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Merge/Affiliation Strategy – Checklist

In April I wrote a post regarding mergers and affiliations in health care – hospitals and senior living. As demographics shift, reimbursement and health policy dynamics change, organizations continue to evaluate the benefit of remaining independent or developing strategic partnerships via affiliation or merger. Size and scale are not the lone determinants as we have seen via large hospital system affiliations. In my post I noted the affiliation upcoming between Froedtert/Medical College and Theda Care, both large hospital and physician group systems in eastern Wisconsin (Milwaukee to Fox Valley). Both had market presence sufficient to remain independent yet each saw trends and possible synergies that suggested an opportunity to partner was more advantageous to their respective missions than remaining independent. Was longer term survival for each and issue, not necessarily. Was longer term growth and market development a bigger issue? More than likely. This is the essence of merger/affiliation strategy. The April post is here: https://wp.me/ptUlY-tH

For non-profits, sales or acquisitions of the primary parent are difficult and complex. A non-profit can readily acquire a for-profit organization rather simply but being acquired creates different tax implications and liquidation of the net purchase proceeds into some charity or range of charities. The dissolution of a non-profit is not an event where owners or individuals are beneficiaries of the sale. The final beneficiary or beneficiaries are charities, likely pre-named in the original organizing documents or an updated version thereof. As mission is the primary driver of why the non-profit provider organization exists, outright sales are uncommon. Mergers/affiliations that don’t produce a purchase price whereby cash (or similar) is exchanged is the preferred methodology for changes in control or quasi-collaboration such that acquisition does not occur.

My strategy framework applies basically to non-profits whereby, the approach is not outright a purchase of assets (acquisition). This is not to say that elements of a common acquisition don’t occur such as change of governance and ultimate control perhaps, of subsidiary organizations and goodwill elements such as name, brand, certain contracts, etc. This is why readers will note that my strategy framework contains similar elements to an acquisition strategy.

The worksheet for analyzing and conducting a merger or affiliation is attached here.  It is free to download, circulate, and of course, use or reference.  Merger Affiliation Worksheet

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June 6, 2023 Posted by | Health Policy and Economics, Uncategorized | , , , , , , , | Leave a comment

Merge/Affiliation in the Cards?

I pay close attention to economic trends and to the health care industry in general, as the same are applicable. One trend I’m watching quite closely is business consolidation and mergers/affiliations. In the general economy, a lot of consolidation is occurring post-pandemic. Restaurants are closing outlets (Red Lobster, Krispy Kreme, Burger King, etc.), retail outlets too like Bed Bath and Beyond and even, Wal Mart are closing stores in various locations. The drivers? Simplistically, supply chain issues (increased costs and inability to pass along the same via price) and labor costs plus worker shortage. There is another driver in some closures and that is environment as restaurants and retailers are leaving communities with high-crime and homelessness as they simply cannot generate a sustainable retail climate amidst theft (inventory loss), customer erosion (customers staying away from certain locations, etc.). Whole Foods leaving San Francisco is an example.

Health care and senior living/housing are not immune to these same pressures. Labor is a huge issue facing all providers today. Changing environment, particularly for urban providers is an issue. Supply chain issues and supply costs are additional motivators or drivers. And let’s not forget the impact of COVID (yet to totally abate in health care and senior living) and increasing regulatory costs. Below are some examples of consolidation and affiliation moves that I have seen recently.

  • Diversified Healthcare Trust (REIT) merging with Office Properties Income Trust. This is really an access to capital play as Diversified is constrained from refinancing debt due to covenants. It has a pretty large capital need to improve its senior living facilities (primarily IL, AL and CCRC). Like most REITs with senior living holdings, the occupancy levels remain below targets/desired levels.
  • Good Samaritan Lutheran/Sanford is offloading a large amount of skilled nursing facilities and other senior living centers across 15 states (primarily western states). Good Samaritan was the second largest chain provider of senior living.
  • Sanford, which merged with Good Samaritan, is in the process of affiliating with Fairview Health. Fairview includes Ebenezer (senior living) which, is the largest non-profit manager of senior living projects in the country.
  • Theda Care health system in Appleton, WI announces an affiliation plan with Froedtert/Medical College of Wisconsin health system. The two, primarily hospital and clinic-based organizations will offer services along with locations throughout the eastern corridor of WI, primarily Milwaukee metro area and the Fox Valley area (Appleton and Green Bay as the metro reference).

Looking at the press releases and then, reading other disclosure information and knowing players in each of these scenarios, a similar series of factors are driving the affiliation/merger/consolidation activity. Not surprising, these factors are not unique to health care/senior living. They are the same factors in many cases, driving decisions across all businesses/industries.

  • Labor availability and cost. Affiliations and outlet reductions reduces labor cost and vulnerability to staff shortages.
  • Stagnant volumes and revenue shortfalls. Senior living is not back to pre-pandemic occupancy levels and frankly, while the trend is improving, it could be a while before we see pre-pandemic occupancy levels.
  • In the case of senior living, further movement toward home and community-based care options is eroding demand. This means, provider capacity is impacted. Closing outlets or selling them to more localized providers such as the case with Good Samaritan, make sense. Local providers have inherent market advantages that large, national or regional players simply don’t have.
  • Supply chain improvements are possible with a larger platform though by experience, they are not as large and impactful as often forecasted. Single-source buying is good and can achieve discounts but often, the reliance on one source may challenge quality targets and innovation. I’ve seen this definitely occur with food and food service supplies.
  • Overhead reduction is the biggest gain or biggest possible gain. Reducing management layers and consolidating overhead functions can cut millions of dollars of duplicative positions. In really good mergers/affiliations, bureaucracy is also reduced netting more efficiency and better care/service. This however, comes over time.
  • Access to capital can improve as scale improves. In other words, larger organizations have more opportunities and outlets to raise capital when needed, especially if the scale achieved is margin positive.
  • Increased market share and increased market opportunities can occur. For example, in the case of the Theda Care and Froedtert affiliation (if it closes), both systems get access to new markets via their affiliation and new customers without having to “build new” or “start new”. New building and starting new locations/outlets is expensive and time consuming. Leveraging the business footprint with a synergistic partnership is much faster and in theory, less expensive.

More mergers/affiliations to come?  No doubt.  While the economy is moving toward a recession and labor remains challenging, providers will have to look toward possible strategic opportunities that include adding services, becoming more efficient, building/improving capital access, and accommodating rising costs without concurrent increases in reimbursement or additional rate.  Affiliations make sense for some providers, especially when selling is not a real or viable option (non-profits). 

I’ll provide a merger/affiliation strategy document/post soon!

April 12, 2023 Posted by | Assisted Living, Health Policy and Economics, Home Health, Hospice, Policy and Politics - Federal, Senior Housing, Skilled Nursing | , , , , , , , , , , , | Leave a comment