The specter of healthcare reform and challenges facing hospital operators have proven to be powerful catalysts for consolidation and integration in the hospital industry. Despite the trend toward consolidation, the hospital “market” is significantly more confused than at any time in the last 20 years. The hottest topic of discussion is business combinations. More systems are speaking with potential target hospitals and a large number of for-profit buyers are growing more active in the marketplace.
One clear trend is the increasing difficulty of completing transactions and the need for advance preparation. Advance preparation can ensure two things in a transaction. First, preparation can mitigate the risk that a transaction’s closing will be delayed or side-tracked by the discovery of a regulatory issue during due diligence. Second, if issues are presented early in transactions and solutions for these issues are readily available, then the bidder’s price for the company will have incorporated the risk of these issues. This avoids a later repricing of a transaction based on the discovery of an issue late in the due diligence process. Preparation can lead to swift closure of hospital transactions at attractive valuations, thereby maximizing community benefit.
In preparing any hospital for market, the following key issues should be considered:
In preparation for any transaction, hospitals should identify physician and institutional referral sources, consider whether a financial relationship exists and assess whether the relationship is compliant with the Anti-Kickback Statute and Stark Law as well as other applicable state laws. Relationships that should be examined include physician employment agreements, leases, medical director agreements and supply agreements with physicians. Noncompliant relationships should be identified and corrected if possible.
To position a hospital to capitalize on increased integration activity, hospitals considering a sale or integration with a system are urged to review these issues in advance of any transaction. Before a hospital starts discussions with suitors, the critical issues of referral source relationships, contracts, culture of compliance and billing and coding should be audited and any aberrations addressed. This preparation and implementation of corrective actions will translate to fewer re-pricing events and obstacles to a timely closing, thereby enabling maximum value to be achieved for the community.