Guest Blog by John Gilchrist on Hospital M&A Activity
The increase in hospital merger and acquisition (M&A) activity creates many consequences, both known and unknown. Generating greater economies of scale for purchasing, payor contracting, and physician recruitment are just a few of the known ramifications. One large unknown is what happens to a hospital’s fundraising foundation. With over 4,500 US nonprofit hospitals and many of those with a fundraising function, both the acquiring and acquired organizations need to understand these consequences, beyond the legal transactional considerations.
The foundation of the acquired hospital may have hundreds, perhaps thousands, of loyal and dedicated donors. The combined gifts of these friends of the organization may range in the seven to nine figures. Many of these foundations have built deep, meaningful and productive relationships with community members. What happens to these relationships in a M&A situation? Perhaps the foundation’s fund corpus is not significant relative to the dollar value of the combined organization. A 2013 Advisory Board report indicated philanthropic revenue accounted for approximately 42% of available hospital capital. Too often, the foundation is a back-burner issue, if it is even at the strategy table. The relationships within a community can be a powerful ally to a hospital seeking approval in its merger efforts – if the benefits are communicated early in the process to these donors.
This series explores the inner working relationship between a hospital foundation and its parent during a sale. The author, John Gilchrist, FAHP, CFRE, has lived through one nonprofit sale and is experiencing a second sale. His insights into this process can prove to be excellent counsel to an organization going through a merger or acquisition.
M&A Activity Likely to Continue in the Non-Profit and For-Profit Hospital Sector
Hospital mergers and acquisitions (M&A) are occurring at a rapid pace and many more active discussions are happening in hospital boardrooms across the nation. The PWC 2nd quarter 2014 Health Services Deals Insights report states M&A activity is likely to continue in two largest components (non-profit and for-profit) of the US hospital sector. 87% of US hospitals are at least considering some form of alignment with other hospitals or hospital systems (DHG Healthcare Winter 2013 – What Hospital Executives Should Be Considering in Hospital Mergers & Acquisitions).
This series of reflections is not meant to be offered nor construed as any professional advice. I seek to share the experience of going through a non-profit hospital sale as it pertains to its related fundraising foundation. My hope for the reader is to increase awareness of the possible ramifications of this scenario in the accountable care organization (ACO) era.
One can imagine the feeling of a 6:50 a.m. call on January 13 for a mandatory senior management meeting at 8 a.m. The CEO informed us the hospital system would announce later that day of its intention to sell the system, in whole or in parts, to any qualified buyer. The reasons were many, but they centered on size, scope and essentiality. Size relates to a system’s ability to secure low cost capital and to extract best pricing from suppliers, among other factors. Scope focuses on care integration to reduce costs and improve quality – hardly an impossible task with sufficient resources in clinical documentation and utilization management tools, for example. Essentiality addresses market share vis-à-vis the competitive market. In order to negotiate appropriate reimbursement from managed care networks (MCN), the healthcare enterprise must have sufficient patient and provider market share in the community. If your enterprise can not reach an agreement with a MCN, the MCN must feel as much (perhaps more) economic pain as the enterprise in the absence of a contract. At that threshold real negotiations and genuine compromise can occur and lead to a livable agreement.
The announcement signified the beginning of extreme change for the hospital Foundation, its donors, board members, and especially you, the Foundation leader. Your professional life has just been turned upside down. One finds oneself asking questions like:
• What happens during the sale process?
• What if no qualified buyer is found? Is a Chapter 11 bankruptcy filing possible? Hospital closure?
• What economic signs were missed?
• What do you tell donors? What about the donor who just 13 days ago made his largest gift – a significant six-figure gift – ever?
• Will the hospital, and foundation, have to conduct layoffs?
More questions will follow in the ensuring days and weeks. Two suggestions: 1) Make sure you have a voice in the development of the post-announcement communications materials. 2) Address the implications for existing Foundation funds.
Consider this statement as your source of strength in these meetings: Donors embody a group of highly passionate supporters of your enterprise – you might be the sole representative of their interests.