Michael Dowling: The prizes and pitfalls of hospital acquisitions

Consolidation is one of the most important trends shaping the healthcare industry today, but hospital and health system leaders rarely approach these ambitious actions with a clear sense of what makes an effective deal. Though partnerships, affiliations and joint ventures have become increasingly prevalent, as well as the acquisition of ambulatory service centers and other outpatient facilities, this article will focus on the mechanics of hospital acquisition.

As president and CEO of Northwell Health, I have seen our health system expand to 23 hospitals. From my experience, I can say there are four essential factors to consider before pursuing a hospital acquisition.

  1. Is the mission of the hospital you are in discussions with consistent with yours?
  2. Would the acquisition add value to your organization?
  3. What is the relative health of the hospital you are targeting? That encompasses not only financial health, but its reputation for clinical quality, its standing in the community, and the political dynamics of the hospital’s governing board and leadership team. Understanding a hospital from a holistic standpoint requires a full diagnostic analysis.
  4. Does the deal help you competitively? And what are the repercussions if one of your competitors acquires the hospital instead?

A shared mission

When analyzing another organization, one of the first things to focus on is its culture. If you only examine the hard facts and data, you will miss a major part of what's important. To the extent possible, leaders must try to understand the personality and mission of the organization. Culture is unbelievably important and dictates what the people are like and how they act interact internally. It's essential to talk to staff, not just leadership, and find out how the organization treats them. No matter what leadership says, talking with frontline staff is the only way to truly find out the organization's management style — is it control-based and top-down? Or bottom-up and more collaborative? You would be surprised how much you can learn by just walking around a facility and talking to everyone, including customers. If an organization's leadership doesn't give you access to the frontline staff, that should raise serious concerns.

Recognizing that the essence of an organization is what happens in the middle ranks, it's also essential to speak to middle management, because limiting interaction to leadership may give you a warped view. To ensure successful integration, be sure to listen attentively, observe day-to-day operations and identify people you can work with, as well as those who might be a problem later on.

Three red flags

There are three red flags we always examine when looking to acquire a hospital.

  1. Lack of transparency. If leaders are not fully transparent with you, they are trying to hide something.
  2. Micromanagement by the governing board. If the board doesn't allow its management team to oversee day-to-day operations without interference, you could have major problems. Ask yourself if you can change that culture, and if so, how difficult would it be? How can you make a board understand its responsibility to hold management accountable but not insert itself in day-to-day management?
  3. Long-term contracts with physicians and administrators. If contracts with clinical and administrative leaders are long and unbreakable, you could have trouble making changes and recruiting a new team if problems arise.

 How to ensure successful integration

The transition process is key to successfully integrating a new hospital. Some health systems facilitate integration with a separate transition team while the leaders who are actually running the facility are left out of the process. I have never found that to be an effective approach. The people running the core day-to-day business of a hospital should be responsible for the integration because they have to live with the results. Those leading integration efforts must be adaptable, agile and be committed to working incredibly hard. If those people aren't in the organization already, you have to find them and make necessary replacements. Also key is having the right people in finance, clinical leadership and human resources.

If you go back 10 years and look at the C-suites of hospitals Northwell has acquired, few of the same leaders are around today. Sometimes you need to make leadership changes quickly because the incumbents may be poisonous to the transition process. Other times, we have found leaders of newly acquired facilities to be very adaptable and open to change. The same standards must also be applied to physician leadership.

Pitfalls to avoid

One mistake executives often make when acquiring a hospital is looking at the short-term rather than taking the long view. It is easier to consider the immediate effects, and think how an acquisition will affect the organization in one or two years. I look at things from a five-year perspective, understanding that some problems may be tough to overcome in the beginning but can be solved over time. Another common oversight when taking on new hospitals is examining executive leadership but ignoring middle management. Organizational efficiency revolves around middle management, and an organization's future evolves from it.

Consolidation is an essential and beneficial move if you want to provide broad-based, holistic, coordinated care. If your main priority is improving patient outcomes, the advantages of consolidation outweigh its disadvantages. However, organizations that simply collect hospitals without properly integrating them or coordinating care are destined for failure. There are many health systems that are simply a collection of points on a map — freestanding silos independent of each other. The concept behind effective acquisition should be preventing duplication and enhancing efficiency, because if your only aim is to make yourself look big, employees and patients will be the ones to suffer.

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