Are you an independent organization considering your options in an uncertain and evolving health care environment? Are you part of a health care system now, or do you expect to be part of one in the future?

Hospitals and health systems affiliate with partners to improve access to capital, achieve critical mass and economies of scale, increase access points, and expand their presence across geographic regions. Over the next two to three years, these incentives will lead hospitals and health systems of all types to seek alliances that will ensure their success.

Independent or Affiliated: Making the Decision

Many independent hospital board members and senior leaders are considering several critical questions:

  • What is our mission and vision?
  • What are our future goals and needs, and can we succeed financially (given our credit worthiness)?
  • How will our organization and the needs of the community be best served — if we remain independent or if we align with a partner?

Most health care transactions are driven by a short list of impending strategic imperatives and market realities. Evaluating the reasons behind an affiliation is a first step for the hospital's board members and senior leaders.

Is Independence a Viable Option?

The desire to remain independent often has to do with maintaining local control and focusing on local needs. Although the impact of health care reform will vary from market to market, you will need to make frequent assessments of the local health care environment. Consider, for example, the financial impact of growing enrollment in insurance exchanges, Medicaid expansion (or not), growing accountable care organizations and other market game-changing activities. To make an informed decision about the ability and wisdom of remaining independent, evaluate whether your organization has the critical characteristics to meet market needs into the future.

The following checklist, "Characteristics of Successful Independent Hospitals," highlights the characteristics necessary for success within the new health care paradigm. If your board members and senior leaders find that your organization lacks these characteristics and is not prepared to acquire them, they should consider affiliation options.

CHECKLIST: CHARACTERISTICS OF SUCCESSFUL INDEPENDENT HOSPITALS

 

Strategic Position

      Assessment

Current Status

Future Potential

  • Appropriate continuum of health care services (affiliated or owned/operated)
  • Robust primary care network
  • Appropriate specialty care and strong referral sources
  • Health plans that prefer you as a provider
  • A service area population large enough to manage risk in population health
   

Clinically Integrated Network Platform and Performance

  • Clinically integrated network delivering cost-efficient and clinically effective care
  • Integrated and aligned physician network
  • High-value services (high-quality outcomes, patient satisfaction and low cost per case)
  • Value-based reimbursement models with payers (pay for performance, [P4P], shared savings, global budgets)
  • Integrated care delivery model with systems to support care redesign and management across the continuum (efficient throughput, effective care transitions)
  • Systems and processes to define preferred care paths and tools to measure and report on performance
   
Infrastructure Readiness
  • Information technology infrastructure and analytics to support clinical integration and information exchange across the continuum
  • Ambulatory footprint with a variety of access points across the service area
  • Robust physician enterprise that is efficiently operated and effectively led
  • System that is prepared for further care transition from inpatient to ambulatory settings
   

Financial Performance

  • Operating margins capable of supporting short- and long-term needs and strategic objectives
  • Available capital to fund:
  • Facility and equipment needs
  • Physician recruitment and alignment
  • Clinical integration development or expansion
  • Information technology advancement
  •  Positive contribution margin for bundled-price, shared savings, P4P or capitated payer arrangements for the clinical service portfolio
   
  • Leadership
  • Leadership team capable of successfully managing the organization through future challenges and transition
  • Clinical leaders engaged in driving the transformation with and among their peers
  • Culture of innovation, adaptability, performance excellence and accountability
   

An assessment of these characteristics should lead to a clearer understanding of whether your hospital can, and should, remain independent. If your organization chooses affiliation, the assessment will identify the resources your organization can bring to the partnership, as well as those you require from an ideal partner.

An Independent Hospital's Affiliation Journey

A mid-sized community hospital located in a West Coast suburban area recently examined its ability to remain independent amid growing competitive pressures. The board wanted to remain independent for the foreseeable future, but declining operating margins over the prior 24 months raised concern about the hospital's long-term financial sustainability. The hospital also was carrying a high debt load, and an examination of its long-term capital needs produced an extensive list of projects necessary for success in an accountable care environment. The identified capital requirements far exceeded the hospital's debt capacity and, coupled with declining operating margins, the board decided to evaluate its strategic options.

The board decided to test the interest of several larger systems in the region. Leaders held confidential meetings with the CEOs and board chairs of each system in which they discussed mission, vision, culture and potential collaborative opportunities. When they found that other systems were interested, the leaders made a formal request for proposals.

After analyzing the proposals, conducting reciprocal site visits and engaging in dialogue with interested parties, hospital leaders identified several preferred partners. While each of the organizations provided attractive offers, the board used clear criteria to evaluate and select its ideal partner. These criteria included the organization's mission and vision, financial strength, strategic position for population health management, a strong physician alignment strategy, and a synergistic culture. The most important question for the board to answer was: Will an affiliation meet the community's health care needs significantly better than if we remain independent?

After careful consideration and due diligence, the board members decided to affiliate with the organization that met their criteria and had the best cultural fit. The selected partner exhibited a strong preference for clinical collaboration and system integration that magnified the strengths of the community hospital while providing resources and capabilities for long-term sustainability.

Timing, Critical Mass and Culture

Timing is everything. If you wait too long, your preferred partner no longer may be able to take on additional commitments financially, operationally or competitively (e.g., it may be approaching antitrust limitations). Explore options that currently might not be available to you, as the market will evolve. Also consider that the organization you partner with today will continue to change as the system continues to expand.

Will your strategy for achieving critical mass be realized better by aligning with a larger system or by your becoming the aggregator of other similar-sized (or smaller) providers? The answer depends on the dynamics of the local environment and the strength of the potential partners. You may need to consider a two-step process of sequential affiliations to achieve a scale that is financially viable.

Furthermore, do not underestimate the importance of aligning the cultures of the respective organizations; doing so is as important as finding common ground on mission, financial terms and clinical alignment. Misaligned cultures can damage the long-term survivability of an alliance as much as problems with economics, governance and competitive position.

Final Considerations

The decision to remain independent or to affiliate is complex, with far-reaching implications for the organization, the community, medical staff members, employees and other stakeholders. Careful due diligence can increase the likelihood that the strategy you ultimately pursue will be the best for your unique circumstances. One size does not fit all. The pros and cons associated with these legacy decisions will reverberate for years to come. Making difficult decisions requires courage, foresight, insight and resolve that the greater good may be served in the future.

Authors' note: Subsequent articles in this publication (October 2014, January 2015, April 2015) will explore various structures and other elements that go into making good decisions about other essential facets of the affiliation process.

Guy M. Masters, M.P.A., is a senior vice president; Brandon Klar, M.H.S.A., is a senior manager; and Cleo Burtley, M.B.A., is a senior manager, all at The Camden Group, headquartered in Los Angeles.