Becker's Hospital Review

10 Sign up for the COMPLIMENTARY Becker's Hospital Review CEO Report & CFO Report E-Weeklies at www.BeckersHospitalReview.com or call (800) 417-2035 regional networks, it's difficult to say what might happen if a merger eventually leads to their systematic collapse. After all, many experts are convinced the merger is pursued to avoid just that. It's not always a matter of size, but also importance Generally, the larger a health system, the less likely it is to fail. "The size of the parent company makes the risk of failure lower," says Jordan Shields from Chicago-based Juniper Advisory, an independent investment banking firm exclusively focused on hospital mergers and acquisitions. "It is a bad outcome if a community's hospital fails.  Small hospital companies have a higher risk of failing than large systems. That's one of the reasons the credit rating agencies place emphasis on business scale." In that sense, the concept of "too big to fail" may hold true for large, integrated systems — their size will reduce their risk. But this is still different from the traditional meaning of the phrase, which really came to life after the banking collapse and bailouts in 2008. In healthcare, especially in urban markets, the phrase can also go another way. "The safety-net [hospital] isn't too big to fail — it's too important to fail," says Mr. Nolan of Navigant Health. In urban markets, safety-net hospitals or health systems are essential to the community. Detroit Medical Center, Caritas Christi Health Care in Boston and West Penn Allegheny Health System in Pittsburgh are three examples of systems that are, or were, pillars of non-profit healthcare in their respective urban communities. But within the past four years, all three systems underwent or are in the process of unorthodox transactions. For-profit Vanguard Health Systems, based in Nashville, Tenn., purchased DMC in November 2010. Boston-based Steward Health Care System, a new affiliate of private equity firm Cerberus Capital Management, purchased the Catholic Caritas Christi in March 2010. And Pittsburgh-based health insurer Highmark was working to buy West Penn Allegheny at the time this article went to print. Studies suggest only hospitals that are financially viable and essential to the market need to be saved. As for the examples mentioned above, DMC employs approximately 12,000 people. Caritas Christi was the 10th largest employer in Massachusetts with more than 13,000 employees, and West Penn employs roughly the same number. These organizations were also critical in their markets for the volume of charity care they delivered in underserved areas. DMC was, for instance, the largest charity care provider in the state of Michigan. "Local governments are going to view some hospital systems as too big to fail, and they won't allow a hospital to just go by the wayside," says Rex Burgdorfer with Juniper Advisory. "As a result, they'll be more amenable to concessions on the transaction terms for a company to come in and save the hospital." The larger the system, the more pressure to find the right CEO The boards of integrated health systems may fall prey to a search for perfection when looking for the best CEO candidate to lead their multifaceted organization. For example, if a system includes hospitals, a health plan, a physician group and a home care setting, that board may want a CEO who has touched all service lines and One case of Legionnaires' disease can threaten your bottom line. Protect Patients and guard against costly emergency clean-uP and legal liability. Partner with The Legionella Experts® for Legionella detection, control, and remediation. is equipped with prior leadership experience at each part of the system. This is faulty thinking, says Kimberly A. Smith, partner and managing director of executive search firm Witt/Kieffer's Eastern region in Burlington, Mass. "Surely those people are in extraordinarily short supply," she says. Instead, boards should ensure their requirements for an incoming CEO are divided between technical skills and leadership abilities. If these requisites are disproportionately sought, with more focus on one or the other, the executive search can quickly become arduous. "There's a moment when the governing group steps back and says, 'What are we really looking for in the defined future, in the next three to five years?' And that refocuses governance on exactly what core leadership competencies are needed; not so much the technical competencies," says Ms. Smith. "There's a real difference between the two." It's also critical for governing bodies to remember the distinct roles of the health system CEO and COO. For the latter, prior experience or specific expertise with each sub-entity of a system is more crucial. "[The COO] is the person charged with delivering an end product and making sure the pieces of the organization come along," says Ms. Smith. "But the CEO is a much more strategic role. I think it's increasingly important for organizations to recognize that the vision and capacity to develop followership and get all entities on board with a common direction — that's the skill set you're looking for. Not so much whether the CEO has run a home health agency." n Subscribe Today! Becker's Hospital Review CEO Report E-Weekly To subscribe to the FREE E-Weekly, visit www.BeckersHospitalReview.com 877-775-7284 | www.specialpathogenslab.com and click on the "E-Weekly" tab or call (800) 417-2035

• Cover