the hole of our revenue process, and we looked at major contracts to renegotiate," he says. "Then we looked to do an affiliation for economies of scale."

To get these economies of scale, Haywood Regional Medical Center and WestCare Health System agreed to form a unified healthcare system that integrates the strategic, operational, and financial aspects of both organizations. Though not a merger, the new arrangement meant the creation of WestCare Health System, which includes Harris Regional Hospital, Swain County Hospital, and other healthcare facilities serving a four-county area in Western North Carolina. Poore says the primary goal of the arrangement was to help reduce operating expenses, as well as improve quality and patient safety.

The facility didn't stop at there. In 2009, it established an affiliation with the Carolinas Healthcare System, the third largest public healthcare system in the nation, with 25 hospital facilities across two states.

"We were looking for economies of scale, but also for ways to grow in the future," says Poore. "For Haywood, Swain, and Harris, it would be hard to access capital as individuals and to get the type of expertise that we needed to make real changes. It's just more difficult to get these economies as a single entity."

While Poore's facility sought out a partnership primarily to help save money, larger systems are seeking new opportunities to secure market share, and the poor economy affords them the perfect financial climate to do so. Joe Randolph, executive vice president and COO at St. Joseph Health System in Orange, CA, says the $4 billion Catholic health system evaluates acquisitions from a number of points of view, including how it extends the mission of its healing ministry, as well as opportunities in new and existing markets.

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