Issue link: https://beckershealthcare.uberflip.com/i/718038
34 CEO / STRATEGY & LEADERSHIP Do Hospital Affiliations Risk Becoming the Next Brexit? By Rex Burgdorfer, Vice President, and Jordan Shields, Vice President, Juniper Advisory T he European Union is an affiliation. Unlike a federal govern- ment — the United States for example — where members combine into a single sovereign nation, each member state of the EU remains independent. e EU member countries gain a mea- sure of collective strength and influence by ceding control over certain decisions, regulations and institutions to a central authority, but they remain sovereign and free to exit. Sound familiar? is is the same type of arrangement as hospital affiliations. Over the last several years, hospitals have rapidly formed collab- orative regional partnerships. ese relationships are designed to address challenges that small systems and independent hospitals are ill-equipped to efficiently navigate on their own. Hospital affiliations include accountable care, population health, purchasing, information technology, academic, management and many other agreements. In consulting presentations and at conferences, community hospitals are encouraged to pursue affiliations rather than fully combine to realize the benefits of scale without ceding ownership or control. As Britain's vote to leave the EU, or Brexit, showed us, this argument is a dan- gerous fallacy. By definition, affiliations require participants to cede control, either to the collective (accountable care agreements) or to another party (IT and management agreements). e problem with affiliations is that their greatest selling point — sov- ereignty — is also their greatest weakness. Affiliations do exactly what they are set up to do; they work until they don't. e oen overlooked truth is that when they come to an end, organizations and countries typ- ically find themselves worse off than before they entered the partnership. It is no surprise when affiliations end — if they were not intended to be temporal, the parties would cede sovereignty to gain the en- hanced stability and the benefits of full integration. More oen than not, affiliations end when money becomes an issue. In Britain, it was how disillusioned workers who felt le behind perceived the EU's immigration policies. With hospitals, these points of friction include disputes over where high margin cases go in clinical affiliations, fair sharing of preventive medicine costs in accountable care organiza- tions, disagreements over where to invest capital or place centers of excellence in joint operating agreements, and disputes over imple- menting or deferring the latest system upgrade in IT affiliations, among many, many other questions. e objectives of independent companies change and diverge over time. When that happens, the affiliation unwinds. Unfortunately for both Britain and the remaining members of the EU, the dissolution of health system affiliations that we have worked on indicate that all parties are in for a rough ride. Hospital systems that leave face the immediate challenges of backfilling corporate resources, contracts and clinical relationships while attempting to restore stability. We see this playing out in parallel for Britain. ey have yet to formally initiate their departure from the EU, but are already seeing their senior politicians flee for the exits, Scotland in near-open revolt, their currency drop as interest rates spike and their companies cutting back employment. What does this mean for the organizations that remain in the affili- ation? ose that stay typically don't stay for long. Affiliations draw their strength from scale. As they begin to shrink, the benefits of staying shrink while risks grow. ose that linger (Germany) bear re- sponsibility for the weak (Greece). e strongest participants (Britain) tend to leave first, because they can, and the remaining block ends up with less to offer, so the next tier of participants complete their own cost-benefit analysis and are much more likely to leave. Unfortunately for those participants (Italy or France) they tend to be even less pre- pared for their departures than those that were out the door first. e last to leave are le cleaning up the mess. is incentive causes a "run on the bank" once initiated. Finally, the Brexit saga has the potential to inform nonprofit hospital leaders about the ability to reconstitute oneself following divisions. Unlike large sophisticated countries that can go back to being inde- pendent, hospitals rarely have that luxury. Once part of an affiliation, it is extremely difficult to "unscramble the egg" or "put Humpty Dumpty back together." Such realities can force an emergency sale out of distress, eroding value and forgoing the potential to achieve favor- able terms. e best partnerships are entered into based on careful consideration of alternatives with a decades-long view. Being forced to quickly find an alternative or new partner as an affiliation pulls apart results in poor decision making and lost value for the community. Monitoring Greece's fate will be interesting. Hopefully the draconian outcome of bankruptcy is avoided. Bankruptcy or closure, however, have been regular outcomes of failed health partnerships. is same phenomenon of centralization is true in the nonprofit hospital world. Full scale change-of-control transactions are infinitely more difficult to create, but have proven to be more powerful and permanent. e ability of a combined entity to affect positive change is much greater when owned, controlled and operated as one. is lack of durability comes with costs. History has shown that groups that take the more difficult leap upfront of fully combining (e.g., by pursuing a merger, sale or consolidation) fare better in the long run compared to those that dip their toes in ready to pull them out at the first sign of trouble. Witness the success of the United States in the post-WWI era. While extremely difficult to form (the Revolutionary War, Civil War), the United States' economy took off when it completed its interstate high- way system and knocked down the final vestiges of interstate tariffs and frictions. Similar success stories exist within vertically integrated and centrally governed healthcare companies. n "History has shown that groups that take the more difficult leap upfront of fully combining fare better in the long run compared to those that dip their toes in ready to pull them out at the first sign of trouble."