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Mergers, acquisitions and joint ventures are increasing rapidly in health care, as providers secure partners to gain the competencies and scale needed to succeed in the emerging care delivery and payment environment.

Under the new value-based business model, organizations will be responsible for providing services with the best-possible quality and outcomes at the lowest-possible cost, while managing the health of a specific patient population along the continuum of care needs. New expertise and significant capital resources will be required.

Regional systems looking to expand their scope, market reach, and clinical, financial and strategic capabilities have been particularly active on the acquisition and joint venture fronts. Additionally, new competitors are entering the health care space, with innovative partnerships announced nearly daily. Private equity firms are investing directly in hospitals and other providers. Insurers are buying physician practices, entering the care delivery market directly. Nonprofit organizations are forming for-profit ventures. The provider landscape is changing significantly.

Here are eight lessons that can help boards and executive teams make the best-possible strategic partnership decision.

1. Set Clear Objectives

Conducted by the board and senior management team, this is likely the most important component of the strategic partnership process. Objectives define the business goals the prospective partners want to accomplish. They also provide the framework for all other steps in the partnership process, including the evaluation of potential partners and the selection of the partnership structure.

Objectives need to be as specific as possible so that prospective partners can be evaluated on their ability to meet identified needs.

2. Carefully Manage Expectations

To increase the likelihood that a partnership will achieve beneficial results for both parties, objectives not only should be as concrete and specific as possible, they also should be realistic. Hospitals and other providers cannot expect to structure an arrangement that allows them to continue operating exactly as they have in the past. Their boards and executive teams must be willing to give up a certain degree of control involving some aspects of operations, such as strategic planning and direction, operating and capital budgets, or service continuation and enhancement. Distinguishing between negotiable and nonnegotiable factors is essential, as is the active management of expectations throughout the partnering process.

A community hospital in the Northeast, for example, hoped that a prospective partner would commit to building a new patient tower, but the hospital was realistic about the fact that an unconditional commitment to build the tower was unlikely. Still, the patient tower became the cornerstone of partnership discussions. The partner agreed to build a new patient tower if the community hospital met certain thresholds. By setting expectations appropriately, the community hospital avoided stipulating a deal-breaking expectation that might have been difficult for a partnering organization.

3. Bring the Right People to the Table

A small group of key decision-makers will speed and facilitate the partnership-exploration and transaction processes and maintain the required confidentiality along the way. This team typically includes senior management, financial and legal advisers, and a small task force of board members. The advisers and senior management team typically manage the day-to-day details, while the task force measures and tracks performance against relationship objectives, provides critical advice on the development of the transaction, and reports to the full board at critical stages in the process.

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4. Identify and Assess Partners

A hospital or system that is contemplating a new business relationship should have clear criteria for potential candidates. Based on the partnership objectives, the organization's board members and senior management establish parameters for identifying and evaluating each candidate. Parameters include any direct experience with, or knowledge about, a potential partner, its financial position and ability to access capital, geographic proximity, market strength, physician platform, branding and corporate infrastructure.

As an example, Prince William Health System, a nonprofit health system in northern Virginia, identified 20 potential nonprofit and for-profit partners. A well-defined process winnowed the universe of prospective partners to two organizations that could best achieve PWHS' 11 defined partnership objectives. Based on the core objectives, PWHS chose North Carolina-based Novant Health as its best-fit partner. Novant was willing to pledge more than $240 million to PWHS to enhance services and meet the needs of a quickly growing population in northern Virginia; assist in recruiting 50 additional physician specialists so that PWHS could fill gaps in primary and specialty physician coverage; and upgrade the system's 170-bed flagship hospital and build an additional hospital to bring inpatient care closer to a nearby community.

An unwillingness to develop a mutually beneficial partnership or inflexibility over the partnership structure can eliminate a prospective partner. For example, a community hospital interested in joining a health system to broaden its market reach and attain specific clinical program goals and specialist recruitment targets initiated a partnership-exploration process. One potential health system partner proposed in general language the ways in which it would recruit physicians and build clinical programs without specifying where activities would occur.

Moreover, the system did not address the community hospital's specific and stated strategic imperative of recruiting and retaining neurosurgeons and cardiovascular surgeons. As a result, the community hospital believed that the system likely would retain its hub-and-spoke system of care, with market growth achieved by the system, rather than the community hospital.

A shared vision and a mutually agreed-upon commitment to mission-based health care, operational discipline and effective clinical programs were critical to the partnership between NorthEast Medical Center and Carolinas HealthCare System. Although the 450-bed NEMC had an 82 percent market share in the North Carolina county it served, the nearby Charlotte community was growing rapidly, and its health care environment was becoming highly competitive.

Charlotte-based CHS already had 24 owned, leased and managed hospitals in North and South Carolina. The partnership between NEMC and CHS expanded the breadth and depth of services in the larger community. For NEMC, the partnership expanded tertiary services, added to its network of affiliated physicians and improved access to capital to meet strategic needs. For CHS, the merger solidified the health system's tertiary presence in its market area and provided improved access to specialized care.

5. Test Cultural Compatibility

While the business case for a partnership must be solid, more qualitative considerations should not be overlooked. A successful partnership rests not only on financial and operational underpinnings, it also relies on compatible corporate cultures, management and decision-making styles, governance and values.

During a partnership process, cultural compatibility can be assessed by interacting with potential partners. A well-designed process allows for interaction — at appropriate times and with required confidentiality — with key constituents, including boards, management, physicians and community leaders.

The partnership process for 176-bed Martha Jefferson Hospital in Charlottesville, Va., for example, began at the conclusion of an update to the hospital's strategic and financial plan. Although MJH had stress-tested its five-year plan for ensuring services to its community, the executive team and board wanted to evaluate partnership scenarios that could enhance, accelerate or widen the scope and nature of available services, and enhance the quality and safety of operations.

MJH had extensive experience with numerous partnerships in the past. It used a structured process to identify and assess a range of potential partners, defining and applying identical evaluation criteria to each organization. A number of the criteria focused on strategic and cultural fit and the ability to influence the execution of MJH's strategic plan.

Sentara Healthcare, a nonprofit system based in Norfolk, Va., was one of the potential partners participating in the screening and evaluation process. MJH had had a long-standing, collaborative relationship with Sentara, so the board and executive team wanted to be particularly careful to evaluate Sentara in the same manner as the other organizations. Their collaborative history involved the divestiture of one of MJH's non-acute care business units to Sentara more than five years prior to the new partnership exploration process.

In the years following the divestiture, Sentara was an important resource to MJH in advising on the execution of its IT, quality and patient-safety efforts. This interaction not only afforded opportunities for individuals in the two organizations to build working relationships, it also validated Sentara's commitment to the highest-quality care.

At the end of the rigorous evaluation process, Sentara emerged as the optimal partner. The merger of the two organizations was completed in June 2011.

6. Select the Right Partnership Structure

The transaction structure for a partnership is critically important to achieving expected partnership benefits. Structures range from loosely integrated to fully integrated arrangements.

Choosing the most appropriate transaction structure depends on the objectives of the partnership. If a principal objective is to obtain a large amount of capital for infrastructure and development, the most likely transaction structure would be a merger with a large organization. If a major objective is to enhance surgical service lines, less highly integrated transaction structures, such as a joint venture or clinical affiliation, may be more appropriate.

The MJH management and board began its study of transaction structures for a partnership with an evaluation of loosely integrated, joint venture-type structures. This is often an appropriate starting point for organizations with the ability to remain independent. Over time, and through a thorough evaluation of its aims, MJH deemed that a more integrated structure offering the full, committed support of a partner would better enable it to achieve its strategic objectives, fully realize the organizational mission and meet the needs of its community going forward. The transaction structure approved by both organizations involved the integration of MJH into the Sentara organization through a corporate member substitution.

7. Ensure Stakeholder Buy-in

The success of a partnership relies on the acceptance and participation of stakeholders, including the community, hospital staff, and employed and independent physicians. Stakeholders need to understand the reasons for pursuing a partnership, as well as the ways in which a partnership assures the viability and growth of health care in the community going forward.

A thoughtful consensus-building process brings stakeholders on board. This process typically is implemented through a communications plan that engages with each constituent group at appropriate times during the partnership process. Many organizations use advisers who are experienced in developing such communications.

Finally, stakeholder buy-in can be driven by a well-structured governance process, as executed by board members. As stewards of the community asset, trustees who have a thorough understanding of community needs are often the best advocates for ensuring that a partnership addresses organizational needs and key stakeholder concerns.

8. Recognize When Not to Partner

Partnerships should be pursued to provide value to the community, to reposition for the changing health care business model and to ensure viability into the future. Partnerships should be forward-looking and strategic. But an organization's leaders who have not clearly thought through partnership goals, partner characteristics or the ramifications of partnership structures may not be ready to make a partnership decision.

There are times when a partnership is not the right strategic move, and the organization's leadership should reconsider its options. Hospitals and health systems, particularly market leaders, should walk away from a transaction if: strategic conditions change; the prospective partnership fails to meet objectives; expectations are unrealistic; stakeholders are not on board; negotiations languish; or the partnership plan fails to meet timeline deadlines.

Timing Is Everything

Exploring partnership options is perhaps the most important activity in which a board and management team will engage. Partnership may be an imperative for fulfilling fiduciary and management responsibilities into the future.

Health care's value-based business model will be transformative for most hospitals and health systems. Many organizations will need to secure strategic partners to access required expertise and capital resources. The time to consider whether or not to partner is while the health care organization maintains a solid market and strategic financial position and while there are multiple attractive options. We urge health care boards and executive teams nationwide to consider partnership opportunities carefully and, in so doing, take stock of these eight lessons.

Mark E. Grube (mgrube@kaufmanhall.com) is managing director and Michael J. Finnerty (mfinnerty@kaufmanhall.com) is senior vice president of Kaufman, Hall & Associates, Skokie, Ill. Grube is also a member of Speakers Express.

Sidebar - Thinking Through Partnership Goals