The depressed economic climate in 2009 led some hospitals to seek out opportunities for affiliation arrangements with other facilities, and sometimes even for mergers.
It’s difficult for small to mid-sized hospitals to compete against larger health systems in many markets, and Mark Grube, a partner at Kaufman Hall, said his firm saw an increase in hospital mergers since the middle of last year, although M&A activity reached “another level” after the financial crisis.
“The industry was ripe for consolidation,” Grube said. “The stand-alone organizations and smaller systems have been hit hard. Weaker organizations may have been pushed into consolidation by the economy, but stronger stand-alones are thinking they might be better served by linking with other organizations.”
A 2009 survey by Noblis Health Innovation found nearly a third of hospitals were “much more interested” in affiliation than in 2008.
According to the survey findings, interest in affiliation was highest among organizations with existing affiliations or organizations with deteriorating operating margins.
“We have observed an increased interest among our clients in exploring affiliation options,” said Kathleen Henchey, principal at Noblis Health Innovation, a non-profit advisory firm.
According to Henchey, 90 percent of surveyed organizations with existing affiliation relationships have break-even or better operating margins, while only 65 percent of the unaffiliated are in the black.
“Hospitals are walking a tightrope, trying to balance the growing needs of their communities with today’s economic challenges,” said Rich Umbdenstock, president of the American Hospital Association.
One example of a 2009 merger involved the Prince William Health System of Manassas, Va., and Novant Health of North Carolina. Both organizations are not-for-profit health systems.
Prince William Health System is a small system that included a 170-bed hospital, while Novant Health is a large integrated delivery network of more than 1,000 physicians and 372 practice locations.
The challenges of being a single-hospital system in a tough economy likely drove PWHS to look for a merger opportunity with a deep-pocketed partner.
Potomac Hospital, another facility in the same area of northern Virginia, also saw the economic writing on the wall, and moved to merge with Norfolk, Va.-based Sentara Healthcare.
“These past few years have been a period in which many hospitals, including Potomac, have experienced economic difficulties,” said William Moss, the retiring president and CEO of Potomac Hospital.
Potomac, a 183-bed facility in Woodbridge, Va., hoped the merger with the larger health system would boost access to cutting-edge medical technology, making the hospital more competitive in the suburban Washington, D.C. market.
“A partnership with Sentara is important for Potomac Hospital’s future,” said Marion Wall, chairman of the Potomac Hospital Foundation board of directors. “By relieving some of the recent economic pressures that hospitals like ours have been experiencing, we can better ensure that Potomac will continue to provide … a source for expert healthcare.”
Yet even in tough economic times, some health systems saw growth opportunities in 2009.
Methodist Health System in Dallas, Texas, embarked on a series of aggressive expansion projects – including construction of a $60 million, 32-bed orthopedic hospital in Addison, Texas – that may appear stunning to an industry that has had to scale back capital projects in the face of recession.
The health system is also building a $38 million, 60,000-square-foot hospital in McKinney, Texas, and completed work on the second phase of a new $37 million Mansfield, Texas, hospital.
Perhaps Methodist’s success is a harbinger of the future. Indeed, by late fall, the consulting firm Thomson Reuters reported that hospital financial performance had recovered to pre-recession levels.
“U.S. hospitals are on track to come out of the recession in better financial shape than they were in when the downturn began,” said Gary Pickens, chief research officer at Thomson Reuters. “When we published our first analysis of hospital economic health in the fall of 2008, hospitals were facing unprecedented economic stress and staring down a real crisis. Now, by taking aggressive measures to reduce costs, the majority of hospitals are positioned for a strong recovery.”