Affiliation: Too Early Is Better Than Too Late

Against the backdrop of an ever-evolving and consolidating healthcare environment, the decision to preserve independence or pursue strategic alliances is taking center stage for a variety of hospitals and physician groups.  Autonomy remains closely guarded, worn as a badge of honor by numerous hospitals and providers.  Yet while some organizations possess the infrastructure, resources, and market conditions to remain independent, others are finding autonomy increasingly difficult, if not impossible, to sustain.  The question being asked by these organizations is:  How long can we maintain our independence?

Maintaining independence is one thing; clinging to it is entirely another. We find that most (but not all) provider partnerships are born out of mounting operational and financial distresses for a partner-seeking organization.  Frequently, independent hospitals or physician groups choose to remain independent for too long, allowing market and economic forces to erode their long-term viability.  It’s an approach that extends local Moodys_Quote_14M05D09autonomy but lessens or eliminates partnership opportunities over time. Eventually, “best fit” partners will have already committed to other providers or won’t be interested in a rescue mission.

Independent hospitals and physician groups that court partnerships before becoming overwhelmed by financial and operational challenges do so from a position of greater strength, which broadens their partnership appeal and options.  Proactively seeking affiliation opportunities from a strong position frequently improves negotiating leverage related to clinical programs and services, community goals, capital, and facilities, among other key objectives.

So why do hospitals and physicians seek affiliations?  Rarely is it a result of a single event or performance against a handful of indicators.  More commonly, a combination of forces and market factors make an affiliation increasingly necessary.  See the figure below.Financial_Health_14M05D09

Thus, the role of the board and senior leadership is to identify “red flags” early on in order to take steps toward performance improvement and/or position the organization for an affiliation while it still has significant value.

  • Financial red flags:
    • Flat or declining net patient revenue.
    • Increasing bad-debt expense (greater than 10% increase from prior period).
    • Weak operating cash flow margin (less than 6%) and downward trend.
    • Depreciation outpacing capital expenditures (2 consecutive years).
    • Low days cash on hand (less than 90 days) and downward trend.
  • Operational red flags:
    • Year-over-year decline in inpatient/outpatient volumes.
    • Decrease in market share.
    • FTEs per adjusted patient day exceeding regional averages.
    • Compliance or accreditation problems.
    • Loss or realignment of key physicians.

The reality is that fewer organizations can stand alone in the new healthcare era, and some form of affiliation is or will be required for the majority of healthcare providers. Organizations that ignore this fact or cling to independence too long run the risk of ruin. Thus, providers need to ask themselves how long they should remain independent, not how long they can.

John Fink, Senior Manager, co-authored this post.

This entry was posted in Affiliation Agreement, Healthcare Consolidation, Hospital Consolidation, Physician Alignment, Physician Strategy and tagged , , , , , by Scott Burns. Bookmark the permalink.

About Scott Burns

Scott joined ECG in 2008 with more than 25 years of healthcare experience in mergers and acquisitions and business, strategic, and facility planning. He has been involved in numerous large- and small-scale projects, leading engagements for a range of clients, including federal and state health agencies, academic medical centers, urban tertiary hospitals, community providers, regional health plans, and physician group practices. Over the years, his work has resulted in tactics to enhance growth and performance, reduce costs, and improve patient populations’ access to needed healthcare services. Prior to joining ECG, Scott was a Director in the Health Industries Advisory practice of a Big 4 consulting firm and was a Director for Tenet Healthcare Corporation’s predecessor company, where he was responsible for overseeing acquisition and development activities, as well as leading planning and financial analyses in support of transactions and capital investments. He is a frequent speaker and author of healthcare industry white papers and publications on a variety of topics. Scott has a bachelor of arts degree from Purdue University in West Lafayette, Indiana, with a concentration in public administration and an emphasis on health services administration.

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