What happens when a sale is not an option…Affiliate.

Ken Marlow, Partner, McDermott Will & Schulte
Farley Reardon, Managing Director, Juniper Advisory

With growing financial uncertainty for health systems that face looming changes to supplemental programs and Medicaid eligibility, health systems are driven to pursue alignment strategies to expand referral networks and resource capabilities or accessibility. Providing more with less continues to be a requirement for an enduring health system and is creating strain on healthcare access and delivery. Independent hospitals are shuttering weekly because the headwinds are increasing and, in many cases, such hospitals do not objectively look at the state of financial distress they are in or, in some cases, delay taking the necessary steps and corrective measures to either change their margin trajectory or find a strategic partner. These headwinds are challenging for not only independent hospitals, but large health systems as well. The most straightforward way for systems with fewer resources to access more is through full integration with larger health systems. Whether it is due to organizational structure, leadership committed to remaining independent or limited interest by third parties that are not willing to financially integrate with a distressed hospital, sometimes full integration or a sale to a strategic partner is not an option. What then…

This article is a collaboration of viewpoints to provide insights and observations of enduring and evolving alignment strategies when a sale or full integration is not in the cards but there is a strong strategic foundation for those hospitals and health systems to partner. When a sale (or buy) is not an option, affiliate. These affiliations can be an opportunity for the independent system to access benefits of integration, such as significant operational efficiencies through scale or access to electronic medical record or EMR and other technological resources as provided by its larger partner and expand the clinical services for its community that it cannot provide independently. These affiliations can be a much-needed lifeline and offer a real opportunity to change the financial trajectory. As for the larger partner, affiliation can be an opportunity to further expand its network of care and patient base, create opportunities for higher quality care, and generate new revenues from its provision of services. In the end, it can be a win-win for both organizations without requiring full integration. When establishing an affiliation, there are two primary areas of alignment, (i) clinical and (ii) operational.

While there are many services that can be provided within these two areas, we will focus on a few active examples within each area and provide observations for consideration in evaluating whether these are appropriate for your circumstances.

Clinical Alignment

Clinical alignment creates benefits for both the contributing health system and the receiving health system. These can be structured as service line and/or quality program agreements to support care within the community for the receiving system and create opportunities for the contributing system to become the preferred provider of higher acuity services when needed. Clinical alignment also may occur through joint recruiting agreements, including the option for a contributing system’s employment of certain specialists within its larger provider network. In addition to specialist placement on a part-time or full-time basis, clinical alignment options include the management of certain service lines to support current programs or the development of new service line programs for the benefit of the receiving system and its community. The receiving system may become a member of the larger system’s clinically integrated network, other population health or value-based care initiatives, and become a participating provider in the contributing system’s health plan.

Benefits of clinical alignment relationships are the ability to access new or additional resources and capabilities to enhance quality of care within the community and improve the patient’s experience of receiving care closer to home. Additional benefits include provision of specialists that otherwise would not be available for the community or integrated within the receiving system’s offerings, the development of a dedicated referral partner for advanced care needs on both sides (receiving and contributing); and participation in a clinically integrated network that provides expanded services.

Challenges or shortcomings of these relationships include navigating the complexities of the development of a master affiliation agreement, which may also require multiple agreements for each service line. In addition, providers from the contributing system in proximity of the receiving system may create brand confusion within the community – which hospital is truly providing access to these new services and specialties for ongoing care. Like any contractual relationship, the unwind is as important (if not more so) than the provisions for access to new services. Creating strong clinical alignment with one health system may limit options for future alignment/integration, based on complexity to unwind provider/service line agreements. In addition to unwind provisions, the contributing system may require exclusivity for services provided that may limit options to pursue new or alternative affiliations. Beyond the provisions in an agreement, the challenge of reestablishing new referral patterns may be enough of a barrier that the receiving system may accept a suboptimal relationship, due to circumstances that may be unavoidable, with the goal, often short-term, to avoid disruption that may trigger a tipping point, often a financial tipping point.

Operational Alignment

The opportunities for the receiving or independent system to achieve significant efficiencies and savings are much greater due to the breadth of support services available today, as opposed to historically when affiliations were limited primarily to group purchasing organization or GPO-centric benefits. The contributing system also receives the benefit of revenue from the receiving system as well as the ability to aggregate even more services through an expanded network of subscribers, which can reduce its own costs for services. Today, independent health systems can join collaborative networks within traditional group purchasing organizations or GPOs through both state health associations and regional health systems. Certain national health systems offer subscription services that these large systems originally developed for their network, including IT services, procurement, and central business office services. Revenue cycle management, offered through a variety of vendors, is critical to capturing as much revenue as possible and essential for proper coding and billing for systems to improve collections. In addition, there are opportunities for the parties to partner on pharmacy services arrangements and the 340B Drug Pricing Program.

Benefits of these operational, support services provide for independent systems the opportunity to join regional or national networks through these support service agreements to lower the cost of operations while maintaining independence. In addition, as new technologies are developed to improve business office services, these subscription programs offer a way to expand access to services and further distribute the cost and improve the delivery. Beyond operating efficiencies, these subscriptions offer long-term flexibility and often limit brand confusion as these operational services are typically behind the scenes to the receiving system’s community. For revenue cycle management services, these can ensure that the independent system has the greatest chance of maintaining reimbursement for its services. With the aggregation of savings referenced above, it creates an opportunity for enhanced margin and ultimately the chance to continue independence or make it more likely to find an opportunity to fully integrate with a larger system, when necessary, as an operationally strong and more attractive system.

Challenges or shortcomings of these relationships include the loss of locally developing skills and expertise for these services over the long run. While gaining reliable access to services and reducing expenses is a key benefit, converting to outsourcing these services also cuts off the pipeline for internal or local expertise and business leadership, which creates reliance on affiliations or subscriptions in the future. Often these operational services are developed for the benefit of the contributing system so customization at the local level may be limited. Like the consideration for unwinding clinical services, by engaging in these contractual networks, it may preclude the opportunity for the receiving system to exit the relationship when the needs expand beyond a subscription service.

Conclusion

Affiliation may be the lifeline for certain hospitals or health systems to maintain viability as a whole or for certain clinical services in communities across the country, and there are a number of options, both clinical and operational, for independent health systems to consider for each specific need. With so many solutions to choose from, it is important for independent or receiving health systems to develop clear objectives and maintain options, not pre-selecting the neighboring system, to gain access at the best terms and, most importantly for a system seeking to preserve independence, to develop a very clear plan if the affiliation does not meet the future needs to allow the receiving system to independently chart a new path. Today, there are more available solutions than ever before that will create opportunities to both maintain independence and improve operations for longer term durability. At the same time, the saying, “expect the best, prepare for the worst” remains true for strategic affiliations and wise counsel to be used in the evaluation and selection of the right option for your system.