What hospitals should think about when considering mergers

For strategic reasons or simply to survive, more hospitals and health systems are expected to be looking closely at mergers, acquisitions or some type of partnerships, analysts say.

Many hospitals are struggling financially due to the COVID-19 pandemic, while others are looking for partners to expand their healthcare capabilities. As healthcare leaders investigate such deals, what should they be considering?

Hospitals that are weighing mergers or partnerships shouldn’t look at those transactions as a way to solve just one problem, such as getting more leverage with payers, said Anu Singh, managing director of partnerships, mergers and acquisitions at Kaufman Hall, a healthcare consulting firm.

“I think any organization that would limit a partnership model evaluation factor to one economic variable, whether it be revenue or expense, has a risk of being fatally flawed,” Singh told Chief Healthcare Executive.

“You have to be undertaking these kinds of discussions because you have thought of a multitude of potential revenue, expense, capital expenditure, clinical, operational, site, intellectual capital, artificial intelligence, critical business intelligence … There has to be so many reasons to undertake these, that it's such a compelling financial and strategic opportunity where the benefits far outweigh the risks of taking that step.”

(In this video, Kaufman Hall's Anu Singh outlines key considerations in mergers. The story continues below.)

• Read more: More hospital mergers should be coming in 2023

Consider strategic plans

Hospitals need to evaluate the prospects for mergers and acquisitions based on their own strategic plans.

“One of the things that our clients are asking most from us right now, is, we need you to really rigorously evaluate our strategic plan and look at it for risk factors,” he said. “Like if some of these assumptions don't go our way, just how exposed are we to this or to that?”

Organizations and leaders need to understand where they have competitive advantages, and where they are coming up short against their peers. When systems are missing on a number of their strategic goals, that could be a sign that organizations should start asking questions about whether continuing as an independent entity is the best way forward, Singh said.

However, there’s no one single metric that will indicate if a hospital needs to find a partner, Singh said. Those decisions rest on the strategic plan, the organization’s market and its competitive position.

“The general advice is, very carefully look at your market and know what your core business is,” Singh said. “Develop a strategic plan around executing for that core business.

“And if you start to see that you're not executing along that, you should have enough monitors and triggers, and maybe ranges of operations or success known that as you're monitoring that, when you fall outside of that comfort zone or that safety zone, that's when you have to increasingly start thinking about partnership models.”

• Read more: Investors expect more mergers in healthcare, life sciences in 2023

Don’t rely on past success

As providers look at their strategic plans, healthcare leaders and boards should understand that what worked in the past may not necessarily work in the future.

“The most common mistake I see right now is assuming the historical success of what drove an organization to the point it is today will remain in place going forward,” Singh said.

The sweeping changes in the healthcare industry require health systems to develop new strategies.

“I don't think anyone should be dusting off their strategic plan, and just say, ‘Well, let's just do more of the same for the next five to 10 years,’” Singh said. “That's probably the most critical flaw I see is that If you're not carefully evaluating what is happening in your market, and how it's changing, who may be coming to disrupt your market, who may be aligning with or against you in your market, you're missing the potential of where your market is going.”

In addition to missing competitive advantages by relying on outdated strategies, health systems may set themselves up for trouble if they’re looking for partners.

“If you're looking for the wrong things, you may look to a strategic partner who's giving you some of the capabilities and resources for your past success instead of your future success,” Singh said.

• Read more: These proposed mergers and acquisitions fell apart. Here’s why.

Don’t wait too long

If it’s clear that a hospital or system is struggling to compete on multiple levels and isn’t succeeding in its core business, then leaders need to examine mergers.

If it becomes clear that it’s time to consider a merger or some other kind of partnership, hospitals shouldn’t delay the inevitable.

“Don't wait until so long that you don't look like a healthy viable enterprise,” Singh said.

Health systems that are acquiring hospitals are spending a great deal of time and energy integrating high-performing organizations.

Some systems may be less interested in acquiring a hospital that’s distressed, or they may not have the capabilities to turn around an organization beset with problems, Singh said.

Compete or collaborate?

Hospitals and health systems are seeing more rivals from non-traditional sources, including retailers.

VillageMD, backed by Walgreens Boots Alliance, purchased Summit Health-CityMD in a $8.9 billion deal in October is yet another indicator of the changing healthcare landscape. VillageMD said it finalized the deal on Jan. 5. In September, CVS Health announced the $8 billion acquisition of Signify Health, a network of doctors providing care to patients at home. Amazon announced a $3.9 billion deal to buy primary care provider One Medical in July.

Retailers can be credible competitors to entry-level primary care, Singh said, but that doesn’t mean they are necessarily a threat to hospitals and health systems. Depending on the systems and the markets, there could be opportunities for collaboration, he said.

“I don't think it is a unilateral truth that the retail providers of that primary care are either a competitor or a collaborator,” Singh said. “I think it's going to have to be different. Or it can be somewhere between those two extremes for each health system, who's eventually going to have to interact with those segments.

“I think there was a time where we said, ‘All that's a threat, all that's a threat.’ I don't know if that's the case anymore,” he added. “I think organizations may reposition to say, that's another access for primary care. And maybe there's a way to collaborate with that organization.”

Reset and be nimble

Hospitals should closely examine where they excel and where they could do better this year, said Ash Shehata, KPMG’s national sector leader in healthcare and life sciences.

“The underlying tone of the data we're getting is executives saying, we need to reset ourselves in ’23,” Shehata told Chief Healthcare Executive in an interview earlier this month. “And we need to really figure out what are the things we want to keep? What are the things we want to change?”

KPMG is anticipating more hospitals will look for mergers in the coming year, particularly as the economic challenges grow more daunting for some providers.

Healthcare leaders should be talking early and often with their boards about their strategies for the coming year, Shehata said.

“Do this in conjunction with your board leadership,” Shehata said. “Because we've got a lot of board leaders that are also asking very similar questions. And being able to exchange that dialogue, and to talk about here are the options, here's the things we looked at, and to kind of give those boards a little bit of the insight into that journey, I think really starts to kind of put people behind the same energy for ’23.”

Healthcare leaders should be nimble and shouldn’t settle for making incremental changes, said Kevin Holloran, senior director and sector leader for the non-for-profit healthcare group at Fitch Ratings.

“Be open to change. Be quick to change,” Holloran said in a December interview with Chief Healthcare Executive. “Think transformational, not incremental.”