2013 Southwind Institute

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1 2013 Southwind Institute Anthony M. D Eredita Executive Vice President Southwind, A Division of The Advisory Board

2 2 The M&A Wave is On-going: Hospital and Physician Scale thought to be an answer but may lead to more scrutiny Hospitals across the nation are being swept up in the biggest wave of mergers since the 1990s, a development that is creating giant hospital systems that could one day dominate American health care and drive up costs. (NY Times 8/12/13) Senators and representatives can ask the federal Government Accountability Office (GAO) to look into issues of public interest. One of Washington State s solons, Rep. Jim McDermott, has asked for a study of consolidation hospital mergers and also the acquisition of physician practices and outpatient facilities by hospitals. Rep. McDermott has a concern about hospital costs, facility fees in particular, but also the clout exercised by large entities in a market. The commissioning of this project has just been announced, so the release of the GAO report is somewhere down the pike a ways, but it will be interesting when it comes out (Puget Sound Business Journal 8/19/13)0

3 3 It is Critical to Know the Strategic Driver Why are systems scaling? 58% of hospitals are now part of a system in search of Many hospitals cite their reason for entering a transaction as: Seeking economies of scale (to manage cost of new infrastructure requirements) Draw on a partner s unique clinical or managerial strengths Gaining geographic strength to better serve patient and community need Scale attributed population base and grow market share Defensive need to remain positioned within a market against competitors protect regional perimeters Meet physician network concerns Economic survival (access to capital) Realization of need to re-invent local care delivery model

4 4 Many Variants A one system M&S strategy can be an evolutionary process Regulators do not prescribe a specific model for collaborations between hospitals. Rather, they look at the effects of the collaboration on patients and the market. Lesser Current State Unaffiliated Local Market Based Facilities with Mixed Medical Staff Traditional Delivery/Community Model Migrating to Vision Strategic Benefit Generally, as long as the effects of joint activity are, on balance, beneficial to patients (resulting in higher quality, better outcomes, and/or lower cost), the collaboration is allowed under antitrust law. Greater Affiliation Loose Strong Joint Venture Joint Operating Agreement* Lease Merger Acquisition Greater Retention of Control Lesser Achieved via Regional Physician CI Program Is it enough to realize meaningful value proposition on facility side? *Agree to jointly engage (virtually merge part or all of each hospital) in some type of economic activity, such as investing in infrastructure, providing patient care, or contracting with payers, but they do not merge.

5 5 Many Variants Differing levels of engagement (not exclusive to H:H transactions) Lesser Strategic Benefit Greater Affiliation Loose Strong Joint Venture Joint Operating Agreement* Lease Merger or Acquisition Greater Retention of Control Lesser Not usually a blending of governance or management Usually around service line strategies More recent activity around sharing of infrastructure and related resources Can be support of broader CI strategy Used to create something new Shared governance and management or related oversight Usually contains a form or shared risk around profit/loss and proportionate capital management May retain separate assets but essentially a merger with combined service offerings Combined governance that does not preclude or eliminate current structures Joint capital risk Often an operating company arrangement One entity may lease and operate Can be accompanied by transition of some assets Financial risk is shifted to leasing entity (capital and operating) Decision to mutually combine or purchase by one of another Similar goals but acquisition may be more controlling by acquiring party and less partnership like model at governance and management levels

6 Industry Strategic Imperative 6 Our pace and structuring toward integration is increasing Hospitals and their mixed medical staffs are setting a strategic path to integration (employed and non-employed) that can begin with essential service lines and continued organizational development of supportive structures with an emphasis toward enterprise value Strategic Focus Affiliation to Integration Transition relationships from affiliations to loyal alignment and integration as part of a defined evolutionary plan including development of complimentary organizational and relationship structures Integrating clinically and financially is an essential means of driving the quality and cost of health care delivery to a defined population ( delivering care accountably ) and is at the root of payment reform ( population management )

7 7 Continuum of Development Develop a Business Plan for Affiliation: a multi-discipline approach Vision & Programs Integration & Community Structure Provide thought leadership and oversight in developing the shared vision Identify functional areas for inclusion/joint operating efforts essential to fulfill the vision Understand and identify the best models for affiliation and system-wide clinical integration (end game) Engage the community stakeholders as partners in realizing the vision Pay particular attention to payers and messaging Understand and provide input into the affiliation model development and related governance and management structures to support an efficient integrated approach to defined functional areas and decision making Define the infrastructure and support resources necessary to support the vision

8 8 Many Pieces and Increasing Complexity Diligence and integration strategies taking center stage Acquisition components Hospitals Physicians ASCs CIO ACOs Insurance JVs Contractual arrangements Other Vision What we want to be at some point in the future (emotive and is a source of inspiration) Vision often provides the parties with a bigger context that is necessary to help kick start the business development or change process and should provide an answer to the perceived imperative Vision enables the parties to put their potential relationship into greater context Vision should always remain central, which requires communication

9 9 Does M&A Contribute to Strategy (Vision Realization) Facility Inpatient and Outpatient Departments Diagnostics ORs (in/outpatient) Labs Floors Cost effectiveness Other Operational efficiency Quality clinical outcomes Reduced variation Clinical information systems Openness to partnering Driving Toward Vision In-Network loyalty Professional Specialties Requiring Facility Based Resources and/or Support Cardiology Oncology Pediatrics Women s Services Hospitalists Teaching Facilities Quality clinical outcomes Protocol adherence Utilization mgmt. Cost management Reduced variation Care coordination Admission/discharge coordination Professional Services Purely Ambulatory in Nature Primary Care Urgent Care MSO/PSA Disease management and wellness Protocol adherence Access Quality clinical outcomes Fully Integrated And Coordinated Chronic and Episodic Care Delivery Requires Integrated Strategies and Structures to Drive Clinical and Financial Outcomes Consistent patient experience (brand building) In-network loyalty Admission/discharge coordination Care coordination

10 10 Translating Scale into Full Value: Structure Early Leveraging Scale for a Defined Medical Group Advantage Hospitals Deriving Deeper Value from M&A Achievable Value Physicians ASCs CIO ACOs Insurance JVs Contractual arrangements Other Financial Scale Moving across several fronts Redeployment and repurposing assets Clinical & Operational Scale Evidence-based practice, standardization Rationalized clinical capacity Centralized operational processes Full Value Scale Optimized care coordination across the continuum Meaningful participation in population health management Capacity to manage risk under evolving payment models New geography, volume growth Contracting leverage Access to capital Degree of Integration Source: Advisory Board interviews and analysis.

11 11 Pathway to Building Cohesive Culture Shared Vision Jointly developed strategic planning initiatives and tactics: A component of heath system strategic plan Achievement of tactics drives fulfillment of strategic objectives Does fulfillment of objectives drive achievement of vision? Executive team and well positioned physician leadership and supporting management Defined values and norms in operating practice Accountable leadership by example Training and staff development Tools and resources Are we enabling positional success? Collective accountable performance and achievement of initiatives through behavior that is consistent with norms and values across practice: Focus on consistency and brand development Creates the system way Are we building a cohesive group culture through performance? Clearly articulated, communicated, and shared vision: Defines components role within the health system Is there a communicated direction that is visible? Defined organizational structure to support execution of strategic initiatives and tactics and daily operations: Distinguish and segregate governance and management Enable sufficient management/ leadership structure to support executive leadership role Clearly defined meaningful roles and responsibilities with consistent positional expectations and accountability Decision matrix Does structure support achievement of strategic initiatives, daily operations, and leadership success? Cultural Development Aligned behavioral incentives: Compensation plan aligns incentives to encourage and support achievement of strategic outcomes in a manner consistent with values and norms Communication and feedback on progress against plan/incentive metrics (dashboards and evaluations) Tangible and intangible meaningful incentives for accomplishment Are we incentivizing the right behavior? Ongoing: Communication of progress, results and provision of feedback at all levels

12 Defining Value-Driven M&A Strategy 12 Three Guiding Principles 1 Founded upon organizational vision that can be clearly communicated 2 Enables accurate assessment of true partnership potential (prospecting to due diligence and ROI) 3 Fosters open and transparent communication and collaboration necessary to achieve full value scale culture building component

13 13 Preparing for Growth in an Era of Consolidation Executing a Value-Driven M&A Strategy (physician enterprise focus) I II III Determine M&A Strategy 1. Define M&A strategy based on market-informed practice vision 2. Assess acquisition targets based on strategic, performance, and cultural compatibility 3. Measure potential anti-trust risk exposure for horizontal M&A 4. Determine transaction funding source Discern True Target Practice Value 5. Appoint acquisition committee to oversee all M&A processes and facilitate negotiations 6. Realize limitations of Fair Market Value in assessing true practice value 7. Conduct in-depth, crosssectional stakeholder interviews 8. Augment practice financial review with thorough revenue cycle analysis 9. Structure pro forma around nuanced due diligence assumptions Execute Seamless Integration 10. Evaluate M&A transactional feasibility based on due diligence findings 11. Codify detailed material terms in comprehensive letter of intent 12. Maintain negotiation momentum with open, objective-driven communication 13. Begin robust onboarding process before formal transaction close Source: Advisory Board interviews and analysis.