Protecting Corporate Value in Affiliation Transactions

HFM April 2014 CoverHospital leaders are increasingly interested in affiliations, or relationships with other healthcare organizations that do not involve ownership changes. Affiliations can take many forms, including management agreements, clinical affiliations, purchasing cooperatives, and joint operating agreements. But they also pose unique risks. Community hospitals often pursue affiliations rather than mergers or outright sales, for instance, to access the benefits of increased scale without ceding ownership. However, this strategy often can result in a shift of control and transfer of the community hospital’s ownership without any reciprocal economic or noneconomic benefit. Clear and consistent affiliation objectives—among other strategies—may enable participants to avoid such risks.

Affiliation Drivers

Organizations pursue affiliations to maintain independence while improving qualitative, operational, or financial performance. The objective of affiliations usually is to maximize near-term control while enhancing integration,scale, quality, capital access, or other benefits associated with partnership. Successful affiliations focus on narrow, clearly identified improvements, allowing organizations to maximize the benefits of affiliation while retaining as much control as possible.

As organizations respond to healthcare reform and the shift toward value-based payment models, affiliations can facilitate the exchange of best practices, reduce costs, and provide access to tools necessary for effective population health management. Few independent hospitals cover the full continuum of care necessary to succeed under population management. Achieving full integration through an asset sale or merger, however, often is too large of a leap for board members of many standalone hospitals. Affiliations offer an alternative approach to fill organizational gaps and better position hospitals in the changing payment and operating environment.

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