Merger and Acquisition Analysis | Finding the Right Partner(s) in 2020 and 2021

Author

Stephen C. Hanson, FACHE, Partner, CEO Advisory Network
Steve is a senior executive with a consistent track record serving five health systems and four independent hospitals providing services to seven states over a multi decade career.

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What is the best strategy for evaluating a potential merger or acquisition in the new normal of COVID-19? 

​As we continue through these challenging times of pandemic, economic turmoil and racial tension, it is not completely clear what the future will bring.  What is clear is that health, both public health and health delivery, will be fundamentally altered.  Healthcare organizations will be seeking larger scale.  Larger health systems, insurers, large tech companies, and private equity will be looking for smaller hospitals and health systems as well as private physician groups to merge with or acquire.

Certainly, for smaller to mid-sized health systems and physician groups, there is the economic reality of needing larger balance sheets to regain financial footing.  These organizations need now to examine potential larger entities with which to consider engagement.  While the reality of COVID-19 continues as of this writing, separate resources focusing specifically on future partnering need to be dedicated.
 
The first question is: do we need to merge with/be acquired or are there other mechanisms to gain scale? 
 
The following criteria should then be taken into account when studying all potential merger or other partners for the organization:

1. What is the culture fit? What is the larger organization’s reputation for (and actual data) regarding quality/safety/patient experience?  What is the larger organization’s approach to employees?  Physicians?  Commitment to racial and sexual justice?
2. Will affiliation with the potential larger organization allow our system/practice to flourish in the new normal of health?  Will it help our ability to focus on telehealth, remote monitoring, expanded hospital at home and other home services, virtual and augmented reality, precision medicine, genomics?  Will it help us to link with public health to a greater extent and to be prepared for continued presence of COVID-19 and potentially future pandemics?  What will the impact in the future be on the serving all age groups including the large millennial cohort?
3.  Will affiliation assist in infrastructure?  What does the larger party bring in terms of domestic supply chain, 3D manufacturing, robotics, information technology of all types, artificial intelligence and advanced analytics?
4.  Will affiliation bring the smaller entity into Medicare Advantage and other value-based systems in an appropriate geography?  Will it bring additional access to physicians, advanced care professionals and other caregivers?
5. How will affiliation affect governance?  Will there in fact be economies of scale?  How will local governance be impacted relative to the larger system or corporation’s governance?
6.  Will affiliation improve the smaller entity’s ability to participate in research?  Philanthropy? How can these result in involvement of future public health efforts?
7. Finally, as the above questions are being addressed, what is the financial status of the larger organization? Many larger health systems and hospitals have been under significant stress compared to historical performance.  What are the key financial ratios in 2020 and what is projected to happen going forward?  Is the larger party holding discussions with other smaller entities that would change the scenario? 

​For small to mid-sized hospitals and health systems and private physician practices, a formal process incorporating management, governance and physicians needs to occur.  The process should ask and answer these key questions for all potential larger parties in the immediately foreseeable future.
 
The opportunities can focus on three potential scenarios:

1. Merge with or be acquired by one larger entity.
2. Maintain independence but develop formal partnerships with multiple larger entities.  For example, a larger insurer for “population health,” a tech company for infrastructure.
3. Join an alliance of like organizations which would then meet the needs identified in the above questions.

 
Robust implementation of this process will result in a prioritized list of a few larger entities which to approach initially. Larger organizations are more likely to have available resources in studying the potential for smaller partners and the main focus would on the merger/acquisition scenario.  but the seven questions remain the same.
 
How will affiliation with potential smaller parties improve the larger entities to meet the future challenges addressed in the questions?  Even on the financial question, what will involvement with each potential party impact the balance sheet?  The larger entities also need to develop a prioritized list and begin to approach the smaller organizations with the greatest potential.  However additional external resources may be needed even for them.
 
The eight Partners of the CEO Advisory Network have collectively been through over 100 mergers and acquisitions/sales involving hospitals, physician groups, long term care, health plans.  They can guide this exploratory process and work on the initial approach to those larger organizations which present the most potential for smaller health systems/groups.  Conversely, they can assist the larger organizations on the best smaller partners going forward.
 
The pandemic has suddenly brought the future into health and healthcare.  It is imperative that progressive organizations of all sizes take the lead during this unprecedented time!

To speak with Steve Hanson, Partner, about mergers and acquisitions contact him today at [email protected]