Hospitals' merger mania may be unprecedented, but many of the deals described as mergers by the media don't actually involve a pooling of assets and liabilities.
Many hospital executives prefer to seek a middle ground-something short of a full-asset merger but more than an affiliation. The hope is these hybrid configurations will help them achieve some of the benefits of consolidation without actually merging.
In places like New York, where managed care hasn't reached mature stages of development, such nonmerger consolidations are rampant.
"This is a fairly recent phenomenon; it's been happening at a greater frequency than in the past," said Jay Williams, practice manager for the New York office of Towers Perrin's Integrated Health Systems Consulting.
For example, one of the region's largest networks, New York Hospital Care Network, has entered a number of "sponsorship" arrangements, which give New York Hospital control over individual hospitals' community boards. The network is more tightly controlled than some other regional networks created through contractual affiliations, and in most instances New York Hospital didn't have to spend a dime to gain that control.
More recently, New York's Presbyterian Hospital announced "a corporate relationship" with Palisades Medical Center in North Bergen, N.J. (Sept. 9, p. 16). The hospitals intend to create a new corporation governed by a joint board with 60% of trustees being appointed by Presbyterian and 40% by Palisades. "We have created this model to be what is a called a parent-like company," said Marc H. Lory, Presbyterian's chief operating officer and president of its regional health system.
Why not merge assets? "I don't believe the Palisades board at this time is ready for that," Lory said. Executives said the board wanted to retain local control. Even so, the institutions saw the need for some corporate relationship that would allow them, for example, to jointly pursue managed-care contracts. "I think there are benefits we can get from this structure that are better than an affiliation," Lory said.
Earlier this summer, Presbyterian and New York Hospital announced plans to consolidate with the intention of merging over time. Because of regulatory and operational hurdles, a full-asset merger could be as many as five years off. Instead, the two teaching hospitals will begin by creating a joint parent company.
Some providers, like North Shore University Health System in Manhasset, N.Y., are simultaneously pursuing mergers that involve asset ownership and sponsorship arrangements that do not. Three of the system's eight hospitals were brought into the fold through sponsorship agreements.
"Sponsorship is really a legal structure which achieves the same outcome (as a merger): common control over the network," said Patrick R. Edwards, North Shore's assistant to the president.
There are different "tactical and strategic reasons" for choosing to sponsor rather than own a hospital, Edwards said. In many cases, it's easier for the local board, management and community to accept such an arrangement, he said. Also, many institutions have existing debt covenants that make it more difficult and less expedient to merge, he said.
"I think expediency has a lot to do with this type of thing," Williams said. Nonmerger deals buy time to evaluate assets and consider mission issues, for example.
In cases of failed mergers, Williams added, "one of the main issues has been the unification of goals and operational strategies." If a merger doesn't work, it can be expensive and difficult to untangle, he said.
The growth of mergers and other nonmerger consolidations has created a need for guidance on how to account for such transactions.
Currently, not-for-profit hospitals are reporting similar transactions in different ways, said Fred Heinzeller, a partner with Deloitte & Touche in Minneapolis and a member of the Healthcare Financial Management Association's Principles and Practices Board. The lack of common reporting standards makes it difficult for readers of financial statements to make direct comparisons, he said.
In July, the HFMA's P&P board released an "exposure draft" called "Healthcare Mergers, Acquisitions and Collaborations" to help finance executives identify and use the appropriate accounting methods. The document attempts to distinguish when a business combination should be accounted for as a pooling of interests, a purchase, a new entity formation (such as a joint venture) or a contribution.
"The reason for dealing with it is that the accounting literature that deals with consolidations does not deal with not-for-profit organizations," Heinzeller said. The P&P board is taking written comments on the draft, which will be used in developing a final position paper.