First of two parts: Board’s Role in Mergers and Alliances — The 7 questions boards always ask

First of two parts
Board’s Role in Mergers and Alliances: The 7 questions boards always ask

Just as in the early 1990s, hospitals and health systems are seeking advantages of size and scale to prepare for the uncertain but undoubtedly difficult aftermath of healthcare reform. Last week, Modern Healthcare reported that Central Connecticut Health Alliance, a 330-bed hospital with two campuses, has signed a memorandum of understanding with Hartford (Conn.) Healthcare to become the system’s fourth hospital. Earlier, two major Dakota health systems — Sioux Falls, S.D.-based Sanford Health and Fargo, N.D.-based MeritCare Health System – announced plans to merge. Modern Healthcare says 28 deals were announced in the first half of 2009, according to Irving Levin Associates, Norwalk, Conn.—but “a spate of announcements” has come since July 1, signaling heightened interest.

Sometimes alliances rather than mergers are the best match to achieve strategic goals. In May, 19-hospital Banner Health, the largest not-for-profit system in Arizona, announced a partnership with the prestigious University of Texas M.D. Anderson Cancer Center in Houston, to build a $90 million outpatient clinic and cancer hospital at one of Banner’s suburban hospitals.

Approval of a merger or major alliance is clearly a governance responsibility. I’ve had several clients ask about the best approaches to facilitating the board’s involvement in a partnering process. I advise them that there are seven questions that boards always ask, and which require their engagement to reach the best answers:

1. Why are we doing this? The rationale must have a strong fit with the mission and the strategic vision. It must fill critical gaps – e.g., capital, geographic scope, clinical integration, administrative efficiencies. The financial and market share benefits should be quantified, not just rhetorical. In addition, why is this partner the right one? Have we looked at all the options?

2. What’s the best corporate structure? A range of structures, from full asset mergers to joint ventures to clinical affiliations and more –can be used to gain the benefits of combining organizations. Boards should be educated in the range of options and weigh in on the one that’s best suited to achieve the strategic intent of a deal.

3. How will the authority of our board be affected? Hospital boards often don’t want to sacrifice autonomy but consolidations often fail when the governance structure impedes a tough but necessary strategic or final decision (case in point – the recent breakup of Health Alliance in Cincinnati). Failure to choose a sustainable governance model can doom a new system from the start.

4. How will board members be chosen? Current board members may want to preserve their seats but the most successful systems minimize representational governance in favor of competency-based board composition. Getting the “right people on the bus” can make or break eventual success.

5. Who will be CEO? Boards understandably want to protect their CEO, but co-CEO models rarely work. The management succession process should be clearly laid out in advance. Current executives should be treated fairly, and the resulting organization should have strong leadership to get the job done.

6. What will happen to our most treasured facilities or programs? Sometimes specific protections are appropriate to include in an affiliation agreement, sometimes not, and sometimes it’s agreed super majorities will be necessary to close facilities, integrate clinical product lines, or divest assets. It all depends and requires candid discussion.

7. Is it legal? FTC is displaying renewed interest in the anti-trust potential of hospital mergers. Boards will want to know in advance if there’s a good case to be made to federal and state regulators.

Of course, there will be other many other issues specific to each deal. Mergers and alliances with Catholic systems pose particular challenges. But these seven questions must always be addressed up front.

In Part II next week, I’ll discuss how soon and how much to engage the board, including the most common steps for board involvement.