Tightening Medicare and Medicaid reimbursements, reforms in the payment system, costly information technology investments and access to capital are among the factors driving independent hospitals to explore affiliations or mergers. Add on top of those forces a physician shortage that makes it harder to recruit doctors, and Brian Peters of the Michigan Health & Hospital Association sees the trend only intensifying.
“As we attempt to read the tea leaves and look at all the pressure points out there, the trend is going to accelerate and there’s no turning back,” said Peters, the MHA’s executive vice president for operations. “You’d be hard pressed to find a hospital in Michigan where the board hasn’t at least teed up this question.”
The number of small, community hospitals in Michigan has steadily declined for years, Peters said. About 100 of the MHA’s 137 members are now part of a multi-hospital system. He said he expects small, community hospitals to become a “very small minority” in the years ahead.
The West Michigan marketplace alone has seen a number of consolidations in recent years, beginning with the 2008 merger of Hackley Hospital and Mercy General Health Partners in Muskegon to form Mercy Health Partners.
Zeeland Community Hospital and Gerber Memorial Hospital in Fremont in 2010 became part of Spectrum Health in Grand Rapids. Last year, Bronson Healthcare Group acquired a majority stake in Battle Creek Health System. Community Hospital in Watervliet merged into St. Joseph-based Lakeland HealthCare in 2010.
Outside of the region, Flint-based McLaren Health System bought the bankrupt Cheboygan Memorial Hospital in May and Marquette General Hospital in June signed an acquisition agreement with Duke LifePoint Healthcare, based in Brentwood, Tenn.
The largest deal in the state came at the end of 2010 when Vanguard Health Systems acquired Detroit Medical Center.
The DMC and the Marquette deals both involved for-profit acquirers in what has traditionally been a not-for-profit state, a scenario that Peters calls a potential “game-changer.”
Attorney Larry Burns, a partner and chairman of the health care practice at Varnum LLP in Grand Rapids, sees more for-profit involvement coming in the consolidation trend, through private equity investments and for-profit systems seeking to expand.
Although buyers tend to commit to the mission of an institution it acquires, how the migration of for-profit entities into the mix may affect the charitable missions and outreach of not-for-profit providers “remains to be seen,” Burns said.
“The need to satisfy your shareholders and turn out a profit becomes a big deal,” Burns said. “How it meshes with a nonprofit mission is hard to tell.”
Burns said the present industry dynamics are making it much harder for hospitals to remain independent and not at least look at some form of affiliation with a larger system, although they do not necessarily need to merge or sell.
“Boards that are doing their jobs are going to look at these kinds of opportunities,” he said. “They will need a partner to help them stay viable and on the cutting-edge as best they can.”
In weighing its future, Memorial Medical Center retained Juniper Advisory in Chicago to serve as an adviser on possible partnerships. Juniper Advisory will present options to directors during 2013.
Given the pressures the industry dynamics now place on hospitals, especially small facilities, directors at Memorial Medical Center felt the need to examine a potential partnership, President and CEO Mark Vipperman said.
Directors are “doing our due diligence to see if we can best serve the community as an independent hospital or as part of an integrated model,” he said. “We’re talking about how are we going to serve future generations.”
The 87-bed hospital will issue a letter of offering that seeks ideas from interested prospects on how they would fashion a potential partnership, Vipperman said. He expects to see “a pretty extensive list of systems we’ll reach out to.”
Directors at Memorial Medical Center go into the process without any preconceived notions about how it may end, Vipperman said. Potential scenarios range from an acquisition or merger, to a joint venture or affiliation, and even maintaining the status quo as an independent hospital.
The board of directors intentionally left the process broad to “explore all the possibilities for our community,” Vipperman said.
“There’s a whole continuum of relationship opportunities. We’re not limiting our thinking right now,” he said. “We don’t want to miss an opportunity by narrowing our thinking on the front end.”
The move comes as Memorial Medical Center’s finances remain in good shape, board chair Al Deering said in a statement. Given the changes that are driving consolidation, directors decided now was the best time to examine a possible partnership while the hospital is in good financial shape.
“To do so if we were in trouble would not be advantageous for the hospital or the community,” Deering said.
Nationally, the consolidation trend among hospitals has been occurring for several years and accelerated in the last few. Data compiled by Deal Search Online shows 590 takeovers between 2002 and 2011. There were 86 deals for hospitals in 2011, up from 75 in 2010 and 55 five years earlier.
Although the trend is accelerating, there’s no guarantee a hospital seeking a suitor will find an easy go of it.
Just as directors at the small hospitals need to go through an extensive due diligence, health systems also need to assure that any organization they’re picking up is a good fit based on their potential expansion into a geographic market and their financial position, Peters of MHA said. Small hospitals that offer both to a potential partner may have better options from which to choose and the ability to get better terms from an acquirer.
“There’s a similar vetting process that’s going on on the other end of this as well,” Peters said.
Spectrum Health, which has grown its footprint through alliances and acquisitions, generally views any potential deal from the perspective of what it brings to the system.
“We only consider these kinds of partnerships and strategic alliances when they make strong sense for both parties. We never shut the door on anything, but we’re not looking to have anybody join our organization for just growth’s sake,” Spectrum Health spokesman Bruce Rossman said.