HOSPITAL CONSOLIDATION TRENDS IN TODAY'S HEALTHCARE ENVIRONMENT ---------------------- ~---------------------- A GOVERNANCE INSTITUTE WH I TE PAPER • SUMMER 20 I 0 The Governance Institute"' The essential resource for governance knowledge and solutions' 9685 Via Excelencia • Suite 100 • San Diego, CA 92126 Toll Free (877) 712-8778 • Fax (858) 909-0813 Governancelnstltute.com About the Authors uring his 30-year investment banking career, James previously a consultant at the Blue Cross BlueShield Association. Ms. Burgdorfer, principal and founder ofJuniper Advisory, Borislava holds an M.B.A. from the University of Chicago. LLC, has concentrated on domestic and international Rex Burgdorfer joined Juniper Advisory in 2009 and focuses on D merger and acquisition assignments, and has further executing mergers and acquisitions transactions for the firm's clients. specialized in merger work for the hospital industry since 1990. Prior Rex was previously with Morgan Stanley and holds an M.B.A. from the to forming Juniper, he co-led the mergers and acquisitions groups Kellogg School of Management at Northwestern University. of Ponder & Co. and John Nuveen & Co. Jamie was a member of Kathleen Maloney is responsible fo r administration at Juniper. Prior Citigroup's mergers and acquisitions department for eight yearsi to joining the firm, she was a member of the mergers and acquisitions before that, he was a vice president in the corporate finance group at group at Ponder & Co., and before that she worked at Northwestern A.G. Becker. He holds an M.B.A. from the University of Michigan. University Medical School. Ms. Maloney holds a B.S. from Northern David Gordon's 27 years of advisory experience has been concen­ lllinois University. trated in the healthcare services industry. Prior to forming Juniper, Mr. Gordon co-led the mergers and acquisitions groups of Ponder & Juniper Advisory LLC Co. and John Nuveen & Co. Previously, he managed the healthcare 191 N. Wacker Drive, Suite 900 services group at Piper J affray. Mr. Gordon holds an M.B.A. from the Chicago, IL 6o6o6 University of Notre Dame. (312) so6-3ooo Borislava Karageorgieva joined Juniper in 2006 and provides www.juniperadvisory.com analytical and transaction support to the firm's clients. She was Acknowledgements The authors would like to thank each of the CEOs and board chairs who were kind enough to meet with them and share their views regarding the hospital business. They would also like to thank Terry Mieling of Bank ofAmerica Merrill Lynch for his insights into the municipal bond market, and Michael Peregrine of McDermott Will & Eme1y for his insights into state attorney general and board fiduciary duty matters. About The Governance Institute The Governance Institute provides trusted, independent information and resources to board members, healthcare executives, and physician leaders in support of their efforts to lead and govern their organizations. The Governance Institute is a membership organization serving In addition to its membership services, The Governance Institute not-for-profit hospital and health system boards of directors, execu­ conducts research studies, tracks healthcare industry trends, and tives, and physician leadership. Membership services are provided showcases governance practices of leading health care boards across through research and publications, conferences, and advisory services. the country. 'JIOSPITAL CONSOLIDATION 'TRENDS IN 'TODAY'S 'JIEALTHCARE ENVIRONMENT The Governance Institute® The essential resource for governance knowledge and solutions-· 9685 Via Excelencia • Suite 100 • San Diego, CA 92126 Toll Free (877) 712-8778 • Fax (858) 909-0813 Governancelnstitute.com Charles M. Ewell, Ph.D. FOUNDER Jona Raasch CHIEF EXECUTIVE OFFICER Mike Wirth PRE SIDENT James A. Rice, Ph.D., FACHE VICE CHAIRMAN Cynthia Ballow VICE PRESIDENT, OPERATION S Kathryn C. Peisert MA NAGING EDITOR Glenn Kramer CREATIVE DIRECTOR The Governance Institute is a division of National Research Corporation. Leading specific set of facts or drcumstances. Ideas or opinions expressed remain the in the field of healthLare gO\ ernance since 1986, The Go,rernance Institute responsibility of the named author(s). In regards to matters that in>olve clinical provides education and information services to hospital and health svstem boards practice and dirE'ct patient treatment, membprs are ad~ ised to consult .vith of directors across the country. For more information about our services. please their medical staffs and senior mdnagement, or other appropriate professionals, call toll free at (877) -12-Br B, or visit our Web 5ite at Governancelnstitute.com. prior to implementing an] changes based on this publication. The Governance Institute is not responsible for any claims or lo>ses that rna) arise from an} errors The Governance Institute ended ~ or~ to ensure the accur dCY of the information it or omis~ion~ in our publications whether cau-,ed by The Go-. ernance Institute or provides to its members. This publication contains data obtained from multiple its sources. sources, and The Governance Institute cannot guarantee the accuracy of the information or its anal\sis in all cases. The Go-. erndn .. ~ Institute is not involved © 2010 The Go .'ernance Institute. All rights reserved. Rej.Jroduction of th is in representation of (linical, legal, dCcounting, or other professional services. publicatior, in whole or part is expressly forbidden without prior written consent. Its publications should not be construed as professional advice based on an) II '}{o sPI TAL CoNSOLIDATION 'TRENDS I N 'Tov AYS '}{EALTHCAR.E ENVIRONMEN T Table ofContents 1 Introduction 3 Chapter 1. Consolidation: Change Is Coming 3 Historical Causes of Consolidation 3 Healthcare Reform's Impact on Consolidation 4 Slow Pace of Consolidation 7 Chapter 2. Industry Structure 7 Hospital Facilities 9 Development of Hospital Systems 11 Hospital Companies 12 Summary 13 Chapter 3· Industry Direction in Response to Healthcare Reform 13 Current Merger Market 14 Large Systems of the Future 15 Considerations for Boards and Management Teams 17 Conclusion 'JlOSPITAL CONSOLIDATION 'TRENDS l N 'TODA¥'S 'JlEIILTHCARE ENVIRONMENT Iii Introduction conomic and health policy experts seem to reform will impose lower prices and enforce reimbursement models agree that healthcare delivery is a "market that create powerful incentives for hospitals to form large systems of failure." The U.S. spends much more on care, including bundled payments, payments for quality, and account­ healthcare than countries with similar econ­ able care organizations. E The hospital industry is highly regulated, capital and labor intensive, omies-16 percent of the gross domestic product. This puts U.S. businesses at a competitive disadvan­ and technologically and commercially complex. And yet, the overall tage in the global marketplace and acts as a drag on structure of the industry appears to be a mixture of cottage industry the economy. with a heavy dose of altruism, rather than the large sophisticated industry it needs to be. One could argue that reform, effectively, results in the federal government telling the health care delivery industry: "the cost of healthcare delivery is unsustainable. We are going to fix this Despite spending twice as much as most major industrialized coun­ by driving down prices; you, the providers, figure-out how to make tries on healthcare, the outcomes associated with these expenditures this work." are mixed. We trail other countries in most measures ofhe alth quality Despite the significant level of discussion regarding business combi­ (e.g., infant mortality, life expectancy, and disease prevention). This is nations occurring at the present time, significant hospital consolida­ not new; many of the same issues and concerns have been discussed tion and creation oflarge companies seem far-off. Why is this? What over the past twenty years. Healthcare executives and leaders have been is it about the hospital industry that causes it to have an incredibly calling for the creation oflarger hospital "sy stems" for at least a decade. fragmented structure and to be so resistant to change? While there This white paper seeks to develop a framework in which to consider are some obvious and understandable reasons for this structural the likely impact of the Patient Protection and Affordable Care Act and anomaly, this white paper attempts to explore the reasons behind the the Healthcare and Education Reconciliation Act of 2010 (collectively now-antiquated structure of the hospital industry, and considers how referred to herein as healthcare reform) on hospital consolidation it can evolve in the immediate future. and, specifically, how this might occur and what hurdles are likely to In preparing this white paper, we sought input regarding the factors be encountered. (For the purposes of this white paper, consolidation influencing the rate of consolidation from independent and multi­ refers to horizontal combinations of ownership and control between hospital systems, located in both urban and non-urban areas. We hospitals, rather than the creation of vertically arranged businesses then gathered available data illustrating the consolidation trends that through combinations.) We do not attempt to review the need for have occurred over the past two decades. To this, we added our own scale and larger companies; this topic has been well covered by others. experience in advising non-profit boards on business combination Rather, we take this as a given