An old adage says that if you have money, expertise, and a customer base, you can get by without anyone else’s help. Most rural health systems would prefer to do just that, but for many, it’s becoming increasingly difficult.

Competition from regional health systems and physicians, new regulatory requirements, and aging infrastructure are creating additional demands. In rural communities, shortages of nurses, pharmacists, laboratory and radiology specialists, and other professional staff are compounding the problems.

Faced with these dilemmas, many rural systems are looking at non-merger strategic partnerships with local physicians, other rural systems, or their urban counterparts. Popular models include peer hospital networks and alliances, joint ventures on clinical services, mergers with other providers within a shared governance framework, and various types of non-merger affiliations with other hospitals.

Enduring partnerships create value

Any of these models can be an effective option for maintaining a viable hospital and health delivery system. However, rural communities tend to think of their hospitals as quasi-public assets and govern them with a strong sense of pride. Sharing the control of a community asset is not easy, and many communities are reluctant to do so unless all other options have been exhausted.

In crafting strategic partnerships, the emphasis should be on “staying power” - long-term commitments that focus on the core business objectives of the partners and revolve around vital programs and services. Most successful strategic partnerships create leverage for each partner, expand services or establish new ones, and create two-way competitive advantages.

The most enduring partnerships also provide sufficient risk-and-reward potential so that each partner takes the partnership seriously. In addition to a strong financial commitment by each partner, there must be some form of shared control that ensures each partner an equitable voice consistent with their financial risk.

To partner or not to partner

Strategic relationships are not “off-the-shelf” products, and they are not the answer for every organization. The following questions provide a good test for whether or not a strategic partnership should even be an option.

1. Is your health system strong enough to finance its own growth - including facility and technology improvements - over the next five years?
   
   
2. Can your system be the dominant player in at least one or two major clinical service lines over the same period of time?
   
   
3. Do you have the management and clinical expertise to compete successfully?
   
   
4. Do you have access to vital third-party or managed-care contracts?

If the answers to all four of these questions are “yes,” your organization can probably face the future without outside help. If not, some form of strategic partnership may be beneficial.

Partnering means sharing control, and choosing the right partner involves balancing what a rural system needs and how much control it’s willing to share. When capital investments are not equal, the major capital partner typically enjoys a higher degree of control. That’s why it’s important to understand organizational financial needs before identifying partner candidates.

Partnering options exist along a continuum. At one end are the arm’s-length partnerships typified by peer hospital alliances and the purchase of services between hospitals. At the other end of the continuum are “merger” relationships with much more financial and strategic integration.

Rural Hospital Strategic Relationship Continuum

The importance of doing the “right stuff”

Making sure that the partnership is doing the “right stuff” is as important as picking the right partner. Projects that bring minimal value seldom create enough potential reward to be taken seriously.

• Rural Hospital Networks and Alliances
  Networks and alliances help rural providers control operating expenses, access technology, and advocate on issues of mutual interest. Virtually every state with a sizable rural population has some form of rural provider network, which may include hospitals by themselves or bundled together with physicians and long-term care facilities. Some provide group-purchase discounts, pooled staffing for selected clinical areas, shared staffing for emergency-room physicians, or special services. For example, one Midwestern consortium of 26 rural hospitals owns an extensive network of mobile imaging services, along with a for-profit arm that makes services available to physician clinics.Each member of a network or alliance typically has board representation and pays dues and service fees.
  
  
• Joint Ventures
  Joint ventures are common when capital and expertise are needed but the partners want to keep the ownership and governance of their core businesses separate. Joint ventures, which take many different forms (e.g., partnerships, limited liability companies, corporations), are often formed between rural hospitals and rural and urban centers. They usually involve a business line that is integral to each partners’ core businesses (e.g., recruitment and ownership of primary care physician practices, construction of medical office buildings, establishment of a jointly owned and operated laboratories) and are co-governed and co-capitalized by the partners.
  
  
• Management Support and Contractual Relationships
  There are various types of non-merger “affiliation” relationships between hospitals that are based on transfers of management services from one partner to the other, without a deep strategic commitment by either partner. One partner essentially buys services from the other, usually at a discount. These types of relationships minimally entwine the strategic objectives of the partners, but they do provide for a variety of support services (e.g., financial oversight, strategic planning, laboratory, IT services), which may include overall management of one partner by the other. These relationships may involve an annual affiliation fee or a fee-for-service consulting arrangement.
  
  
• Higher-Order Affiliation Relationships
  Higher-order affiliations involve long-term commitments by the partners to pursue strategies that go beyond individual projects or management support services. The options range from minority representation of one or both partners on the other’s governing board to 50-50 board representation with substantial financial commitments from each partner, sometimes with joint operating agreements for one or more partner hospitals. The highest order of affiliation, short of an asset merger, is the “sole corporate member” affiliation. In this type of affiliation, one partner (generally a larger regional system) becomes the only corporate member of the smaller partner’s corporation, with final authority over certain key organizational decisions. Sole corporate affiliations are shunned by some rural systems as being too controlling, but when properly constructed, they can deliver high value while maintaining an acceptable level of local autonomy.
  
  
• Mergers
  Mergers make one organization out of two and require the highest level of shared control. They seldom succeed unless there is high level of trust between the partners, and as a result, most successful mergers are the endpoint of a longstanding relationship. Depending on the governance principles adopted by the partners (reserved powers, board structure, etc.), mergers can still result in substantial local control. In rural communities throughout the upper Midwest, there are many examples of successful rural-urban hospital mergers and integration between rural hospitals and local physicians.

Conclusion

While not every rural hospital or health care system needs a strategic partner, there is a wide variety of options available for those who do. Most relationships can be developed in way that preserves an acceptable level of local autonomy while leveraging additional human and financial resources.

Ultimately, all partnerships have to be custom-tailored to the corporate cultures of the partners, local market dynamics, and financial circumstances. Strong leadership and a methodical analysis of local needs are the keys for creating a successful partnership.

David C. Hoffman, Ph.D., is a partner in Wipfli’s Health Care Practice who specializes in strategy and designing partnerships between rural and regional health care organizations. He can be reached at 608.274.1980 or dhoffman@wipfli.com.