Can We Remain Independent?

Jordan Shields, Partner

One of the most common questions we hear from hospital boards is whether their organization can remain independent. For many hospitals, 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. Independent 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. Most importantly, 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 hospital is stronger: System A with a 4% operating margin that closed obstetrics services and outreach clinics, or System B that is breakeven but still provides those services to its community? If System A closed obstetrics and its outreach clinics in order to protect the margins necessary to remain independent, it is worth asking what, exactly, independence was protecting.

Boards should also consider what independence may cause them to forgo. The Advocate Aurora Health and Atrium Health merger provides an unusually clear example of the hidden costs of independence. Both were already among the largest and most sophisticated health systems in the country, participated in Premier and were receiving favorable supply pricing. Yet after combining, Advocate reported more than $500 million in annual supply savings. If two of the country’s twelve largest hospital systems could find hundreds of millions of dollars in supply savings by increasing scale, the hidden costs for smaller hospitals are 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. Advocate found $500 million flowing each year into the yachts, private jets and vacation homes of its suppliers that could instead support its healthcare mission. Those are meaningful dollars for a nonprofit system now making a $1 billion investment to expand access in underserved communities on Chicago’s South Side.

The benefits of scale extend beyond purchasing. Advocate brought decades of experience with clinical integration, while Atrium had developed one of the country’s larger Hospital at Home programs. A successful program developed in one market does not have to be independently rediscovered, rebuilt and debugged in another. The same applies to clinical protocols, research, virtual care and other capabilities.

Perhaps the most important test is whether independence supports the hospital’s ability to provide the services its community needs. At Juniper, we have studied obstetrics at rural hospitals, where a common concern is that joining a larger system will result in services moving to a hub and the local hospital becoming a “Band-Aid station.” Our research found that rural sole community hospitals and critical access hospitals that are part of systems are more likely to maintain obstetrics than comparable standalone organizations.

That does not mean systems never close services. They do. But independent hospitals make difficult economic and clinical decisions as well. A standalone hospital 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 a hospital accepts lower access, weaker capabilities or a diminished role in its community. It should only be affirmed when independence has been shown to be the best way of advancing the organization’s mission.

None of this is an argument that larger systems are always preferable. 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.