Healthcare Mergers, Joint Ventures and Governance

"The healthcare industry has experienced increased consolidation in recent years, and there are significant challenges in healthcare mergers that should be addressed both before and after integration. Specifically, there must be common goals, shared values, and one aligned culture within an established governance structure to create efficiencies and best practices with the combined best features of each of the consolidated entities.
As one example of the manifest need for cultural alignment, earlier this year, the HCA Midwest Health System purchased two Catholic hospitals in Kansas City (St. Joseph and St. Mary’s Medical Centers) as part of a transaction that resulted in a total of 12 hospitals, seven surgery centers and over 10,000 employees. In connection with this transaction, the HCA Midwest Health System has agreed to work with the local Catholic Dioceses of Kansas City to preserve the hospitals’ religious heritage. This is one of many examples illustrating the importance of culture and strategy as essential pieces of governance and successful integration.
For healthcare board members contemplating or engaging in mergers or acquisitions, the need for proper governance practices is magnified in the pre- and post-integration environment. If there is not sufficient discussion and alignment on cultural norms and values pre-merger, the consolidated entity will likely encounter costly challenges that could have been proactively addressed and resolved.
To execute their duties effectively, healthcare boards must engage in proper oversight of critical areas. The primary oversight responsibilities for healthcare boards can be grouped into six functional categories:
Culture – Culture is the term that describes the values, attitudes, norms, and behaviors of the entity – who they are and how they interact with one another. When two or more healthcare entities with different backgrounds merge, it is critical for them to (a) reach alignment on culture and (b) have an assured commitment for the going-forward culture before merging. Developing and maintaining the right culture maximizes the benefits of integration, allowing the consolidated healthcare system to achieve synergies and efficiencies that are possible through combined efforts that are greater than the sum of the individual capacities. Boards should devote time and attention to proactively defining, communicating and reinforcing the culture.
Talent – Emerging best practices are to have a more interactive, full-board discussion around robust succession and talent development planning for the CEO and senior management. Boards must demonstrate independence in undertaking executive compensation and evaluation decisions.
Strategy – As the oversight duties for boards increase, trustees are taking a more active role in assuring that their entity has a strategic plan that the trustees fully understand and jointly own with management. Involvement in the strategic process is best achieved through a meeting or retreats after integration devoted to strategy that not only educates on strategic issues, but also permits the trustees to have informal time together to promote collaboration through socialization and trust building. Such meetings allow boards and management to mutually develop their respective macro and micro roles – an invaluable asset for the consolidated system. Effective strategic plans for healthcare entities will take into account compliance and the changes on the horizon for the industry that will result from the Affordable Care Act.
Compliance – Complying with laws and regulations, while simultaneously assuring the highest ethical conduct, is largely dependent on a board’s commitment to best practices in compliance.  The government places additional compliance requirements on healthcare entities and expects healthcare boards to be aware of the applicable complex regulatory structures. The board must continually monitor the entity’s compliance risk assessments, education/prevention, and detection to ensure that all are working well on an integrated basis.
Risk – As board and trustee responsibilities increase, boards are expanding their oversight of risk management. Specific to healthcare entities, the Office of Inspector General requires an ongoing process of risk assessment. Best practice is to establish and maintain an Enterprise Risk Management program with clear allocation of accountability. The board should (a) oversee ERM and assure that it receives sufficient attention at all levels of the entity and (b) ensure that remedying of major risks is discussed by the full board and addressed in the entity’s strategic plan.
Governance – Boards should be large enough to accommodate the need for diverse skill sets, resources and experience and small enough to promote collegiality, flexibility and effective participation. Some healthcare boards are decreasing the size of the board and creating a board of visitors or board of advisors. Thus, the board operates more effectively while still involving well-respected advisors who provide access to experience, resources and networking. To this end, best practices today are for a nominating and governance committee to create a template of needed skills and character attributes for full board input and approval. The approved template is then used to ensure board searches are based on needed skills and required attributes."

Bill Ide is a partner at McKenna Long & Aldridge LLP.