Written by Kathleen Roney | December 14, 2012
In November, the University Medical Center, operator of University of Louisville Hospital and the James Graham Brown Cancer Center, announced a joint operating agreement bringing together University Hospital with KentuckyOne Health in Louisville. This joint operating agreement is the result of more than a two-year partner search for University Hospital, which faced a few obstacles along the way.
In 2011, the hospital was part of a proposed three-way merger between Jewish Hospital & St. Mary’s HealthCare in Louisville and Catholic Health Initiatives’ St. Joseph Health System in Lexington, Ky. Catholic Health Initiatives would have overseen the multi-hospital system. Kentucky Gov. Steve Beshear blocked the merger between the public and faith-based organizations, saying such an arrangement would result in the transfer of state assets, in the loss of governance over those state assets and was not in the best interest of the Commonwealth. This left financially challenged University Hospital without a partner. Jewish Hospital & St. Mary’s and St. Joseph Health System pursued the merger without University Hospital to form KentuckyOne.
Following the failed three-way merger, University Hospital re-started its partnership search, this time taking a more formal approach. After a second attempt, University Hospital again chose the same organizations — this time organized as KentuckyOne Health. However, the second time around, the organizations pursued a different structure — a joint operating agreement instead of a merger — that met the stipulations set by Gov. Beshear and Attorney General Conway.
Under the new deal, University Medical Center will retain ownership of its assets and will operate University Hospital’s Center for Woman and Infants; KentuckyOne Health will oversee day-to-day operations of the remainder of the hospital. All current policies for women’s health, end-of-life care and its pharmacy will remain unchanged, including a full range of reproductive services. In addition, KentuckyOne has committed to maintaining University Hospital’s current levels of charity care.
Developing a successful joint operating agreement between a public academic health center and a non-profit, religious-affiliated health system had its challenges, but University Hospital navigated the process — twice. Through two periods of negotiation and deal forming, David L. Dunn, MD, PhD, executive vice president for health affairs of University of Louisville, learned a great deal. Here he discusses the partnership search following Gov. Beshear and Attorney General Conway’s ruling and lessons he learned from the experience.
A second transaction process
“[When Gov. Beshear turned down the three-way merger he] indicated to [University of Louisville] that we needed to ‘cast our net more widely.’ I was at the University of Buffalo prior to coming to Louisville and had experience with a request for proposal process. We used that process as a wider net to search for a partner,” says Dr. Dunn.
In February, the hospital issued a request for proposal, hoping to combat financial challenges and make improvements. Proposals were accepted until March. In October, Dr. Dunn was given authority to choose a private partner and the KentuckyOne Health announcement was made in November.
The interesting point is that University Hospital chose KentuckyOne Health as a partner the second time around after a second, broader partnership search. According to Dr. Dunn, the difference was that University of Louisville satisfied the governor and attorney general’s concerns by following a competitive bid process and considering more partners. KentuckyOne was ultimately chosen because it was, and is, an extremely good fit, says Dr. Dunn.
Here are five recommendations from Dr. Dunn that other hospitals may be able to learn from in pursuing affiliations, partnerships or acquisitions of their own.
1. Conduct a financial analysis on your hospital. Dr. Dunn recommends conducting a complete financial overview of your hospital before pursuing a competitive process for two reasons.
“If you are a public entity, and need to involve elected state officials, the financial overview may give reason to why you are planning or pursuing a deal. [For] potential partners, a financial overview increases transparency so the partner may see [the hospital] it is considering clearly,” says Dr. Dunn.
2. Pursue a competitive process with a request for proposals.
Although University Hospital’s competitive process was an outgrowth of Gov. Beshear and Attorney General Conway’s concerns, Dr. Dunn would recommend other hospitals follow a competitive process.
“I think the RFP process — at least for academic medical centers — could be considered a best practice because it allows [the medical center] to disseminate [its] interest in obtaining a health system partner. Rather than in a random fashion, [the deal forms in] a very considered fashion. You can select a series of entities that target your terms and ask them to come to the table to discuss the deal further,” says Dr. Dunn.
3. Keep the necessary officials informed throughout the process.
University of Louisville and University Hospital executives maintained regular contact with Gov. Beshear, Attorney General Conway and their staff throughout the second partnership search, and Dr. Dunn believes this played a role in the success of the transaction.
“They provided advice or counsel before we launched the request for proposal. We asked for their input, because we wanted to make sure that the process we were following was acceptable to them,” says Dr. Dunn. “Even the [communication] plan we used was unique because [it was developed directly] from the guidance that Gov. Beshear and Attorney General Conway gave us as to what the problems in our first deal were.”
4. Engage expert consultants.
According to Dr. Dunn, having a legal team that understands transaction law, in particular, healthcare transaction law, made a big difference because they focused on the legality of the deal.
“They helped us work directly with Gov. Beshear and Attorney General Jack Conway to ensure the legal soundness of the deal as well,” says Dr. Dunn. “We also brought in consultants early on to help us with this process in terms of the analysis. When we issued the RFP we had to engage [certified public accountants] to examine the financial sustainability of the medical center and the health science center. We also engaged an investment banking firm to help us assess financial performance of the organizations that responded to the RFP and to compare the financial pro formas of the proposed transactions.”
5. Consider alignment on mission, culture and values early.
According to Dr. Dunn, considering how two or more organizations will align in mission, culture and values is important, and it is a good idea to get an understanding of those issues earlier rather than later. University Hospital discussed those issues with the organizations now part of KentuckyOne Health during the 2011 negotiations, so the discussions were not as in-depth the second time around. Regardless, they should always be discussed.
“We aligned missions by laying out our mission, understanding their mission and making sure there were large amounts of cross-over between our organizations,” says Dr. Dunn. “We also examined how KentuckyOne Health — in terms of its parent companies — comported itself, what its mission was and how it behaved as a corporate citizen.”
In terms of the religious culture and mission, Dr. Dunn says discussions were very clear around each organization having their own culture — whether it was a faith-based culture, a Catholic faith-based culture or an academic culture. “We had a crystal clear understanding that all of us would respect each other’s traditions but not adopt them.”
Despite challenges along the way, the University of Louisville was able to structure a joint operating agreement that satisfied all parties. The above practices helped the organizations find mutually agreeable terms to form a deal that passed state inspection. Although every deal is different and circumstantial, tenets for success can be applied in multiple situations.