Is Your Community Hospital Considering Affiliation? Don’t Overlook the Regulations…

The pressures placed on smaller hospitals continue to mount across the country. Many smaller hospitals are struggling to maintain competitive market position and preserve operating margins in the wake of significant industry consolidation, which can decrease their marketability and bargaining power compared to larger competitors. Furthermore, unprecedented regulatory reform, including new reimbursement models, electronic health record implementation, quality reporting requirements, and the impact of individual state electives–such as whether to expand Medicaid programs under the Affordable Care Act (ACA)–require access to competencies and resources that many smaller hospitals do not have. These influences have resulted in an increasing number of smaller hospitals affiliating or considering affiliation alternatives. From January 1, 2009, through June 30, 2014, there have been over 420 hospital mergers and acquisitions.[1]

While the decision to affiliate is a significant undertaking for any organization, it can be especially burdensome to small, community-owned hospitals. It is often challenging for these predominantly nonprofit hospitals to understand the end-to-end process required to consider and effectuate affiliations, and appreciate the complexities presented by various governing bodies to review and approve such transactions. Without an appropriate plan and understanding of the necessary timing, the alignment process can become very taxing on management teams and boards of directors, and may even lead to missed opportunities. The alignment process generally involves the following steps:

  • Identification of capital needs and strategic objectives of the affiliation.
  • Preparation and delivery of a request for proposals from potential partners.
  • Selection of a potential partner.
  • Due diligence and negotiation of affiliation terms.
  • Regulatory filings, review, and approval.
  • Transaction execution.

Nonprofit hospitals face an added layer of oversight throughout the affiliation process in which many states require regulatory approval, typically by the state’s Office of the Attorney General (AG). Currently, there are over 20 states that have statutes specifically governing the transfer of ownership of community-owned assets in nonprofit hospital systems.[2] While each state has a unique approach, there are some commonalities across many of the states, which include:

  • Obtaining a community benefit analysis and/or fair market value appraisal by an independent party.
  • Filing with the state (30-180 days prior to closing).
  • State AG review (30-90 days after filing).
  • Public hearing and/or ruling from the AG.[3]
  • Post-transaction monitoring.

The identification of quantitative and qualitative benefits accruing to a community as the result of an affiliation is imperative in obtaining approval of a transaction. These considerations can include, among others:

  • Economic impact of the hospital on the community.
  • Economic consideration provided by an affiliating party for the hospital compared to the hospital’s fair market value.
  • Value of investments committed to the community by the affiliating party.
  • Retention of local hospital governance elements.

PYA is experienced in guiding clients through each phase of an affiliation by providing strategic advisory services, facilitating transactions, offering independent third-party valuation services, performing community benefit analyses, and providing expert witness testimony. This full complement of strategic advisory and valuation services uniquely positions PYA to assist clients through each phase of the affiliation process. To discuss how we can help your organization be proactive and prepared, please contact the experts listed below at PYA, (800) 270-9629.

[1]    Irving Levin Associates, Inc., The Hospital Acquisition Report 2014, July 2014.

[2] Office of Legislative Research, Nonprofit Hospital Conversion Laws in Other States, September 30, 2014. http://www.cga.ct.gov/2014/rpt/pdf/2014-R-0229.pdf, accessed November 11, 2014.

[3]     Certificate of Need (CON) requirement may also be applicable inclusive of, or in addition to, state review of transaction.


David McMillan

David McMillan

Principal

Michael Ramey

Michael Ramey

Principal

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