Can We Remain Independent?

One of the most common questions we hear from hospital and health system boards is whether their organization can remain independent. For many organizations, particularly financially strong ones, the answer is clearly yes. But whether a system “can” remain independent is not the question boards should be asking. Financial strength establishes that independence is possible, not necessarily preferable. The more important question is whether independence best supports the organization’s mission and objectives.

There are many good reasons to affirm independence. Standalone organizations can move quickly, maintain entrepreneurial cultures and preserve close relationships among physicians, employees and senior leadership. A physician with a large capital request may be able to walk into the CEO’s office and get an answer before the next committee meeting is scheduled. Above all, many independent organizations simply perform very well. If quality, service mix, physician recruitment and the organization’s ability to invest are all strong, there may be little reason to change a structure that is working.

The problem arises when financial capacity becomes the principal rationale for independence. Margins, liquidity and debt capacity matter, but they are imperfect measures of mission performance. Which organization is stronger: System A, which posts a 4% operating margin after closing its obstetrics services and outreach clinics, or System B, which breaks even but still provides those services to its community? If System A made those closures to protect the margins it needs to remain independent, it is worth asking what, exactly, independence was protecting.

Boards should also consider how operating without scale can divert resources from their missions. Recent combinations of large health systems provide an unusually clear example of the hidden costs of independence. Systems that were already among the country’s largest and most sophisticated, and that pooled their buying through group purchasing organizations, have reported hundreds of millions of dollars in annual supply savings after combining. If systems of that size can still find savings of that magnitude by combining, the cost to smaller hospitals and systems is easy to imagine. The hospital industry remains remarkably fragmented while nearly all of the organizations sitting across the negotiating table are anything but.

Independence may well be worth the cost of this weakened negotiating position, but boards should understand what they are paying for it. Dollars lost to weaker purchasing leverage become supplier profit rather than support for a nonprofit health care mission, whether that means sustaining a service line, recruiting physicians or expanding access in underserved communities.

The benefits of scale extend beyond purchasing. Within a larger system, one organization may bring decades of experience with clinical integration while another has built a leading hospital-at-home or virtual care program. A program that works in one market does not have to be independently rediscovered, rebuilt and debugged in another. The same is true of clinical protocols, research infrastructure, technology and the specialized talent that increasingly require scale to sustain.

Perhaps the most important test is whether independence supports the organization’s ability to provide the services its community needs. Board members often worry that joining a larger system will turn their facilities into “Band-Aid stations” as complex services move to a tertiary hub or, in rural communities, that a system partner will be less committed to services like obstetrics. Juniper’s research has found the opposite on both counts. Community hospitals that belong to systems have higher case mix indexes than comparable standalone hospitals, an indication that more complex care is being delivered locally rather than sent elsewhere. Further, rural hospitals in systems are more likely to offer obstetrics than their standalone peers.

That does not mean systems never close services. They do. But independent organizations make difficult economic and clinical decisions as well. A standalone organization may ultimately conclude that closing a service and remaining independent is the best available alternative. The important thing is that the board reaches that conclusion after understanding the alternatives, including whether a partner could help sustain the service and what other tradeoffs a partnership would bring. Independence should not become the reason an organization accepts lower access, weaker capabilities or a diminished role in its community. It should be affirmed only when independence has been shown to be the best way of advancing the organization’s mission.

Boards can put this into practice in three ways. First, define mission performance in measurable terms, such as access, quality and the services the community depends on, before evaluating structure, so that independence is judged by how well it serves the mission rather than treated as an end in itself. Second, test independence against realistic alternatives periodically, while the organization is strong and has choices, rather than only in a crisis. Third, ask directly what services, capabilities or investments have been deferred or given up to preserve independence. If a partnership is on the table, the same discipline applies to its terms: boards should understand what commitments a partner is prepared to make on local services, capital investment and governance.

None of this is an argument that larger systems are always preferable. Scale creates the capacity to lower costs, share capabilities and sustain services, but it does not guarantee that a system will use it that way. Growing for the sake of growing is no more defensible than remaining independent for the sake of independence. Financial strength can preserve the option to remain independent, but it should not determine the answer. Rather than asking, “Can we remain independent?” boards should ask whether independence best positions the organization to meet the needs of its community and fulfill its mission over the long term.