|By Joshua A. Nemzoff
The scenario is all too common: Your hospital - not the dominant
provider - is one of several operating in a competitive market.
Market share and financial performance are eroding. The
competition is calling to see if you want to sell or merge. You
tried joining a network but ended up with more volume and less money
because the managed care rates were so low. Management and the
medical staff are pointing fingers at each other. You are losing
managed care contracts, and your fellow board members are discussing the
idea of hiring a turnaround expert. Management has tried
everything and still believes the hospital will turn around. The
situation doesn't look good.
At some point, no matter what you're hearing from management and outside
advisers, it is your fiduciary responsibility to make a fundamental
decision: Can you survive as a stand-alone facility? If the
answer is no, you need to begin a process you have probably never
undertaken, and one about which you may know very little. At this
point, a discussion of some key merger and acquisition concepts may be
The primary reason hospitals do not merge or sell is that they are not
willing to give up control. The board sees a sale or even a merger as a
loss of control and an admission of failure; they are letting down the
community, the medical staff and the employees. The thought of selling
out to the hospital with which they have been competing for years is a
difficult one to face.
The fact of the matter is, if you don't think you're going to survive on
your own, you can give up control now or you can give up control later.
Either way, eventually you will lose control.
Merger versus sale. As the "weaker"
hospital, if you think you can maintain control or even maintain 50
percent of the new board slots, think again. If you have a 15 percent
market share along with the problems just discussed and are thinking of
merging with a competitor who has 35 percent of the market and none of
these problems, it is highly unlikely they will agree to a 50/50 merger.
You will undoubtedly end up with a minority position on the board -
i.e., loss of control. You can call it a merger to make it more
palatable to all parties involved, but when you get five out of 20 seats
on the new board, you have "sold" your hospital, and the other party
should be considered a buyer.
Networks/affiliations are primarily a defensive strategy to deal with
managed care. They are very effective in markets in the early stages of
competition. They do not, however, resolve many of the problems a
hospital faces in a highly competitive market. In fact, there are many
examples of networks/affiliations falling apart rapidly as soon as
consolidations occurred in competitive markets.
Conflicts of interest.
Loss of control affects all levels of the organization, not just the
board. Your administrative team may see a merger or sale as a potential
loss of their jobs. Your accountant may lose the audit. Your legal
counsel may lose its retainer. Your chief of staff may not be the chief
of staff in a combined entity. In short, most of the people advising you
don't have much of an incentive to tell you that you should consider
selling the hospital or merging with the competition.
Conversely, if they are telling you to do so, you should listen very
carefully to what they say; they're probably right.
Consolidation. The fixed costs of
operating a hospital are extremely high. As in any business, when you
combine two hospitals you are going to save a significant amount of
money. Merging your hospital with the competition doesn't mean they can
run it better than you can. It means they can realize the substantial
benefits of consolidation.
In addition, since the majority of costs in a hospital are
labor-related, you are going to have to deal with the "L" word -
layoffs. If you sell your hospital, people will lose their jobs.
However, if you don't survive, all will lose their jobs.
Experience. If you're thinking of
consolidation, make sure the people selling your hospital are working
for the board and have a significant amount of experience in hospital
merger and acquisitions. If you do not proceed with an experienced team,
you will exacerbate the problems - and potentially ruin your
Confidentiality. Announcing that your
hospital is for sale is tantamount to signing its death warrant. The
exodus of management, employees and medical staff will occur
immediately. Employee morale will drop within 24 hours. Your CEO will
have his or her resume on the street within a week, and the press and
community leaders will be involved immediately. The need to keep a sale
confidential is extremely important.
Decisional paralysis. When a hospital is in trouble,
everybody has an opinion about how to resolve the problem. Trustees get
advice from lawyers, management, the medical staff, accounting firms,
etc. With all of these opinions, combined with a general sense of panic
due to the rapid deterioration of the situation, it is typical for
trustees to get into a situation where they don't know what to do. As a
result, they do nothing. Psychologists call this an avoidance-avoidance
decision. When faced with two unpleasant choices, most people will
Public hospitals. Tax-supported
hospitals have unique problems relative to selling their hospitals.
First of all, they typically operate "in the sunshine," which makes
confidentiality a problem. Although there are ways to deal with this
issue, keeping a transaction secret is virtually impossible for most
In addition, public hospitals must confront legal and moral issues
involved with the ongoing care of the indigent population. Most, if not
all public hospitals, have an obligation to care for the uninsured. They
are not absolved of this responsibility based on a sale of the
hospital. Therefore, they must provide for their care through some type
of insurance product or force the buyer to assume this responsibility.
Finally, the sale of a public hospital literally takes place in the
press. All of the key meetings of the board are heavily attended by the
public and the press. The transaction receives heavy media attention,
and board members who live and work in the community have to deal with
substantial personal pressures.
The sale of a public hospital is one of the most difficult transactions
to complete and requires an experienced transaction team. However, when
they are done properly, these sales can provide enormous benefits for
taxpayers and the indigent populations alike.
What to do. Given the issues described above, the following
is a checklist of steps that must be taken in order to successfully
complete a sale or merger:
Make a decision. The most difficult step is the first - the actual
decision to sell or merge your hospital. The best way to make such a
decision is to have a meeting of the executive committee of the board,
or if the board is a small one, the entire board. the meeting should be
extremely confidential: no pre-announced agenda, no minutes, no
physicians, no lawyers, just board members and the CEO. An experienced
merger and acquisition (M&A) expert - one who can serve as project
director, lead you through the decision process and review the options
available - should also attend. Remember: The decision to sell is
yours. The purpose of the project director is to tell you how to do it.
Select a project team. The team should consist of the project
director, an experienced transaction lawyer, a health care antitrust
expert and two board members. In exchange for the CEO's assistance and
confidentiality, some sort of golden parachute should be arranged at
this point. Under no circumstance can the CEO be left unprotected
(unless he or she is part of the problem), nor can the lead negotiator
report to the CEO. The relationship must be directly with the board.
Prepare a confidential memorandum. The confidential memorandum (CM)
is a document that contains a general description of the hospital's
services, market share and financial position. It is very similar to
the type of data that you see in a financial feasibility study, but
without the forecasted utilization/financial data. The purpose of the
CM is to provide sufficient information to prospective buyers for them
to decide if they want to proceed with the submission of a bid.
Prepare a bidder's list. Bidders are selected from a group of
potential local market buyers as well as from a national search
conducted by the project director. Bidders are screened based on
financial qualifications, management ability and antitrust criteria. If
the bidder can't afford to buy the facility, or if there is a
substantial risk that the transaction will be challenged by the
Department of Justice or the Federal Trade Commission, these bidders
will be eliminated.
The competitive bid process is used to obtain the best terms as well as
to satisfy the fiduciary responsibilities of the board to sell the
assets of a not-for-profit corporation for fair market value. Although
a fairness opinion can satisfy this responsibility, it is not necessary
if a competitive bid is used.