“Is our organization ‘big enough’ to survive (and thrive)?” This is the most frequent question that I get from board members of provider organizations. The answer to this question is, of course, “it depends.” But there is no doubt that for many types of services in many markets, larger organizations are more likely to thrive. Lower overhead along with concentration of specialized services resulting from consolidations allows for both competitive positioning and rate setting with payers – if benefits and brand are equal, the larger organization with the lower “price” will be the better value (see The Sustainability Challenges Of Delivering Health & Human Services: Cost-Effective Business Models For U.S. Health & Human Service Organizations).
When I work with boards of organizations that are considering “scale” as a solution to strategic issues, I typically review six options for gaining critical competencies or capital. It starts with mergers, acquisitions, and consolidations and quickly moves to what I refer to as “other weird arrangements” – a number of partnership and collaboration models designed to provide the benefits of consolidation without the loss of organizational identify and separate governance. My standard list of options includes:
- Mergers and acquisition (M&A) – These actions combine two or more organizations in a model where one organization owns the other(s), and gains all controls, rights, and liabilities.
- Consolidations and “super parent” structures– Unlike M&A, in a consolidation, all participating organizations lose their identities and emerge as a new organization. Participating organizations can spread the “overhead costs” for technology, financing expenses, compliance, marketing, legal counsel, and other core competencies over a larger revenue base. One method to accomplish this is to create a new parent organization (the “super parent”) to control both organizations.
- Joint operating agreements – Joint operating agreements are a management agreement, typically between two organizations, that allows the organizations to share management services and some facilities, while retaining a separate board of directors. This is sometimes referred to as a virtual merger.
- Shared services organizations (SSO) and administrative services organizations (ASO) – This is similar in intent to the joint operating agreement, but with the creation of a separate organization to provide management services.
- Purchasing cooperatives – Purchasing cooperatives are focused on a single objective: reducing costs through “volume” purchasing discounts. These can be large, national agreements for purchasing, such as Purchasing Partners of America and Partners in Pharmacy Cooperative. Or the model can be smaller partnerships between two organizations who may join together to save on the purchase of technology or medical supplies.
- Virtual service partnerships – Virtual service partnerships are created between organizations to offer a specific service in the market (or respond to a specific RFP). The organization providing the service is “virtual.” It is usually a trade name that operates in the market by organizations that are joined only by a partnership agreement. It is the partnership agreement that spells out proceeds, roles, and responsibilities and ownership of intellectual property.
And, a recent Kaufman Hall Report, New Partnerships 2.0, added a few partnership models to my list:
- “Best practice” collaboratives – These collaborations are similar to purchasing collaboratives, but in addition to increased purchasing efficiencies, they provide partnering organization the ability to share best practices.
- Accountable care collaboratives – In this partnership, hospitals and health systems share resources, and manage the care of a target population. This includes working under shared risk contracts.
- Health plan co-ownerships – These partnerships create a provider-sponsored health plan, often with significant risk, and providing incentives for effective patient care management, and penalties for poor patient care management.
I’m the first to acknowledge that mergers, acquisitions, and consolidations are prone to failure – the success rate of mergers across all industries is about 50%. But despite those grim statistics, I’m less optimistic about “non-merger” partnership alternatives, actually addressing an organization’s strategic issues successfully. Many of the models seem to add both complexity and cost without providing competitive advantage.
In some ways, the pursuit of other options can postpone an inevitable discussion about the need for a merger or consolidation – and weaken the competitive position of an organization in the meantime. When this happens, I’m reminded of the saying, “There is no good time for a hard choice.”