In today’s rural healthcare landscape, the stakes are high—and many rural hospitals are navigating strategic decisions without a full understanding either their strategic risk profile or the value they bring to potential or existing partnerships. Frequently, prospective partners and existing partners also fail to accurately account for rural affiliate value. As a result, opportunities to enhance rural affiliate contribution margin go unrealized. Based on flawed analysis, evaluation of performance and allocation of resources are impacted.
This session introduces a comprehensive framework for understanding how rural health systems create and sustain value. Participants will explore the risks and benefits of independence versus partnership, examine a range of partnership structures—including emerging models—and learn how to evaluate and strengthen their current or prospective alignment strategies. Through real-world case studies, this session provides practical tools to identify strategic and operational risks, mitigate partner-related challenges, and ensure that the full value of rural healthcare is recognized and leveraged in any collaborative arrangement.
Key learnings include:
- Assess Strategic and Operating Risks – Understand the key risks facing stand-alone rural hospitals and how they compare to those associated with partnerships.
- Evaluate Partnership Structures – Explore various partnership models, including traditional and emerging structures, and assess the pros and cons of each.
- Identify, Quantify and Communicate Value – Learn how to measure and articulate the unique value rural affiliates bring to current or future partnerships.
- Strengthen Existing Collaborations – Gain strategies for refining current partnerships to ensure mutual benefit, mitigate risks, and drive long-term sustainability.
Q&A
The ability of a rural hospital to remain independent is highly dependent on both the organization and the market conditions. Pressures from economies of scale and specialization persist, making it increasingly difficult for smaller organizations to operate alone. Additionally, the presence and quality of potential partners vary by region, influencing strategic options. With proposed Medicaid cuts and other market forces at play, we expect continued hospital closures and consolidation efforts to gradually reduce the number of independent rural hospitals over time.
The right time to consider a partnership is when you don’t have to. Ideally, discussions should begin from a position of relative strength, not out of urgency or financial distress. If you consider a new partnership from a place of weakness and desperation, the quality of the partner and associated terms may be compromised. If you wait until everyone around the board table agrees that it is the right time to explore partnering, you have waited too long. By engaging in partnership discussions early, while your organization is still strong, you retain greater leverage, require less from the arrangement, and are more likely to secure the investments and commitments that truly advance your mission. To support timely evaluation of options, discussions of strategic risk and strategic options should be an annual Board and senior leadership agenda item as well as analyses of multi year trends, including updates since the prior discussion.
There are generally two strategic approaches to how performance improvement can strengthen a partnership. The first approach involves completing an operational turnaround prior to entering negotiations, allowing the organization to engage from a position of strength. This can help secure the select priorities of the affiliate organization, including continued local governance, enhanced capital commitments, and assurances to maintain key services. In one notable case, the improved position even allowed for the inclusion of a rare exit clause in the agreement. The client ultimately exercised that clause as their own performance continued to improve, while the partner faced increasing regulatory, quality, and financial challenges.
The second approach involves leveraging a performance improvement plan and early evidence of progress as part of the value proposition to partners. Presenting a credible plan, along with initial results, demonstrates that operating risks are being addressed and are unlikely to jeopardize the partnership’s strategic value. It also reassures existing or prospective partners that the organization won’t become a drain on limited resources, including management capacity or attention.
It is our experience that having a credible plan for addressing operational challenges is essential for continued sustainability as an independent hospital and also adds significant value to organizations that may be exploring a partnership to achieve their strategic objectives.
To be effective and compelling, the value proposition needs to be quantified. You should anticipate push back and be prepared to engage on specifics. Even a large, sophisticated system may not appreciate the specific value that a rural affiliate brings to the table. Doing your homework, quantifying the benefits and being able to explain it are all essential. In some instances, it might be helpful to have an advisor who can bring prior national rural partnership experience at the table for these discussions.
To realize maximum benefit, we advise talking to multiple potential partners and engaging them around these topics to gain insight into their ability to recognize and reward the value that a rural affiliate brings. Engaging in a competitive process with multiple prospective partners in these discussions will yield the best results. If your current preferred partner refuses to acknowledge and engage around these facts, you probably have the wrong partner and should find one that is willing to recognize and reward your value.
One of our case studies (see the appendix of our presentation) highlights a scenario where the initial preferred partner declined to engage meaningfully around the organization’s value proposition. In response, our client launched a formal process to identify a partner that understood and appreciated their strategic value. The resulting partnership has since proven successful for both the organization and the broader community.
The lesson: present the facts, run the numbers, and share this information transparently with all prospective partners. Pay close attention to who is willing and able to engage with those facts. That responsiveness is a critical indicator of strategic alignment and a strong predictor of a sustainable, long-term, win-wins in a partnership. Most importantly, always ensure key terms are clearly defined in writing and backed by contractually enforceable language.
A key indicator is a refusal from the current partner to engage around an improved, correct methodology for evaluating performance of a rural affiliate. One common issue is allocating fixed overhead to the rural affiliate that would not go away if the rural affiliate were to go away. In such a case, the partner is loading fixed overhead onto the affiliate and the result of the analysis will be an incorrect evaluation of the rural affiliate’s accretive value or contribution margin. Additionally, significant disparities in analyzing the value of the home office cost allocation, combined with underinvestment in rural affiliates despite the partner benefiting from incremental referrals, the value of swing bed programs are all markers of an existing or prospective partner who is not appropriately valuing existing or potential rural affiliates.
In our practice, there is no one metric that would be the definitive marker. However, there are key indicators that indicate that the organization’s risk profile is becoming significantly more acute.
Examples include:
- Flat or declining top-line revenue over three or more years
- A sustained decrease in fund balance due to negative cash flow or underinvestment in capital relative to depreciation
- A growing backlog of deferred capital investment
- Declining market share or increasing outmigration of commercially insured patients
- An aging medical staff with limited succession planning
- Escalating competition without adequate resources to respond
These issues rarely manifest as a single event. More often, they represent a gradual erosion of strategic market position and clinical, financial, and operational strength – all of which indicate heightened strategic risk. Unfortunately, this slow decline is often missed—primarily because boards tend not to review long-term performance trends on a regular basis.
It is essential to assess the organization’s strategic risk profile on an annual basis and to examine how that risk is trending over time. Analyzing 5 and 7-year trends across key operating, financial, market, and value indicators offers a much clearer picture than simply comparing current performance to the prior year or to the annual budget. This longer-term view enables a more comprehensive understanding of how strategic risks are evolving.
Once these trends are understood, they should be integrated into a broader analysis that evaluates the organization’s alignment with its long-term strategic objectives. The challenge is that many warning signs of an unsustainable trajectory are cumulative and unfold gradually over several years. If the organization decides to partner, a worsening strategic risk profile creates specific needs and constraints that should inform the selection of a preferred partner, partnership structure and contractually enforceable terms.
