Strategic Partnership, M&A, Management Contract – What Is Right For You?

Rural hospital closures are a reality facing communities across the country. Since 2010, 113 rural hospitals have shuttered, with the majority of those closures happening in the South. The North Carolina Rural Hospital Research Program points to multiple contributing factors, including changing population demographics, decreased demand for inpatient services, market trends that currently favor M&A, and Medicaid expansion (or lack thereof). While a rural hospital closure may come as a surprise to the community it serves, it’s often less surprising to hospital leaders and board members, says Neil Todhunter, president of HealthTechS3. 

“Normally, boards wait until it’s too late,” he says. “They’re always hoping things will turn around. It’s not uncommon for us to hear, ‘We’re not going to make payroll, can you help us?’”

The problem with this turnaround strategy, if you can call it that, is that options are usually limited. That’s where a strategic plan comes in. And it’s not enough to just have one. Todhunter recommends using the process to think through the viability of a relationship with another organization, whether in a merger, strategic partnership or management contract. This helps hospitals identify goals for the relationship and choose the right relationship to help them achieve those goals while continuing to serve their communities.

Here’s a quick look at three of the most common relationships a community hospital might consider and when:

Hospital M&A—Not Necessarily a Cure-all

The best and most common reason to consider a merger is for capital development, such as building a replacement hospital. “A merger can be very beneficial for an independent hospital that requires a significant dollar amount that they don’t have the resources to achieve on their own,” he says.

But, Todhunter says, many community hospitals consider mergers for the wrong reasons. “Mergers can help an organization, but they can also not be as fruitful as hospitals may think,” he says. “Independent hospitals think they can transfer their troubles off to a bigger player, but that’s not how it works.”

The risk is always there, too, that the bigger player will eventually consolidate and close locations, limiting the healthcare options for your community.

“When you sell, you are giving up not just your independence but also control, and once you’ve lost it, it can be very difficult to get back,” he says.

This is why having a clear understanding of your organization’s goals is so important. If the main goal isn’t capital development, a strategic partnership or management contract relationship may be a better option.

Strategic Affiliations—Stressed Hospitals Need Not Apply

Rural and critical-access hospitals seek strategic partnerships for a variety of reasons. They can help staff service lines that are difficult to recruit for, offer new service lines that wouldn’t be practical as a standalone offering, or help independent hospitals gain access to sophisticated IT or materials management systems. The common denominator is that the hospital is otherwise financially strong.

Geography used to play a role in whether collaboration was viable. “Normally, if a hospital is fairly remote it becomes more difficult to have a collaborative relationship just because of the physical distance,” Todhunter says. But technology, and specifically telehealth, has helped remote hospitals overcome some of that challenge.

If you’re considering a strategic partnership for telehealth, Todhunter suggests looking into partnering with a regional player first. For patients who do require a face-to-face visit, the relationship with the provider already will have been established and it will be easier for them to get to the appointment.

Hospital Management Relationships Can Solve on Multiple Fronts

“Finance isn’t everything,” Todhunter says, but that’s often the first and only thing hospital leaders and board members think of when considering a hospital management relationship.

While margins or a lack of leadership may be what leads a hospital to pursue a management relationship in the first place, the benefits extend far beyond—all while allowing the hospital to continue its independence in the community.

“It’s really a win-win, because it gives them the expertise of a management organization and the ability to bring in specialties that they couldn’t bring to bear on their own,” he says. “We also bring significant strategies and benchmarks around quality, patient satisfaction and risk, we help them run physician practices and get up to speed on care coordination, lead them through strategic planning—all things the best hospitals are doing without their having to give anything up.”

Under a HealthTechS3 management contract, the hospital CEO and sometimes CFO become employees of HealthTechS3, but the direction of the organization is still at the approval of the board of directors. “We can’t take any significant actions without the board’s approval, which helps protects the interests of the independent hospital.”

Interested in pursuing any of these relationships for your independent hospital? Rely on the consulting expertise of HealthTechS3 to help guide you through the decision-making process, from thinking through desired outcomes to landing on the best relationship for all stakeholders. For more information, contact Jennifer LeMieux, Chief Operations Officer, HealthTechS3:jennifer.lemieux@healthtechs3.com