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Are Healthcare Affiliations Worth the Risk?

September 09, 2015

Healthcare leaders looking to tackle a near term need with outside help often pursue affiliations, which are partnerships that allow both sides to retain control of their respective business.

Affiliations, or relationships with other healthcare organizations that do not involve any changes in ownership, are an attractive option for companies looking to reap the benefits of increased scale without sacrificing ownership as part of the deal. There are some drawbacks when it comes to involving your company in an affiliation, however.

Why affiliate?

Healthcare organizations seek affiliate relationships to enhance their overall scale, quality, funding, and integration- benefits associated with any partnership. What sets affiliations apart, however, is the fact that the organization seeking the affiliation still retains full control over the organization.

Affiliation Threats

Affiliations sound like a no-brainer decision for hospitals, and a better alternative to a merger, or other kind of partnership, but there are some clear risks involved in the process. It is vital for boards and management teams to define objectives before pursuing affiliations, in order to monitor areas like:

  • Realized benefits- Since affiliate relationships involve two separate leaders with their own particular goals and agendas, the partnerships can easily become combative rather than collaborative. Full integration is necessary for a partnership, meaning that an affiliation is not the place to invest all your individual interests.
  • Stability- While mergers are designed as long term stable structures, affiliations are designed to maintain organizational control by forgoing structural stability. Affiliations are often used to solve long term needs but this can put the organization at risk of overreliance on a partner who may change interests in the future. For this reason, there needs to be constant correspondence between partners involved in affiliations to ensure success.
  • Opportunity cost- It is valuable to understand all of your options (if you do not have much experience with mergers and acquisitions) before you commit to an affiliation. It is vital to analyze the cost and overall benefit of an affiliation. Besides mergers, organizations can look to other options for partnership like management agreements or service-line joint ventures.
  • Termination- Part of the affiliation design is eventual termination. It becomes difficult realizing when the agreement no longer meets the needs of both partners. It is helpful for organizations to be aware of all termination options. It is common to see the larger organization in an affiliation simply absorb the smaller organization at an unfair price. An affiliation that outlines what temporary needs will be fulfilled by the partnership and how each partner will be stronger at the end of the deal will be far more successful than an affiliation that goes into the process without clear ambitions.

Alleviate the stress of affiliation

Though there are potential risks in any affiliation, it helps to take a few steps to prepare your organization for an affiliate relationship:

  1. Evaluate all your options- Is an affiliation the best solution for your organization’s temporary setback? Be sure to compare the full range of partnership options. Since a hospital is a vital part of any community, be sure to prioritize its merit and long term success. Start by assessing the hospital’s business value which will indicate your range of options.
  2. Consider the long term implications carefully- Be sure that both parties will leave the partnership stronger, not weaker than when the affiliation began.
  3. Have objectives that fit the affiliation structure- Affiliations should be pursued to fit short term needs, so if your organization is looking to fulfill a long term need, consider other partnership options.

Research is key. Evaluate the drawbacks of affiliations before you get too hooked on the initial attraction of these partnerships.

Questions? Contact any member of our Healthcare Services Team.

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