Long Island College Hospital drives a hard bargain.
Two years ago, the Brooklyn-based teaching hospital was unhappily aligned with New York's Mount Sinai Health System and sinking deeper into debt. That's when Donald Snell breezed in.
The recruit from Philadelphia's University of Pennsylvania Health System and a veteran of Detroit Medical Center had never worked for a freestanding hospital. That fact strengthened his resolve to position Long Island into an integrated network.
After slashing costs and scrubbing unproductive merger talks with a pair of Brooklyn hospitals, Snell led the search for a new strategic partner. Manhattan-based Continuum Health Partners, a network masterminded by New York's Beth Israel Medical Center, fit the bill nicely. Snell and his negotiating team admired Continuum's focused integration strategy, close relationship with physicians and shared governance structure. By contrast, Mount Sinai's "loose confederation of hospitals" did not make sense to the 44-year-old Snell, now a consultant in Philadelphia.
Eager to become the centerpiece of Continuum's Brooklyn strategy, Long Island College was altar-bound by early spring. And when the deed was done this May, the hospital walked away $15 million richer.
Money didn't drive the partnership, but it clearly served as a key negotiating chip. Continuum's pledge to invest up to $15 million in cash was part of the deal making Long Island College a member of the Manhattan-based system.
"That dollar amount was sort of the price of entry . . . in terms of us talking to anybody," says Snell, the former president and chief executive officer, who stepped down shortly after completing the mergerlike partnership. "We took the tack that we could take care of ourselves operationally, but if the system wanted to help us in developing primary care, that would really be value-added."
Small fortunes. How this struggling 515-bed facility managed to wrest such a hefty cash commitment to build on its skimpy primary-care network should be a lesson to smaller and unaligned hospitals nationwide. For-profits aren't the only dealmakers in town. Small fortunes can be had in merger and affiliation talks with not-for-profit systems.
Although rarely publicized, it is not uncommon for a merger, affiliation or some mergerlike partnership agreement to entail explicit promises of cash or capital investment. A system might agree to spend, say, $2 million to build a primary-care facility or $10 million to expand a hospital's pet program. Consultants say that range of investment is typical, although larger amounts are not unheard of.
Daughters of Charity National Health System is known for its deep pockets. In 1997, when Rochester, N.Y.-based St. Mary's Hospital and Park Ridge Hospital agreed to form Unity Health System, Daughters pledged $40 million for debt repayment and renovations. Its interest in the new system stemmed from a 141-year relationship with St. Mary's and a commitment to serve that market, says Susan Nestor, the St. Louis-based system's senior vice president of advocacy and external affairs.
Mark Wietecha, a managing director with Atlanta-based Hamilton-HMC, the healthcare consulting division of Kurt Salmon Associates, can hardly think of a merger that hasn't included some financial commitment by the bigger system. "They're usually in the memorandum of understanding between the parties," he says.
Citing confidentiality agreements, hospitals often shy away from discussing the financial goodies buried in system documents. Several providers declined to speak with MODERN HEALTHCARE for this article.
"The reason that they don't become public is because no one wants it to set precedent for the next deal," says Therese Wareham, a vice president with Kaufman, Hall & Associates, a Northfield, Ill.-based financial advisory firm.
Legal scrutiny. There may be other reasons, too. Wietecha suggests that if the cash investment is viewed as part of the purchase, such a deal might trigger the scrutiny of the state attorney general.
David Shactman, senior research associate at Brandeis University's Institute for Health Policy, in Waltham, Mass., says the flow of money from one healthcare provider to another is "always an issue." Shactman, who studies hospital conversions, cites Providence, R.I.-based Lifespan as an example. That system, which completed a merger with Boston's New England Medical Center last November, limited its financial commitment to the Boston facility to avoid triggering a Rhode Island law governing hospital acquisitions. Instead of investing $87 million a year for up to 24 years, Lifespan shortened its annual commitment to 10 years maximum.
Wareham says partners may consider a deal to be cashless if there is no purchase price. But many times there is a cash function. Take the "50-50 partnership." Hospital X may have a value of $70 million, $20 million more than Hospital Y. To even things up, Hospital X may keep $20 million out of the deal or Hospital Y may kick in an extra $20 million.
Despite the prevalence of system deals that involve cash investments, analysts say it's unlikely that a system would overextend itself. But when a system assumes another organization's debt, the numbers really begin to add up.
Solving problems. It's easy to get distracted by dollar signs, but money shouldn't drive a hospital's networking strategy, consultants say.
"The message for the smaller hospital is to really take the time at the outset to diagnose their own particular competitive and strategic situation in their own particular market," notes Mark Hall, a Kaufman Hall founder. "Really knowing what the business problem is that needs to be solved is the foundation from which smart organizations are starting."
For Memorial Hospital at Oconomowoc (Wis.), the problem was distance. The 73-bed affiliate of Milwaukee-based Horizon Healthcare felt too removed from its mother ship. Memorial's board decided it needed a strong local partner and sought requests for proposals.
Waukesha (Wis.) Hospital Systems, parent of Waukesha Memorial Hospital-just 15 miles away-emerged as a top candidate among three potential partners. Memorial's board liked that both organizations had similar cultures and served the people of Waukesha County. And it liked the hospital system's investment philosophy. "Waukesha focused on developing programs here with us," says Gregory Wojtal, Memorial's vice president and chief financial officer.
This January the two partners agreed to create a new parent company called ProHealth Care, which has budget oversight responsibilities. The nonasset merger, which aligns the two hospitals under a new corporate parent, calls for investments in a variety of Memorial's clinical programs, including some very specific items. For example, ProHealth will invest $3 million to build a new cancer center on Memorial's campus; a matching amount will come from Memorial's foundation. The agreement also stipulates that a specific dollar amount, which executives declined to disclose, will be invested in information systems.
Capital wasn't the prime reason for choosing Waukesha. It was culture, proximity, community benefit, "and then it was capital," says Doug Guy, Memorial's president and CEO.
Money hasn't always been a key negotiating point for smaller hospitals. Susan Hansen, president and CEO of Washington-based National Health Strategies, a consulting firm specializing in healthcare mergers, acquisitions and strategic partnering, remembers the early days of integration, when facilities merged into systems without demanding cash contributions. She believes some of those deals undervalued smaller hospitals.
Money talks. In the ensuing years, smaller hospitals smartened up and began making financial demands at the negotiating table.
Hansen describes one client who went to extraordinary lengths to prevent the erosion of a hospital's value in the community. As part of a full-asset merger agreement, the acquiring system put up $1 million to fund a foundation. Its sole purpose is to ensure that the smaller hospital's mission is carried out. If the level of community service deteriorates, the money can be used to bring suit against the system. It gives the smaller hospital "some teeth," she says.
In many markets today, systems are willing to talk money when it will strengthen operations. Take the example of Long Island College. Its new parent, Continuum, saw a need to provide comprehensive services in the borough of Brooklyn. Long Island College's academic orientation and tertiary base appealed to system officials. But it trails the competition in primary care. And sources say the hospital, which has suffered from chronic underinvestment, has lost some of its best specialists, too.
Continuum's financial commitment will pay for primary and speciality-care development and additional diagnostic facilities if necessary. "The real key to the appropriate investment is to make sure we're doing it in concert with the physician community," says Peter Kelly, Long Island College's interim CEO and a Continuum executive.
Analysts note that many factors determine a system's willingness to invest in a hospital. Marketplace forces and the relative strength or weakness of the parties at the bargaining table certainly have a hand in establishing the financial terms.
Big Apple opportunities. Hospitals that do business in a competitive marketplace, such as New York City, may have the best chance of landing a lucrative financial package. With increasing managed-care penetration and the demise of rate controls, new lucrative partnerships are springing up in the Big Apple.
In 1997 the former New York Downtown Hospital left the network started by New York Hospital (now New York Presbyterian) to join New York University Medical Center. Now called NYU Downtown, the hospital held out for the best deal it could get-$18 million and a commitment to retain its community focus.
This year Brooklyn Hospital Center ditched NYU's network for New York Hospital and an undisclosed amount of support. In announcing the deal in February, Brooklyn Hospital said it would gain "immediate access to significant capital financing," but a spokesman declined to say how much.
Meanwhile, Brookdale University Hospital and Medical Center in Brooklyn also plans to leave the Mount Sinai system. It is embroiled in negotiations with New York Presbyterian.
That was the environment in Philadelphia two years ago. Despite an oversupply of hospitals in the market, bidding wars broke out as fledgling systems competed for market share. Systems typically pledged a specific amount, say $2 million for an ambulatory facility. In some cases, bids went up to $10 million and $12 million.
Now that most independent hospitals have partnered up, the cash wars are over. Systems are entering joint ventures with smaller hospitals, but they aren't specifying specific dollar amounts, says Lee White, senior vice president for network and business development at Jefferson Health System, Philadelphia.
A typical agreement might call for, say, improving an existing program in occupational medicine or building an outpatient facility. "The support is much more focused on joint ventures than just an infusion of capital," says White.
Jefferson, for example, paid to renovate an ambulatory facility for Riddle Health System and leased space for an OB/GYN group serving Underwood-Memorial Hospital in Woodbury, N.J. "It's really been about program planning," he says. "It hasn't just been a blind infusion of capital."
And that, experts say, is the essence of a good hospital marriage.
"Don't just do a deal to do a deal," says Kaufman Hall's Wareham. "You need to get something from it. And the partner on the other side needs to get something from it."