Mergers and Acquisition Pitfalls to Avoid

Rob Austin and Jon Wiest, Healthcare Finance

As providers and health systems struggle amidst regulatory changes, reimbursement cuts, and shrinking margins a merger can seem like exactly the cure-all needed to ensure survivability. To be sure, consolidations have kept doors open for many a hospital. But these monumental transactions come with their fair share of pitfalls too, and there are both short- and long-term negative impacts that business decision-makers must be prepared to address.

In the first installment of this two-part series, we reported on why so many mega-mergers in healthcare, and other industries, often fail to deliver on the big promises top executives make when revealing that the hospitals or systems plan to combine.

The assimilation of two distinct organizations is really hard, said Rob Austin, director of Healthcare Consulting for Guidehouse and leading expert in the firm's performance excellence group. Inherent in that blending process are cultural assimilation, process, integration, technology, and system integration too. None of these are small tasks.

Supply chain is one area that can see a notable impact following a merger or acquisition. Some specific challenges revolve around clinician-led supply decision-making like which supplies they are going to use, also known as physician preference items. Also, a provider's ERPs are often different as are their item masters and contracts in play between each providers GPO or supply chain vendors can also create challenges as the two organizations try to become one, synchronizing and streamline their operations.

Austin used the example of total hip and knee replacement, which are profitable and high volume procedures. Between two merging systems, one uses supplier A and the other supplier B. Each gets the best pricing by committing to a percentage of marketshare. But when the systems come together, all of a sudden each system's marketshare changes because the two systems are now one, with one marketshare, and two vendors getting a smaller chunk of it than before.

Austin said in his experience what they see is supply costs can go up 10% or more in certain categories immediately post-merger, and that should be expected in just about any transaction.

He also cited a University of Pennsylvania study published earlier this year that showed merger target hospitals only save on average $176 thousand (or 1.5%) annually, "driven by geographically local efficiencies in price negotiations for high-tech 'physician preference items." The researchers found only mixed evidence on savings by acquirers.

One long-term ditch that leadership should avoid getting stuck in is an incomplete cultural integration whereby 5 to 10 years after a merger is completed, the hospitals are still acting as independent organizations. Maybe the EHR is integrated over time and the systems now have the same ERP, but clinicians still operate as though they are still tied to their particular hospital.

When clinicians don't align with new entity, it undermines the success of the merger. The health systems that are most cohesive and have the most operational efficiency and clinical practice unification view themselves as a system as opposed to a collection of individual hospitals.

"They are doing fine financially but are not as operationally efficient as they could be and their quality is fine but it could be better. They are also not the most cost-effective. Their costs are high compared to their competitors because of this lack of full system integration, particularly around the clinicians but it has to do with the administrators being more interested in their own profitability of their hospital as opposed to the overall profitability of the system."

Austin said a lot of it has to do with making structural changes and system changes that drive a change in culture, but here too, it's not easy. Getting people to change behavior and do things differently is hard and does not happen automatically. It requires a lot of educating, training, and communication.

"It's very, very time and labor intensive. I always tell CEOs they need to spend a large amount of time at the target organization and be very visible," says Jon Wiest, managing director at Guidehouse and an M&A expert.

Of course that can be very uncomfortable if the target organization is a competitor. Time, energy, and facetime can not be undervalued. Almost all your time should be spent at the target facility or system. Start out with frequently asked questions before the staff there even asks. Go into it telling them what they want to know, like if or how their compensation and benefits might change. Don't forget that doctors, nurses, and other clinical staff work in shifts so being there overnight to deliver these messages and important information is going to be very important. You will get questions and you need to get back to them quickly. Having those people feel like part of the family early on will be crucial to the cultural integration of both systems later. If you can have the usual operational meetings at the target facility to increase facetime and inclusivity, do it.

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