Snapshot

Piecemeal partnerships among hospitals and small and middle-market systems can address challenges in administrative functions, population health and physician practices while preserving each entity’s independence.

As the hospital ownership landscape has changed, much of the conversation in the boardrooms of independent hospitals and small systems has centered on whether to remain independent or seek partners. Often, these discussions appropriately focus on whether their organizations can remain viable without access to a partner’s support and capital.

However, leadership teams at independent hospitals and small systems are not the only ones grappling with how to access capital and succeed in the post-2007, post-reform world. Within the growing segment of middle-market health care systems (loosely defined as those with 30,000 or more admissions, but competing over a relatively contiguous geography), leaders are facing questions about whether to form partnerships to achieve their goals, but for entirely different reasons.

Executives and board members at these systems have growth visions, but often cannot access capital and capabilities quickly enough to realize their goals. This dynamic, coupled with a nearly universal preference for local control in governance and leadership in nonprofit health care has resulted in a wave of innovative partnership models within the industry.

As a result, middle-market partnership strategies are no longer limited to the traditional triad of enterprisewide deals: funding through operations or debt markets, merging with another system or selling to a for-profit system. Middle-market system leaders can access an emerging array of partnership strategies, many of which can be used to reduce pressure on a specific component of the enterprise and allow participating parties to maintain their independence. Organizational leaders and boards should familiarize themselves with the range of partnership strategies, understand the benefits and disadvantages associated with focused (vs. enterprisewide) models, and develop a framework to decide whether to move forward with one.

Emerging Solutions

Many discrete solutions are emerging to allow health systems to access capital and leverage partners’ scale and skill economies. Examples include back-office collaboratives, population health collaboratives, physician enterprise partnerships and hybrid joint ventures.

Back-office collaboratives. In fall 2012, BJC HealthCare, St. Louis; CoxHealth, Springfield, Mo.; Memorial Health System, Springfield, Ill.; and Saint Luke’s Health System, Kansas City, Mo., launched the BJC Collaborative. In 2013, the BJC Collaborative expanded to include Blessing Health System in Quincy, Ill., and Southern Illinois Healthcare in Carbondale.

According to its website, the Collaborative focuses on “implementing clinical programs and services to improve access and quality of health care for patients, lowering health care costs and creating additional efficiencies that will be beneficial to patients and the communities served by the member organizations, and achieving cost savings.” Essentially, it creates a vehicle for its members to remain independent and share investments in back-office functions (for example, the supply chain) to achieve scale economies beyond those that members could achieve individually.

Similar models have emerged nationally, including Granite Healthcare Network in New Hampshire; AllSpire Health Partners in New York, New Jersey, Maryland and Pennsylvania; and Stratus Healthcare in Georgia. A common feature of these models is that participating hospitals and systems are not direct competitors and, instead, serve adjacent markets. This allows members to more freely share best practices and investments in scale efficiencies, without the fear of strengthening competitors.

Population health collaboratives. Many back-office collaboratives have population health agendas. However, some partnerships have been designed to focus more intensely on population health than others.

Health Innovations Ohio, a partnership among Mercy Health (formerly Catholic Health Partners) in Cincinnati, Mount Carmel Health System in Columbus, Summa Health System in Akron and University Hospitals in Cleveland, launched in 2012 with four focus areas:

• Medicare Advantage, through expanded access to HIO-sponsored plans

• Employee health, through joint adoption of best-practice population health management programs and incentives

• Medicaid managed care, through partnerships and economic alignment with contractors

• Population health, through collectively “defining better metrics to monitor health, better practices to manage chronic diseases and conditions, and developing tools to better engage people to take an active role in managing their own health,” according to HIO’s website

Although the focus of population health collaboratives differs from those of back-office partnerships, the underlying rationales are the same. Population health collaboratives enable members to share best practices and investments required to confront health care’s transformation, while remaining independent.

Physician enterprise partnerships. Employed physician groups also have created economic stresses and innovative partnerships, as health systems try to reduce losses on employed physicians and integrate previously disparate practices into a high-functioning multispecialty medical group.

Southwestern Vermont Health Care recently merged its formerly employed medical group at Southwestern Vermont Medical Center into Dartmouth-Hitchcock’s medical group. The 70 physicians formerly employed by SVMC joined Dartmouth-Hitchcock’s medical group of more than 1,000 physicians with “no assets or cash … changing hands,” according to a news release. SVMC now leases these physicians back from Dartmouth-Hitchcock.

This partnership likely yields several benefits to SVHC and Dartmouth-Hitchcock. The structure creates an economic vehicle that enables:

• SVMC’s smaller medical group to access the scale and skill economies of the larger Dartmouth-Hitchcock practice

• Care coordination and standardization across the Dartmouth-Hitchcock and SVMC systems

• Enhanced access to subspecialty physicians at the SVMC campus

Hybrid joint ventures. This model enables access to partners’ resources to fund system expansion. The partnership between Shands Healthcare and Health Management Associates, now owned by Community Health Systems, is a perfect example. In 2010, nonprofit Shands, the health system affiliate of the University of Florida Health in Gainesville, and for-profit HMA formed a partnership through Shands’ divestiture of a controlling interest in three rural hospitals. Beyond the joint venture, HMA and Shands crafted a clinical affiliation that extends to HMA’s pre-existing hospital portfolio and recent acquisitions in the Shands catchment area. At a high level, HMA provided capital and operational and administrative expertise, while Shands and UF Health lend clinical expertise and brand equity.

Shands has a minority position in the partnered network, which has allowed it to maintain and grow a network to support its wholly owned asset base, without draining its balance sheet or requiring it to achieve competencies in community hospital operations (Shands’ community hospitals were losing money prior to the deal.). Conversely, CHS is arguably better positioned as a prospective partner to North-Central Florida community hospitals, as it now can leverage UF Health and Shands’ strong brands and subspecialty service offerings.

A recent HFM article identified several other for-profit health systems entering into similar partnerships with nonprofit counterparts, including LifePoint Hospitals, Iasis Healthcare and Capella Healthcare, all in Nashville, and LHP Hospital Group in Plano, Texas.

Pluses and Minuses

Though these partnership structures are unique, they offer common advantages and disadvantages to participating hospitals and systems.

On the positive side, each of these models creates a framework for shared capital investments, operational cooperation and shared returns (that is, distributions), while allowing members to retain distinct organizational identities. Participants benefit from their partners’ skill, scale and capital, while retaining local control in the form of individual governance structures and reserved powers related to the specific partnership. These features are particularly valuable as enablers for public-private and religious-secular partnerships, which can pose challenges that prohibit more traditional asset sales and mergers.

These models also share inherent weaknesses. As with any partnership, competing interests, in the form of the classic “yours, mine and ours” mentality, can weaken their efficacy and durability. To some extent, these partnerships are unstable because they are easier to exit than full-scale mergers and acquisitions. Most importantly, each of these models is structurally complex and, because they are relatively new, there are not industrywide business models, organizational charts and governance structures for these collaborations. This complexity often manifests itself in unintended downstream consequences, as individual partners react to incentives and leverage partnership structures in ways that could not be predicted easily during initial negotiations.

Thinking It Through

Because of the complexities associated with emerging partnership models and the growing menu of partnership options, middle-market system leaders exploring partnerships should not only consider traditional merger and acquisition strategies, but also undertake an analysis to inform hold-partner-sell decisions for discrete portions of their enterprises. In so doing, hospitals and systems should consider five factors, the weighting of which likely will vary across organizations.

1. Risk. Assets or strategies with an unacceptable risk-reward profile are often ideal candidates for partnerships or outright divestiture. These approaches allow organizations to transfer or reduce risk associated with holding particular assets or undertaking particular strategies.

Shands’ partnership with Community Health Systems provides a salient example. As an academic health system, an aligned, community hospital network creates opportunities for Shands to secure tertiary and quaternary transfers and referrals and better coordinate care. At the same time, independently owning rural hospitals creates risks for Shands, because it lacks rural operational expertise. Thus, the CHS partnership reduces the risk of Shands’ network strategy by allowing Shands to access CHS’ operational expertise, in exchange for equity in the network.

2. Cost. Partnerships or divestitures can defray costs associated with resource-intensive strategies or assets.

Many of the health systems that are participating in the emerging population health collaboratives have healthy balance sheets. Yet, these organizations see a more challenging operating environment on the horizon and recognize that transforming their organizations from fee-for-service providers to population health managers will consume significant resources. HIO and comparable partnerships enable their members to pool resources to fund transformation, preserving individual balance sheets to fund unique strategies and individually owned assets.

3. Operational performance. Targeted partnerships and divestitures also serve as vehicles to realize benefits of individually unachievable scale economies. Participants in back-office collaboratives presumably have identified ways to achieve corporate services efficiencies that cannot be achieved at their current scale. These partnerships also have allowed members to collectively achieve scale economies and appropriate returns.

4. Quality and service. Hospitals and systems must consider quality performance and service when considering enterprisewide or targeted partnerships. As revenues and patient volumes become increasingly tied to these metrics, economics alone can no longer underpin system-to-system combinations and partnerships.

Clinical quality factored into SVMC’s decision to sell and lease back its employed physician group from Dartmouth-Hitchcock. Thomas Dee, chief executive of SVMC, explained the rationale in a news release: “SVMC has an outstanding quality improvement record. Dartmouth-Hitchcock is a national leader in quality improvement research. The affiliation will leverage the quality improvement strengths of each organization to drive health care quality in our community to a new, higher level.”

5. Mission. Partnerships and divestitures can enable organizations to transfer responsibilities for noncore activities, enhancing an organization’s focus on its core purpose. Outright asset sales often are favored to monetize noncore activities, whereas partnerships may be better suited to support assets or strategies related to an organization’s mission.

A Range of Options

The current wave of mergers and partnerships seems likely to continue, and the strategic options available to well-positioned, middle-market systems will proliferate. As leaders of these systems face shortages of capital or capabilities needed to achieve their goals, they should consider alternative options by diagnosing the need to partner or divest portions of the enterprise. Then, benefits and disadvantages of targeted solutions should be weighed carefully versus those of enterprisewide plays.

Thomas Dixon (thomasrdixon1@gmail.com) is a former director in Navigant’s health care provider strategy practice, Nashville, Tenn.; Victoria Poindexter (vpoindexter@h2cllc.com) is a principal at Hammond Hanlon Camp LLC, Chicago; and Drew Baumgartner (drew.baumgartner@navigant.com) is a managing consultant in Navigant’s health care provider strategy practice, Chicago.