The Rise of the New Health Companies
Snapshot
A handful of high-performing hospital systems are coming together to form unique new entities that offer better, more convenient care at lower cost. Their leadership and approach to opportunities set them apart from competitors.
A profound transition in health care is underway as the industry moves from inpatient-centric sick care to ambulatory, technology-centric personal health care. As hospital and system boards and management teams gain an understanding of this model, they are finding that health care purchasers — public and private payers, employers and consumers — are driving this change because they want less expensive, higher-quality care. They seek a so-called health company to manage health and care needs for themselves (if they are consumers) or for a selected population (if they are payers or employers)[see Health Care in Transition, Page 20].
As this shift happens, trustees and management teams have to evaluate whether and how their organizations can reorganize as a transformative health company that manages and supports ongoing wellness instead of treating episodic, then chronic, illness. The goal is to achieve relevance in a delivery system that is rapidly moving to outpatient, telehealth and mobile-based services for increased patient convenience, better outcomes and lower costs.
Additionally, this new model is attracting such powerful nonhospital competitors as insurers, physician-driven integrated networks and retail companies. All are vying to be the health company that enrolls patients in their regions, captures the revenue stream, and then provides or contracts for the needed services.
Competitive dimensions are changing. Price-sensitive consumers and purchasers will choose providers based on access; pricing; customer experience; availability of virtual, mobile and e-visit channels; and other important offerings.
Transformational Partnerships
Within this environment, provider consolidation is expected to continue through traditional mergers, acquisitions and joint ventures. At the same time, however, another trend is emerging that merits the attention of trustees. It is the “transformational” coming together of two entities to create an entirely new organization — one that could be a health company or major participant in this function in their respective service areas.
Recent examples of transformational partnerships of varying sizes include Baylor Scott & White Health; Northwestern Medicine, the organization created by the merger of Northwestern Memorial HealthCare and Cadence Health; and Advocate NorthShore Health Partners, the new entity formed when Advocate Health and NorthShore University HealthSystem complete their merger early this year. Several additional transformative companies are under active consideration around the country.
Close examination of these transformative transactions indicates that they typically involve several important characteristics:
• They are not just a bigger version of one of the former organizations. They are a new company, which legacy organizations have created by setting aside their historic interests.
• Their leaders have a wholly different way of thinking related to purpose. These partnerships have a common vision of a higher level of organizational performance for future success as a model health system centered on population health.
• They are capable of changing at an unprecedented speed to reach the transformational goals. These arrangements involve large organizations coming together with the scale required to move rapidly. They are not the mergers and acquisitions taking place one hospital or small health system at a time, occurring slowly during health care’s transitional period.
• The partnership often is accomplished through a corporate-style process, meaning that it involves determining many of the partnership’s details within a small group of individuals, and then announcing it near or at the time of a definitive agreement. The process differs from the common nonprofit method, whereby the deal is determined by a larger group and made public when a loose letter of intent is signed.
• These arrangements overcome hurdles that singly or in combination could derail the partnership process at any time. A wholly different process of partnering and a new leadership skill set prevent derailment.
Although these new entities are difficult to create, we expect this trend to accelerate and have a significant impact on future health care delivery. The goal of these transformational new companies is to change markets by providing high-quality services at an affordable price and in convenient locations, using entirely new approaches to manage population health. Legacy organizations risk disruption by these new companies and losing relevance in their communities.
Board members who are planning the desired role of their organizations in a completely different health care environment will be better prepared for the changes needed for future success. Based on observations of recent transformational partnerships, here are two best practices that leaders can consider to overcome hurdles as they develop and execute their organization’s path forward.
1. Ensure the right leadership to drive the right approach. Leaders who create transformational organizations understand that whatever the strengths or size of the legacy organizations, philosophically, they should be considered equal partners. These leaders are aware that acquired/acquirer language is not appropriate. They respect each other and each organization’s past successes. They know that past leadership experience in mergers and acquisitions is not relevant to the success of transformative new entities. In fact, skills used for acquiring other hospitals in years past typically are detrimental to uniting new companies.
Leaders who create transformational new entities also know that discussions of relative value or valuation of individual organizations, allocation of board seats, capital commitments and past legacy promises are not material to the game plan going forward. The unique nature of these transformative entities requires a new way of thinking. They, therefore, insist that all leaders mentally don “new company” jerseys.
As discussions proceed, the right leaders for transformational entities disable legacy traps, which center on the belief that past successes and history require a specific chief executive, board composition, headquarters location and brand for the new entity.
Disabling legacy traps is not a simple process. Politics, naysayers intent on disarming new or different approaches, and optics through which individuals view potential change reflect the inherent difficulty of change within organizations. Past successes often lead one legacy faction or the other to negate or discourage the need to create a transformative new company. Or each side may give lip service to a new company but still want control in distinct ways. At every step, challenges emerge from individuals at all levels whose mindsets are fixed on the traditional merger and acquisition processes of buying or selling.
The right leaders, through their sense of vision, are willing and able to push the transformation on their own, specifically not involving team members who are averse to change or unable to get past legacy thinking.
2. Use a disciplined process to analyze options and synergies. Leaders of transformative new entities challenge existing models and envision a new framework and entity for the emerging environment. As they work to create these companies, leaders use a disciplined process to analyze options and synergies that will speed achievement of their transformation goals for a model health system. The process is multidisciplinary, comprehensive and data-driven.
Because both entities have a track record of success, leaders look at each dimension of what is required for future success, and make evidence-based decisions on which systems or processes to use. Every area of potential synergy is examined with a view toward lower costs and improved quality and outcomes while moving the entity toward effective population health management.
For example, leaders look at payer contracting, supply chain, information technology integration, care protocols, safety metrics and physician compensation arrangements, and ask, “How does your organization do this, and what might be beneficial to the new company going forward?” Objective criteria are defined for evidence-based decision-making that puts the needs and objectives of the new company first.
The executive team and a board task force of some of these new transactions also develop a business case for the new entity based on evaluating:
• The ability to deliver organizational mission, vision and purpose
• New and enhanced core competencies that would be gained or required
• Potential collaboratives with care management, population health and value-based care delivery models
• Growth opportunities to expand the care continuum
• Business portfolio, facility and clinical service distribution requirements
• Clinical and physician alignment across the future network
• Financial and human resource requirements
• Regulatory and antitrust issues
Good decisions are based on evidence. Defining and articulating synergies and the business case is challenging work that typically needs to be done quickly.
Profound Potential
The recent creation of transformative new organizations represents the leading edge of change in health care. This wave of new entities with the vision and flexibility to deliver care under changing business requirements in an uncertain environment could slow the increase in national health care spending and improve the health of Americans. Is your organization re-envisioning itself for a very different future?
James W. Blake (jblake@kaufmanhall.com) and Michael J. Finnerty (mfinnerty@kaufmanhall.com) are managing directors, Kaufman, Hall & Associates LLC, Skokie, Ill.
