Strategic Restructuring for Community Clinics: C A L I FOR N I A Options and Examples H EALTH C ARE F OU NDATION Introduction California is home to over 264 licensed The weakened economy has brought the entire primary care clinics. It also has a state primary nonprofit sector to a moment of profound care association (the California Primary Care reflection. Some predict that 10 percent of all Association) and a network of over a dozen nonprofits will go out of business in this recession,1 regional clinic associations, or consortia, that while others view the worsening economic represent community clinics and health centers Issue Brief storm as an opportunity to restructure the at the local level. Some of these consortia provide sector by focusing on options for organizational technical support, such as centralized human consolidation.2 Nonprofits around the country resource management, practice management, are looking for ways to survive the downturn, group purchasing, electronic health records maximize efficiencies, continue to serve those in management, and back-office administration. greatest need, and increase their social impact. This issue brief will explore CHCs’ and Community health centers (CHCs), which rely regional consortia’s experience with various heavily on state and federal reimbursements and types of partnerships, including administrative are coping with other significant challenges, consolidation and merger, and examine what are especially vulnerable. Although the federal opportunities strategic restructuring might offer economic stimulus package approved in February clinics seeking to strengthen their positions now offers clinics immediate short-term support to and remain viable and vital in the years to come. enhance technical capacity, facility development, and care delivery, funds will not be available What Is Strategic Restructuring? to help shore up reserves or otherwise sustain There are many ways for nonprofit organizations organizational operations.3 to work together, from the most basic forms of collaboration all the way to fully integrated The prospects for survival among California mergers. The partnership matrix (Figure 1 on clinics depend in part on how they answer two page 2) presents the range of options available. critical questions: 1) “How can we best compete for the resources we need to do our work?” and Most CHCs have extensive experience 2) “In what ways could we be stronger by working collaborating with others in their field and together?” Strategic restructuring — establishing community, and much of the consortia’s efforts formal partnerships ranging from administrative focus on fostering collaboration among the consolidation to fully integrated mergers — could clinics in their regions. These often transient help answer both questions. It is an approach that forms of partnership are regarded in the matrix has long been used in the for-profit sector and is chart as basic collaboration rather than strategic becoming increasingly common among nonprofits. restructuring. J une 2009 Figure 1. The Partnership Matrix CONTRACT OR MOU CHANGE IN CORPORATE STRUCTURE ADMINISTRATION Management Services Administrative Consolidation Organization Contracting services Collaboration Enchanging services Information Sharing services Corporate Merger sharing Parent/Subsidiary Corporation Program Joint Programming coordination Single focus or program Joint planning Multi-focus or program PROGRAM Integrated system Joint Venture GREATER AUTONOMY GREATER INTEGRATION STRATEGIC RESTRUCTURING Collaboration Strategic Alliance Corporate Integration • No permanent organizational • Involves a commitment for the future • Involves changes to corporate control commitment • Decision-making power is shared or transferred and/or structure, including creation and/or • Decision-making power remains dissolution of one or more organizations • Agreement driven with individual organizations Source: La Piana Consulting Once a partnership becomes more formalized — involving more of the organizations (e.g., one CHC contracts a commitment to continue, for the foreseeable future, with another to provide financial management shared or transferred decision-making power, as well as services); a formal agreement — it can be described as strategic Joint programming. The joint launching and restructuring. With strategic restructuring, two or managing of one or more programs to further more independent organizations establish an ongoing the programmatic mission of the participating relationship to increase the administrative efficiency organizations (e.g., a centralized disease management and/or further the programmatic mission of one or system); more of the participating organizations through shared, transferred, or combined services, resources, or programs. Management services organization. The creation Examples include: 4 of a new organization to integrate administrative functions; Administrative consolidation. The sharing, exchange, or contracting of administrative functions Joint venture corporation. The creation of a new to increase the administrative efficiency of one or organization to further a specific administrative or 2  |  California HealthCare Foundation programmatic end of two or more organizations, Changes in patient mix. Growing numbers of with partner organizations sharing governance of the uninsured and underinsured patients, more managed new organization (e.g., a jointly established group care patients, an increasingly diverse population, and purchasing organization); and aging baby boomers; Merger. The integration of all programmatic and Workforce and leadership shortages. Shortage of administrative functions of two or more existing health care professionals and administrative staff, organizations to increase both administrative founding CEOs and other leaders approaching efficiency and program quality (e.g., two CHCs retirement; merge into one legal entity, or a CHC incorporates Inadequate facilities. Buildings requiring renovation a previously independent private practice into its or expansion, limited access to capital to finance organizational structure). improvements; Asset transfers, while not shown in Figure 1, are another Pressure to demonstrate outcomes. Information type of partnership common among CHCs, county management and quality improvement tools health providers, and private practices. A typical example becoming more sophisticated, costly technology would be the transfer of a county-run specialty clinic, upgrades; and such as dental or prenatal care, into the local CHC. These Uncertainties of health care reform. How health are not represented on the partnership matrix because reform efforts might affect clinics is still unclear. they are more transactional than ongoing. As they grapple with these challenges, clinics have earned While most nonprofits enter into strategic restructuring a reputation for shoring up gaps in the health care safety to enhance efficiencies or address financial pressures, net by efficiently providing a wide range of quality care they often end up with expanded services, improved and health education to diverse populations. With every administrative capacity, and greater market share.5 It is challenge comes the opportunity for clinics to strengthen clear that the practical value of strategic restructuring as a and own this niche and prove themselves as innovators in way to respond to both challenges and opportunities has the marketplace. become increasingly accepted and embraced throughout the nonprofit sector. What is less clear is the extent to Some clinics have already started to explore ways in which which CHCs — specifically those in California — have various forms of partnership can help them respond to considered or welcomed it as a means of addressing their challenges and opportunities. Sharing financial expertise specific needs. or other administrative functions is one way in which CHCs have sought to strengthen their capacity in these Challenges and Opportunities for CHCs areas and/or reduce overhead costs. Consortia have also In addition to the various pressures experienced by all played a role in making pooled resource opportunities nonprofit organizations, CHCs face unique challenges such as shared information technology and electronic and opportunities, both nationally and in California.6 records management available to member clinics. Joint Some of the most pressing include, but are not limited to: programming or shared facilities are other ways clinics Financial survival and competition. Dependence can combine expertise and resources to better serve on public funding, lack of adequate reserves, complex their communities. Finally, some CHCs have engaged financial management, and increasing competition; in mergers to add services (such as pediatric, dental, Strategic Restructuring for Community Clinics: Options and Examples  |  3 or mental health), expand their reach (through school- The Health Resources and Services Administration based or mobile clinics, for example), and/or ensure (HRSA) has been supporting and encouraging this type uninterrupted access to critical health care services for of cooperation among clinics for several years though its those most in need. Health Center Controlled Networks initiative. While many of the networks funded by HRSA focus largely on Strategic Restructuring among CHCs technology issues (health information technology and Mergers among CHCs appear to be more common in electronic health records, for example), others — such as California than in other states. However, other states may Miami’s Health Choice Network and Central Oklahoma take greater advantage of opportunities to consolidate Integrated Network System Inc. — supply a wide range of business functions to reduce overall costs and enhance services to their members.7 service delivery. It has been speculated that California’s high merger rate may be due in part to its relative size, with respect to the sheer number of clinics — particularly Examples of Collaboration Through California’s Regional Clinic Associations small, grassroots clinics — that exist. By the same token, • The Council of Community Clinics in San Diego the state may be too large and diverse to make some serves as the parent corporation for Council forms of back-office consolidation feasible at the state Connections and the Community Clinics Health level. Network (CCHN). Council Connections is a for-profit group purchasing organization serving members in 40 states; CCHN provides its 30-plus members (clinics Partnerships Short of Merger: as well as other consortia) with disease and quality Shared Administrative Functions management and managed care contracting services Clinics can collaborate on many levels short of merger, as well as information technology support. including sharing or integrating: • In 1996 the Alameda Health Consortium and seven of its member clinics created the Community Health Administrative functions, including human Center Network (CHCN). Its original purpose was to resources, purchasing, corporate compliance, and facilitate member clinics’ participation in the managed communication; care system and to support improvements in their operational infrastructures. CHCN has since expanded Clinical services and programs, such as health and now serves as both a practice management support network and a full-service managed care education, disease management, pharmacy, electronic service organization. medical records, and quality improvement; • The Redwood Community Health Coalition, Managed care functions including credentialing and serving Sonoma, Marin, Napa and Yolo counties, offers a wide range of support services to its member contracting; clinics, including a technical services organization that Finance, such as grants management, claims provides access to expertise in infrastructure, project management, and hosted software systems (such as processing, accounting, and billing; and an electronic health record), as well as a help desk. Information services/information technology, • The Central Valley Health Network recently hired a director of human resources to serve both the such as chief information officer services, project network and its member clinics. management, training, help desk, Web design, and • The six clinic members of Mendocino County’s infrastructure. Alliance for Rural Community Health are currently exploring the feasibility of sharing senior staff for human resources, information technology, and finance. 4  |  California HealthCare Foundation In California, collaborations of this type have for the home. Because neither was yet in severe financial crisis, most part been initiated at the consortia level. Some merger discussions were able to progress in an orderly and are well established, while in other cases consortia unhurried manner; the fact that the clinics already had are just beginning to explore what it would mean to established relationships with SCHC (Roseland’s medical share some level of staffing or functionality involving director was part of SCHC’s team) eased the transition. human resources, administration, finance, or quality The mergers were announced in 2008. improvement. SCHC has a track record of using mergers to diversify Clinic Mergers: Mini Case Study Examples its scope and deepen its impact in the Santa Rosa Completed mergers and merger discussions have been community. Although SCHC has engaged in such motivated by a variety of pressing events at individual partnerships as opportunities emerged, CEO Naomi clinics. At least 18 California clinics have undergone Fuchs made the case for a strategic approach that one or more mergers in the past 15 years, many of emphasizes going in “with eyes wide open” and taking them starting with a less permanent form of partnership care to ensure that the benefits to all parties are worth the (such as the consolidation of administrative functions as potential costs. governed by a management services agreement, or MSA) that eventually led to a merger. A few of these are profiled Mountain Valleys Health Centers: below.8 Although many share common characteristics, Merger in Response to a Leadership Transition each offers unique lessons. and Merger with a Private Practice Mountain Valleys Health Centers (MVHC) was formed Southwest Community Health Center: in 2001 by the merger of Butte Valley Medical Center Merger as a Strategic Choice and Big Valley Health Center. Both centers shared similar Southwest Community Health Center (SCHC) was missions and complementary services, though each served founded in 1996 as a family clinic serving southwest different rural communities in this tri-county area of Santa Rosa and has since opened several additional sites northeastern California. The merger arose in response to become the largest CHC in Sonoma County. Roseland to financial hardship at Butte Valley and the retirement Children’s Health Center had operated as a program of a of its longtime CEO. The leadership of both clinics had local multiservice agency since 1996, providing pediatric already developed a strong working relationship prior services through its school-based program. Santa Rosa to the merger, which smoothed the way for an MSA by Free Clinic started in 1999 as a program of another which the CEO of Big Valley took over management charitable agency to serve the homeless. responsibilities at Butte Valley after its CEO retired in 1999. This, in turn, allowed for a period of trust-building As small neighborhood programs, Roseland and the Free before entering into a full merger. MVHC CEO Dave Clinic had been operating on thin margins for some time. Jones reported that although the anticipated economies In 2007, conversations began about bringing both under of scale were not fully realized, the merger did enhance the auspices of SCHC, which had already engaged in the sustainability of community health care services in the several successful mergers and other partnerships. SCHC’s region through the consolidation of resources and efforts. Federally Qualified Health Center status had the potential to bring improved rates, and thus greater sustainability, to At the time this clinic merger was under way, a private the two smaller clinics. Roseland and the Free Clinic also practice group approached Big Valley and asked to be welcomed the opportunity to have a medically oriented brought under its aegis. Mergers or affiliations between Strategic Restructuring for Community Clinics: Options and Examples  |  5 CHCs and private practices are becoming increasingly The severity of the financial trouble at Sequoia, and common as physicians either retire or seek out a more CSV’s assumption of its debts along with its assets, satisfying experience than they might receive from a resulted in a complex merger process. In addition to the provider group. However, private practices may not legal costs involved in navigating through bankruptcy share the same mission as community clinics, nor are court to obtain the asset transfer agreement, the process their patient populations necessarily the same. Both took a great deal of time. While legal counsel represented of these factors were cited as challenges in the cultural CSV in the courts, Schilling and his staff delved into integration following MVHC’s acquisition of the practice. sorting out and renegotiating the numerous grants, The physicians had to adjust to the more charitably loans, leases, and contracts Sequoia had left behind. minded clinic culture, and they brought with them a In particular, obtaining updated licenses and permits different clientele than typical clinic patients: Many of through HRSA and state agencies was no small task. their patients didn’t qualify for federal reimbursements, so the clinic in effect doubled its size without increasing Far from a planned partnership, CSV’s acquisition its federal grant dollars. Jones reports that MVHC is still of Sequoia might best be described as a “merger by completing the transition from both the clinic and private necessity.” As Schilling characterized it: “Our choice was practice mergers and probably will not engage in another to either watch them shut down, or to rescue them.” merger until these have fully settled. AltaMed: Merger as a Competitive Strategy Clinica Sierra Vista: AltaMed Health Services Corp., serving Southern Merger as a Response to Financial Crisis California for nearly 40 years, is one of the five largest Clinica Sierra Vista (CSV) began in 1971 as a Federally Qualified Health Centers nationwide. Founded small, storefront clinic to meet the needs of migrant as the East Los Angeles Barrio Free Clinic in 1969 by farmworkers in the southern San Joaquin Valley. It has volunteer community leaders, AltaMed now serves over since expanded its services to diverse communities in 66,000 families per year, offering a wide array of services Kern and Inyo counties and grown to become one of and programs. It has grown in large part through the the largest private, nonprofit health center systems in the strategic and proactive use of mergers to expand capacity state. Sequoia Community Health Centers was established and build market share, and ultimately to deliver services in 1978 as a small health and social outreach program to a broader swath of the regional community. in downtown Fresno and began providing clinic services two years later. Over the next 27 years, it added six sites, One of AltaMed’s most recent mergers was with enabling it to serve a diverse client population of over Community Care Health Centers (CCHC) in Orange 37,000 by 2007. County in 2008. According to AltaMed CEO Cástulo de la Rocha, AltaMed had already identified a strategic In early 2008, Sequoia’s leadership contacted CSV’s interest in expanding into that geographic area, which CEO, Stephen Schilling, for his counsel on financial and coincided with CCHC’s needs when the latter found administrative issues. CSV provided the requested advice itself in financial difficulties and failed to receive Section and even extended a loan to Sequoia in an effort to help 330 funding. What had started as conversations about it fill gaps and effect a turnaround. However, Sequoia less formal collaborative opportunities soon turned ultimately filed for bankruptcy. CSV then proposed to the into successful merger discussions. Shortly after that courts that it acquire Sequoia’s assets in order to maintain merger, AltaMed acquired three additional practices in the provision of services to the Fresno community. Orange County, effecting fast growth in that area. This is 6  |  California HealthCare Foundation illustrative of AltaMed’s use of partnership to enhance its such as an emergency room diversion project it conducts competitive position, and reflects de la Rocha’s conviction in partnership with the hospital. that CHCs are best positioned — more so than private physicians or other types of providers — to provide a true The Effort later merged with the Birth and Family Health medical home to the populations in greatest need. Center in 2008, adding prenatal and perinatal care to its portfolio of services, and it continues to consider merger The Effort: in cases where it will strengthen its ability to serve the Merger to Strengthen Business Model community. Family Service Agency (FSA) in Sacramento was established in 1953 to provide mental health and social LifeLong Medical Care: Initial Use of External services in support of children and families. The Effort Experts Builds Future Capacity was founded in the 1970s as a substance abuse clinic LifeLong Medical Care operates nine health centers following the Haight Ashbury Free Clinics model. tracing deep community roots back to 1976. It was formed when the Over 60 Health Center merged with In 2005, a significant leadership crisis prompted The Berkeley Primary Clinic in 1996. Since then, LifeLong Effort to seek out the advice of FSA’s CEO, Robert has maintained a steady pattern of growth allowing it to Caulk, who was well known for his knowledge of the expand its services in an urban area with an ethnically and local health care system. FSA was a more established socially diverse population. organization that had reached a point in its development where it needed to expand in order to remain sustainable. The merger of Over 60 Health Center and Berkeley Caulk proposed a merger of the two organizations, Primary Clinic was motivated by efforts to reduce preceded by a six-month management services contract overhead costs and consolidate administrative expertise. during which he and his leadership team worked to The two clinics had discussed the potential of merging for improve The Effort’s financial and management systems several years before formalizing their partnership. Because while the two boards conducted due diligence to explore this was a first-time merger for both clinics, consultant the viability of a merger. The merger was approved and expertise was used to carefully evaluate the feasibility of the combined organization adopted The Effort’s name. a merger before committing to a final decision, and was particularly important in assessing financial and business FSA was motivated in large part by recognition of model implications. Outside assistance was also used to external trends and the limitations of its own business quickly identify needs pertaining to human resources, model. At the time, many of the family mental health internal cultural integration, and relations with external services it had been providing were migrating to the stakeholders. LifeLong CEO Marty Lynch reported primary care sector, leaving less room for standalone that knowing the requirements and challenges ahead agencies like FSA. To remain relevant, it needed to of time helped both organizations prepare for a more broaden its scope of services. FSA was still small enough successful merger. This experience left LifeLong with a that it was relying on fundraising to meet its budget, tested process and real-life model to follow in subsequent and it saw the opportunity to achieve a scale with the merger/partnership activities, and it no longer relies on potential to become more self-sustaining. Since the outside assistance to evaluate and implement partnerships. merger, the organization’s budget has doubled in size, in part through the development of innovative programming The LifeLong merger did not entail a comprehensive cultural integration of the two partner clinics, at least Strategic Restructuring for Community Clinics: Options and Examples  |  7 at the outset. Instead, the new entity operated with the clinics had been independently, and thus became a more same administrative functions while the clinics and staff influential force in the community. retained their own identities in the community. Even so, the merged organization was stronger than the two Figure 2 identifies several other clinics that have gone through one or more mergers in the past 15 years. Figure 2. Merger Experience among California CHCs Crescent City Yreka 1. Mountain Valleys Health Centers Del Norte Siskiyou Modoc 2. Open Door Community Health Centers 3. West County Health Centers Inc.  4. Southwest Community Health Center Arcata 5. The Effort  Eureka Shasta Trinity Redding Lassen 6. Lifelong Medical Care Humboldt Susanville 7. LaClinica de La Raza Tehama Red Bluff 8. West Oakland Health Council Corning Plumas 9. Community Medical Centers Chico Butte 10. Axis Community Health Glenn Sierra Oroville Mendocino Yuba 11. Gardner Family Health Network Truckee Ukiah Sutter Yuba Nevada City 12. Planned Parenthood Mar Monte Colusa Placer Lake 13 Clinica Sierra Vista South Lake Tahoe 14. Santa Barbara Neighborhood Clinics  Yolo El Dorado Sacramento Healdsburg Sonoma Napa Alpine 15. AltaMed Health Services Corp. Sacramento Amador Napa Fairfield 16. Orange County Rescue Mission Vallejo Solano Calaveras 17. Neighborhood Healthcare Marin Oakland Contra Costa Stockton San Joaquin Tuolumne Mono 18. San Ysidro Health Center San Francisco  San Francisco  Fremont Modesto Mammoth Lakes  San Mateo Alameda Santa Clara Stanislaus Mariposa Bishop  San Mateo San Jose Madera  Santa Cruz Santa Clara Merced Madera Santa Cruz Hollister Fresno Monterey Salinas Fresno Inyo San Benito Visalia Tulare Monterey Tulare Avenal Kings Delano Ridgecrest San Luis Obispo Bakersfield San Luis Obispo  Kern Santa Maria Barstow Santa Barbara Lancaster San Bernardino Needles Lompoc Los Angeles Victorville Santa Barbara  Ventura Simi Valley Palmdale Los Angeles San Bernardino  Anaheim Palm Springs Long Beach  Santa Ana Indio Riverside Blythe Orange Escondido Oceanside  San Diego Imperial San Diego El Centro Chula Vista Source: La Piana Consulting 8  |  California HealthCare Foundation Merger Discussions That Do Not Result in a These mergers can be particularly complex if a clinic Merger became endangered through financial or administrative Some clinics have considered or discussed merging mismanagement. If the acquiring partner is not careful with another CHC but chose not to. Their reasons to start with a clean slate, the cleanup of bad books, for deciding against merger are typically rooted in old contracts, and the like can be both expensive and some form of self-interest on the part of the board, the time-consuming. administration, or both. In one example, the two boards were unable to agree on which CEO would serve as Partnerships Are Complicated by Differences in the leader of the new organization. Additionally, both Core Values or Mission clinics so strongly believed that their business model was Mergers are more difficult between partners with the “right” model that they were unwilling to consider differences in fundamental beliefs or values, however alternatives. In another case, two struggling clinics slight. Because most CHCs have similar missions — to conferred for a year until each board decided that their provide medical care to the most vulnerable — this may own clinic was the only one uniquely positioned to be less of a challenge in mergers between clinics than adequately serve the community. Both are now focused in those in which a clinic takes on a private practice or on how to survive independently, though it is unclear specialty service that is not already part of its portfolio. whether they will be able to do so. Such challenges are not insurmountable but can be Challenges and Lessons Learned deal-breakers if other complications already make Among nonprofit organizations, clinics face unique the partnership problematic. Technical issues such as challenges when merging or pursuing other types of finances or staffing arrangements often can be resolved strategic restructuring. While merger is seen as an through conscientious effort and communication, but a increasingly common strategic option in many subsectors, fundamental difference in core mission typically signals clinics are often reluctant to consider a merger until they a bad match and is likely to remain a sticking point. must — which by nature adds pressure to the process. Conversely, when partners share a commitment to the Differences in core values between clinics and private same values and ideals, they can more easily build on practices can also present challenges, as can dealing that commonality to arrive at mutually satisfactory with complex licensing and billing issues. Some of these agreements. challenges and lessons are further outlined below. Navigating Licensing and Billing Issues Takes Too Many Mergers Are by Necessity Rather Preparation and Perseverance Than by Strategic Choice Even in the case of a merger that has gone fairly smoothly, Despite their involvement in a clinic merger, several of securing updated licensing is typically an intensive the CEOs interviewed for this issue brief felt that clinics undertaking requiring tenaciousness in working with probably would only consider a merger as an option of HRSA and other oversight agencies. Dealing with gaps last resort. A few of the case studies involved this type of in the payment of reimbursements while licenses and merger, in which the destabilization of one clinic spurred permits are transferred requires cash reserves, and the its acquisition by another. The already challenging task process can take months. of implementing a successful merger is made even more difficult when it starts in the midst of a crisis. Strategic Restructuring for Community Clinics: Options and Examples  |  9 Establishing (or Repairing) Reputation in the Other factors cited by both clinic CEOs and the 2000 Community Is Important study include careful planning, flexibility in the face of Mergers can serve to enhance or jeopardize an unforeseen challenges, and attention to communication. organization’s community reputation. In the case of a merger where mismanagement or malfeasance Strong Leadership Is Essential During Times was involved, the surviving entity may have to do of Transition some damage control, reestablishing the trust of key One of the most significant contributors to a successful stakeholders and the community. On the other hand, an merger effort is skilled leadership. This includes organization entering a new community also has obstacles having a strong CEO to lead the process, as well as a to overcome as a perceived outsider. strong management and operations team to assist with implementation. Some found that having key leaders Economies of Scale Are Not Always Realized to already embedded in the partner organization was helpful the Degree Anticipated in effecting a smooth transition. Others spoke about the It is commonly assumed that mergers save money through sheer amount of time and attention needed to devote to the consolidation of services, administrative functions, the process and the importance of having dedicated staff etc. The reality is that mergers rarely result in hard cost to maintain these efforts. savings, and even when savings are achieved they can take a few years to materialize. Yet several interview subjects Success Breeds Success: Preexisting indicated that expansion allowed them to leverage, Relationships or Reputation Smooth the Way or spread out, operating (administrative, financial, Clinic CEOs who have demonstrated skilled leadership information technology, human resources, and other in turning their own clinics around and/or have been infrastructural) costs. While economies of scale can be an through a merger before are more likely to be approached attractive motivation, it is critical that such potential be and trusted as potential partners. considered alongside other, more mission-related benefits. Some of the merger examples detailed earlier started Factors Contributing to Success out as MSAs, which offered the advantage of allowing a Although some of the challenges clinics encounter in period of enhanced discovery and trust-building before merger situations are different from those faced by other the actual commitment to merge. nonprofits, the success factors, for the most part, are not. Most of the top six success factors cited in a 2000 study Financial and Legal Expertise Is Critical to of integrations and alliances among social service and the Process cultural organizations in the United States are also among Several interview subjects cited the importance of the top success factors cited by the clinic CEOs featured conducting a financial assessment when considering a in the examples above.9 These include: merger. In a few cases, funding had been made available Having a staff or board member to champion the to hire outside expertise to conduct this research, though alliance and lead the effort; this seems to be more the exception than the rule. Having highly skilled financial staff in-house can be a critical Positive past experiences with collaboration; asset, not only for planning in advance of a merger but in An orientation toward risk-taking and/or growth; and its implementation. Positive past relations with potential partners. 10  |  California HealthCare Foundation Legal counsel is also important. Every merger should be Personal Investment of Founding CEOs and/or Boards conducted with a careful eye toward the proper execution Among consortia directors interviewed for this issue of agreements. For some mergers, such as those involving brief, the most frequently cited barrier was the sense bankruptcy or significant liabilities, legal expertise may be of ownership and emotional attachment that goes necessary to untangle even greater complexities during the with leading a CHC. This is thought to be an issue negotiation and transition process. particularly with CEOs; many have been in this field (or even in their current positions) for as long as 30-plus Communication Is Key to Successful Cultural years, and in some areas there has been little turnover Integration in leadership since the 1970s. These founding leaders While the technical aspects of a merger can be have great personal investment in their organizations. challenging, care must be taken not to overlook the This level of dedication is seen not only among CEOs, “softer” aspects of organizational integration. Whether it but among their boards as well. There is a tendency in is a merger, an MSA situation, or simply the sharing of nonprofits of all types to build an organization around administrative staff, in all situations communication is specific personalities when leadership has been stable key. “Communicate early and often” is common — and for a long time; this can be a limiting factor when very sound — advice. decisions about the ultimate good of the organization are influenced by the personalities involved. Change becomes Recognizing and addressing cultural and organizational harder — especially major change, such as the prospect of personality differences is also important. An organization merging with another entity. taking on administrative functions for another needs to be conscious of the change that implies for those affected, and that doing things differently is not always easy. Community Identity and Organizational Culture Such concerns are even more acute after a full merger. Many CHCs were born out of community-driven efforts, However, while some deliberate effort toward cultural and their organizational identities are tightly linked integration is highly recommended, full integration is not with the local community — cultural and ethnic as well always necessary, or required — the parent organization as geographic. There are very real concerns about the can provide the common vision and identity while prospect of ceding control to an outside entity, and it is individual clinics maintain their unique culture reflecting human nature to want to protect one’s turf. The history their community. of merger and partnership efforts between clinics and hospitals10 has done little to assuage such concerns, as Barriers to Merger clinics often did not fare well in dealing with these larger On the whole, there is little evidence of a national partner entities. trend suggesting that clinics are merging with any great frequency. There does seem to be greater openness to Like most nonprofits, clinics tend to see themselves as sharing some level of administrative functions, but even unique, and each has its own organizational culture. This this is approached with caution. Given the fragility of defining culture may or may not be tied to the culture the many small clinics struggling to survive, what are the of the primary population served. In either case, cultural barriers to considering more formal and highly integrative differences among clinics are often seen as barriers to a models of strategic restructuring, such as merger? merger, as ideally the merger would result in a combined identity and common way of operating. No one is eager to risk giving up their identity and autonomy. Strategic Restructuring for Community Clinics: Options and Examples  |  11 Job Security suggests that “doing good” is “good enough,” but many In a merger, it is possible that some staff positions will CHCs have survived for the bulk of their existence on be consolidated and some existing personnel will be thin margins. These two dynamics together may have terminated. Often, one or both of the merging CEOs will desensitized some clinic leaders to the level of financial have a new job description or be let go. Fear of job losses or managerial crisis under which their organizations are can keep leaders from pursuing merger opportunities. operating. Failure to recognize the severity of these threats Additionally, clinics are also community employers and until it is too late contributes to the “emergency merger” may be reluctant to merge due to the risk of job losses, phenomenon illustrated in a few of the case study however minimal, in the local community. examples above. Stigma of Merger The flip side of this barrier to merger is that without a For the smaller or more vulnerable clinic, a merger may business-oriented perspective, or filter, through which to be perceived as a takeover, which can feel threatening view the clinic’s financial model, organizational capacity, and unpleasant. It is very important that both parties and evolving market position, CEOs and boards may fail feel respected in a merger process and that the partners to recognize strategic partnership opportunities. Knowing establish a basic level of trust so that neither feels like when and how to seize such opportunities is an important a victim. Although many mergers may feel (and in fact competitive advantage. may be) unequal, both parties should be credited for bringing something to the table, just as both are receiving Potential for Strategic Restructuring a potential benefit. Among CHCs Given what has — and has not — been under way in Some consortia directors indicated that although a California with regard to strategic restructuring among consortium may be in an ideal position to recognize CHCs, it appears that there may be some untapped and point out opportunities for collaboration, it can be potential. Clinics seeking to strengthen their position now awkward to raise the issue with member clinics because of and remain viable and vital in the years to come might the consortium’s role as a support to all of its members. be wise to consider strategic restructuring as one of many Consortia executive directors are supervised by their tools they can apply. The benefits of doing so will vary by boards, which are composed of member clinic CEOs, situation, but can include: thus making it challenging for consortia staff to endorse Increased administrative capacity and quality; potentially controversial concepts or actions involving those clinics. Economies of scale in purchasing, staffing, and/or service provision; Inability to Recognize Crisis or Identify Ability to serve a greater number of patients and/or Opportunity broader geographic area; Few clinic CEOs have come to this work with formal training in health care administration, and thus many Ability to offer higher-quality and/or greater range of have not been equipped with advanced financial, business services; modeling, or negotiation skills. Likewise, few CHC Increased access to more sources of funding; boards either possess these skills or demand that they be applied in the clinic context. Not only has the clinic Access to Federally Qualified Health Center status sector been dominated by a values-driven ethos that (if not previously held); 12  |  California HealthCare Foundation Expanded options for succession planning and Each CHC must carefully consider its situation when leadership development; evaluating potential partnership opportunities. While each type of strategic restructuring offers benefits, one might Enhanced visibility and a more prominent role in the be a better fit than another under specific conditions or at community; and a given point in time. Table 1 is an analysis of just some Stronger competitive position for contract of the potential pros and cons of each. negotiations or other advocacy efforts. Table 1. Pros and Cons of CHC Partnership Opportunities T y pe o f P a r t n e r s h i p P r o s / B e n ef i t s Cons / Cautions Administrative Consolidation •Allows each partner to maintain a relatively •Economies of scale are often difficult One or more CHCs contracts with another high degree of autonomy while still increasing to come by, slower to materialize, or to provide human resources and financial administrative capacity and quality and not as large as hoped. management services. realizing some economies of scale. or •Can make it easier to attract and afford higher Joint Programming quality management and administrative staff. Two or more CHCs work together to evaluate, •Can provide an opportunity to strengthen select and implement a centralized disease relationships and build trust among partners, management system. opening up opportunities for additional collaboration down the road. Management Services Organization or [same as above, plus:] •Consortia have different resources, Joint Venture Corporation •Allows for shared governance of the entity targeted work areas, and capacity; not Create or utilize the services of an independent providing the services. all are designed or funded to support organization to provide administrative, clinical, this type of effort at this time. •Allows each organization to focus on its core managed care and/or information technology •Each member clinic can contract mission and strengths. services to a group of clinics. for as few or as many services as Note: While multiple clinics could band together to establish •An independent organization is often better they wish; clinics that haven’t fully an independent organization to serve one or more of these suited to offer its services to an expanding functions, an alternative would be to build the capacity of embraced the concept of shared number of clinics, thus building strength, existing organizations to do more of this work throughout services may underutilize available the state. Several regional consortia play this role within their expertise, and scale that ultimately benefits resources and miss out on some of existing corporate structures, and several others are considering all participating clinics. doing so (see page 4). the benefits. Merger •Can allow smaller clinics — or any that are •Must be done carefully to ensure Two or more CHCs merge into one legal entity, struggling with developing, funding, and that close community ties are not or a CHC incorporates a previously independent supporting increasingly complex systems and compromised. private practice into its organizational structure. structures — to maintain or increase the level •Both the term and concept of of service they provide to their community. “merger” come with negative •Can better position clinics to compete for connotations for many; there is patients, contracts, funding, and staff. usually much resistance to address •Can facilitate a more coordinated system of and overcome. care within a given region. •Can be an effective means to secure stable and experienced leadership in the face of pending executive transition. •Potential to gain new sources of revenue. Strategic Restructuring for Community Clinics: Options and Examples  |  13 Implications and Recommendations partnership — not only cost savings, but other, more The use of merger and administrative consolidation by qualitative benefits — to help inform strategic choices. California’s CHCs and consortia suggests a nominal level of interest in strategic restructuring and presents Educate Clinic Leadership opportunities to learn from existing examples. It also In some cases, the CEO is open to strategic restructuring points to numerous options for educational opportunities options and the board is not. In other cases, it may and other actions that could serve to advance and be the CEO who keeps the board sheltered from the elevate this issue among clinics, highlighting strategic organization’s reality or from needs or opportunities that restructuring as a more accessible and viable set of might be viably addressed through merger or partnership. options. Both CEOs and boards need access to quality, accurate information to make the best decisions for their Change the Conversation organizations. This could be supported by augmenting Perceptions shape our reality. Many mergers are not existing executive training opportunities with board entered into as a strategic choice, but rather as a last development training and educational opportunities resort, further supporting the notion that mergers are that include discussion of strategic restructuring options. somehow evidence of failure. It is important to shift Ensuring that CEO and board training opportunities this paradigm to acknowledge that merger can be an build awareness of organizational capacity and business opportunity. Even for clinics that are not in a position model issues may help move longtime leaders away from to use a merger to expand their service area or scope of personal attachments and interests and engage them more programming, partnership may still be a viable strategy objectively in addressing the question of how best to serve for best serving the needs of the community, as a way to the community. “do more with less.” Even if this means the organization would no longer exist in its current form, its services Explore a Range of Educational Opportunities and employees could endure — it is not losing if the Other resources and tools that may be useful in community wins. positioning partnership as a strategic option for clinics include: The effort to open this dialogue could be supported Develop shared terminology. Identify and share by information that helps clinic CEOs and board language (including neutral terms that better reflect leaders begin to assess their position and to learn the benefits of collaboration) that can be used to about mergers that were proactively planned and discuss a broad range of partnership possibilities in a successfully approached. For example, it may be helpful less threatening way; to feature more in-depth cases in which mergers were approached strategically, sought out from an assumption Support research, presentations, trainings, and of opportunity rather than necessity, and were given targeted technical assistance to help clinic leaders time to unfold at an intentional and reasonable pace. plan. Presentations may be held in familiar forums Tools could be developed to enable CEOs and boards and venues, such as association events, and include to assess the strategic opportunities posed by various panels featuring clinic leaders who have been through partnership options. One tool in which some interview strategic restructuring themselves; subjects expressed an interest is a study revealing the Develop tools tailored to CHCs that can walk potential return on investment as a result of merger or CEOs and boards through the various partnership 14  |  California HealthCare Foundation configurations, pre-merger assessment, planning, sorting out finances, contracts, licensing, etc. Finally, implementation, and post-merger activities; and to encourage organizations to consider a wide array of partnership options, grant funds might be set aside for Maintain a pool of consultants available to help guide testing and/or exploring partnership ideas short of merger. the merger process, partnering with clinics in this work so that the organizations develop full ownership Support Consortia and buy-in. Consortia play an important role in modeling collaborative and partnership opportunities and providing Support Assessment various types of technical support to member CHCs. Several interview subjects cited the importance of Another way to enhance the conversation around pre-merger financial, human resources, legal, and public strategic restructuring could be to provide financial relations assessments, or other viability studies to help support to consortia to ensure that they survive the them make informed decisions. Such assessments often economic downturn so they can, in turn, continue to are best performed by an external expert or a third party, help strengthen clinics. Educating consortia leaders about suggesting a potential role for funders, consortia, or strategic restructuring may help enable them to think consultants. However, tools could also be provided to through strategic issues with their clinic membership, and help CHCs conduct such assessments, in whole or in may highlight more opportunities for consortia to provide part, on their own. centralized administrative support to member clinics. Training may be needed to help consortia directors have To further encourage the consideration of strategic these kinds of conversations with clinic CEOs and/or partnership as a proactive response rather than a reaction boards. to crisis, tools should be developed to help clinics assess strategic partnerships from an opportunistic approach, Be an Objective Third Party and Help identifying the potential benefits. Tools that include the Facilitate Connections whole scope of potential partnerships would allow clinics Funders and consortia are in a unique position to be to test lower-risk partnerships along the way, perhaps able to offer trusted advice to CHCs, encouraging starting with smaller, quick achievements to build trust, consideration of new solutions and approaches. They can and working toward more significant partnerships. also suggest potential partners and facilitate connections, Such tools should help clinics select the right level of not only with other clinics but with others with merger partnership for their goals at the time. experience, expert consultants, etc. Support Implementation Explore Incremental Approaches to In addition to assessment resources and tools, support is Partnership needed during the merger negotiation, implementation, Although mergers are a significant focus of this issue and post-merger integration phases. Clinics might benefit brief, research suggests that other forms of strategic from dedicated funds to engage external facilitation restructuring, short of merger, are probably more for exploratory conversations between CEOs and accessible and acceptable to many clinics, at least for the board chairs, as well as for ongoing patient/stakeholder time being. There may be potential for high-performing communications and marketing throughout the merger clinics to provide MSA services to smaller clinics to help process and transition. For particularly complex mergers, address pressing financial or other capacity issues, either extra support may be needed for implementation, Strategic Restructuring for Community Clinics: Options and Examples  |  15 to allow them to continue independently or as a precursor Conclusion to merger. Given the current economic climate and other pressures — both those that are unique to CHCs and Facilitate Longer-Term Conversations those common to nonprofits of all kinds — creative While incremental partnerships may be appealing to solutions are needed to ensure the continued provision many in the short term, long-term viability may depend of critical services to those in greatest need. Strategic on a more aggressive approach to consolidation. If restructuring offers a set of options for California’s universal health care becomes a reality, CHCs will find clinics to consider as they look at how to strengthen themselves competing more aggressively with a wider their organizations and build their capacity to deliver range of health care providers. CHCs have many strengths quality health care services. By learning more about these and advantages, including their community ties, ethos partnership options, CHCs can add tools to their strategic of frugality, culture of teamwork, and bipartisan political toolbox, enhancing their ability to proactively respond support.11 This positions CHCs as central players in any to emerging challenges and opportunities. Although the emerging managed care and universal health care system, experiences of clinics and consortia that have already making it increasingly important for clinics to become experimented with various forms of partnership offer advocates for themselves and their communities. To do excellent learning opportunities, more resources are so, they may need a stronger and more coordinated voice needed to advance and elevate the conversation about and approach to care. What exactly this might look like merger and administrative consolidation in the clinic in 10 to 20 years is uncertain, but ongoing conversations context. about the future of the sector should be both nurtured and supported and the widest possible range of options considered. Authors Heather Gowdy, Diane Wong, and Melissa Mendes Campos La Piana Consulting  About the F o u n d at i o n The California HealthCare Foundation is an independent philanthropy committed to improving the way health care is delivered and financed in California. By promoting innovations in care and broader access to information, our goal is to ensure that all Californians can get the care they need, when they need it, at a price they can afford. For more information, visit www.chcf.org. 16  |  California HealthCare Foundation Endnotes 1 0.See, for example, Sparer, Michael S., and Lawrence D. Brown. July/August 2000. “Uneasy Alliances: Managed 1.Wasley, Paula. 2008. “100,000 Nonprofit Groups Could Care Plans Formed by Safety-Net Providers.” Health Collapse in Next Two Years, Expert Predicts.” Chronicle of Affairs 19(4):23 – 35. Philanthropy 21(4):19. 1 1.Smith, Mark. February 19, 2009. “How Should CPCA 2.Cortez, A., W. Foster, and K. Milway. February 2009. Prepare for the Future?” Presentation at CPCA Strategy Nonprofit M&A: More Than a Tool for Tough Times. The Meeting. Bridgespan Group. 3.National Association of Community Health Centers. February 2009. The American Recovery and Reinvestment Act of 2009: Frequently Asked Questions. 4.Adapted from Kohm, A., and D. La Piana. 2003. Strategic Restructuring for Nonprofit Organizations: Mergers, Integrations, and Alliances. Westport, CT: Chapin Hall Center for Children. 5.Ibid. 6.See, for example, National Association of Community Health Centers. 2008. A Sketch of Community Health Centers. Chart Book 2008; Schacht, J. April 2007. The Future of Community Clinics and Health Centers in California’s Safety Net: A Blueprint for Action — 2007 Update; and Capital Link and the California HealthCare Foundation. March 2009. California Community Clinics: A Financial Profile. 7.U.S. Health Resources and Services Administration. Fact Sheet: Health Center Controlled Networks ( www.hrsa.gov/ healthit/factsheet.htm). The HRSA Web site has an excellent overview of the types of collaboration possible within integrated service networks. See also Health Center Controlled Networks Matrix for Collaboration/Integration ( www.hrsa.gov/healthit/matrix.htm). 8.Case studies were informed by interviews with clinic CEOs, news articles, and clinic Web sites. Historical information was also drawn from: Wunsch, Bobbie, and Tracy Ream. July 2003. The Impact of Today’s Challenges on the Organizational Structure of California Community Health Centers. The California Wellness Foundation. 9.Kohm and La Piana, Strategic Restructuring for Nonprofit Organizations. Strategic Restructuring for Community Clinics: Options and Examples  |  17