Getting Your Feet Wet: Small Hospitals Should Move Cautiously Before Taking the Plunge Into a Larger Health Care System.

Todd C. Brower There are a number of reasons small independent hospitals contemplate joining larger health care systems: additional resources, such as greater access to capital; advanced technology; administrative expertise; and so forth. Oftentimes, however, a decision to join a system arises from a hospital's concern about its continued viability. Regardless of the reason, joining a system comes with a price. Making the right decision requires appropriate due diligence and a clear vision of the hospital's goals and objectives.

At the outset, a small hospital should keep in mind the strip mall analogy. When building a strip mall, developers always have an anchor store—the prime tenant and the one the developer is most concerned about. Without the anchor store to maintain the profitability at that location, the success of the entire strip mall is jeopardized.

The same holds true in health care systems. When a larger system brings in a smaller hospital, there will already be an anchor store—the hospital (or hospitals) the system is going to protect when things go bad. If the system becomes financially distressed, more likely than not the anchor store is going to be protected, even if it is at the expense of other hospitals within the system. It is not uncommon for the larger system to begin consolidating operations and shutting down the smaller hospitals. If the smaller hospital is going to join a larger health care system, it needs to protect itself from such an event by conducting thorough due diligence up front and negotiating a relationship that makes it an integral part of the system.

Due Diligence the Right Way
No matter how much a small hospital wants to do the deal, it should never cut corners with due diligence. Money spent on due diligence is money well spent, provided it is conducted correctly.

It is imperative that managers select the right due diligence team. A common mistake is to automatically turn to the hospital's accounting or auditing firms. These firms may have excellent reputations for accounting and auditing purposes. However, due diligence is much more than that. The hospital needs a multidisciplinary approach—a review of the larger system's operations, technology, medical staff and quality scores, for example. While the due diligence team will by necessity include persons with the appropriate financial expertise, it should also include lawyers; health care planners; and individuals with operational, medical, nursing and technological expertise.

The due diligence team must be able to ask the hard questions and be willing to tell managers if the deal is not right for the hospital. They cannot do an effective job if they approach their work as though it is already a done deal.

Maintaining Community Presence

One of the greatest attributes of a small hospital is that it serves the particular needs of its community. When joining a larger system, the smaller hospital will lose a certain amount of autonomy. Significantly, it will most likely be controlled by a parent corporation, which is focused on the system as a whole and not necessarily the unique needs of the community served by the smaller hospital. Accordingly, the small hospital not only has to understand that going in but, more importantly, must also define and negotiate its most important objectives before joining the system.

For example, if the smaller community hospital specializes in a particular service that is sorely needed by the community, it should negotiate protections for that service. Likewise, if the system has resources to enhance that particular service, the smaller hospital should make sure those resources are guaranteed for its operations. The smaller hospital's ability to get what it wants is always a question of negotiating strength; but if the smaller hospital cannot guarantee itself the benefits of joining the system, then it should probably be looking at a different system.

Of course, even if the hospital preserves some local autonomy, the parent corporation will nonetheless reserve for itself certain powers over the smaller hospital. It is essential to understand the scope of those powers. Sometimes the reserved powers are so extensive that they render the smaller hospital impotent, and managers can no longer react quickly to address situations. The need to keep a substantive level of control should be at the forefront when negotiating the deal.

Continuity of Management

The parent corporation's reserved powers will most likely also include the ability to replace managers. Sometimes there is a need for change, but oftentimes a wholesale replacement of the management team can seriously disrupt operations and adversely affect employee morale.

Managers must identify the key individuals to continue in their positions after the deal is done. Since this can be a contentious issue, it needs to be negotiated up front. Appropriate protection by way of severance and other benefits should be in place to protect the key members of the management team from leaving or being terminated without cause.

Don’t Forget the Medical Staff
One of the most common mistakes a small hospital makes when joining a system is the lack of consideration for, and participation of, the medical staff in the process. Hospital managers see a system merger as the business of management and forget the significance of their key constituent—the medical staff. Sometimes talks are well under way before the physician leaders are even brought into the picture, causing resentment and forcing managers to fight a two-front war—negotiating the deal while making amends with the medical staff. Joining a system should be part of a strategic plan, and the strategic planning process should always include physician leaders.

Managers may see a merger as a plus for its physicians—access to more expansive services and equipment or perhaps the opportunity for its physicians to practice at larger system hospitals. While that may all be true, what managers sometimes fail to take into account is the "big fish in a small pond" effect: The physicians in the smaller hospital have greater influence over the hospital and the operation of the medical staff than they will have in a larger system. In other words, the medical staff has the same concerns related to maintaining local control as managers do. It is essential that managers work with the physician leaders to address these issues while negotiating the deal before joining the new system.

While there is much more that goes into the process, these are key points to consider when contemplating joining a larger system. Perhaps the single most important consideration is to approach the merger with an open mind and the understanding that a larger system may not be the answer. Moreover, the work doesn't end when the deal is done. Managers must hold the new system accountable to realize the benefits they negotiated when joining the larger system.