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4 Ways to Ensure a Successful Hospital Merger or Acquisition

As pressure to improve quality and reduce costs mounts and capital needs are outstripping access and availability, standalone healthcare organizations will become less common in the healthcare landscape. However, hospitals and health systems that form partnerships and other forms of affiliation will still face unstable economic conditions, the as-yet unclear impact of reform initiatives and the challenges of realizing the anticipated benefits of a merger or affiliation.

Hospitals considering a merger or affiliation can increase their chances of achieving outcome targets and leveraging organizational synergies when thoughtful consideration is given to the broad and complex topics involved — from vision and culture to physician and clinical impacts to financial benefits and organizational and operational concerns. Kathleen H. McCarthy, vice president of Health Strategies & Solutions, offers four strategies for providers considering affiliation or in the early stages of crafting the logistics of a merger or acquisition.

1. Clarify rationale for affiliation. Identifying what the organizations will accomplish together that they cannot achieve individually, including expected organizational and community benefits, should be one of the first steps when considering an acquisition or merger. Enhanced services and clinical capabilities; higher quality care and a better patient care experience; and financial benefits, including access to capital and economies of scale, are among the most common benefits sought through affiliation.

This step "provides the framework for organizations to identify and select a partner that is the best strategic fit based on its ability to meet the identified needs," says Ms. McCarthy. It is also important to clarify the rationale for affiliation before addressing the structure of the combined organization, according to Ms. McCarthy. "One of the biggest challenges is to make sure leaders address the functional ends of the relationship — what they're trying to get in terms of potential benefit — before they address the structure. Form follows function," she says. Organizations may be tempted to dive into discussions about what the new organization might look like without a clear understanding of what each party would like to achieve from an affiliation. This can result in a corporate structure and organizational design that do not support the desired ends of the affiliation and produce less than optimal performance for the combined organization.

Furthermore, organizations should consider mergers or acquisitions in a proactive manner as part of the strategic planning process — before finances, local market dynamics or regulatory influences force the issue. Preparing for and considering partnerships or other types of affiliation as a lever for the organization to continue thriving will "result in better decisions and provide more options for hospital leaders and the communities they serve than if they wait and respond to the market influences," Ms. McCarthy says.

2. Create value (cost/quality). Healthcare reform has placed an increased focus on demonstrating quality outcomes and providing low cost care. Healthcare leaders should evaluate the degree to which quality of care can be improved through a merger or affiliation. Historically, quality initiatives have been among the last to be instituted in mergers and acquisitions. Ms. McCarthy suggests looking at factors such as use of evidence-based medicine and other care management protocols, management and staff accountability for quality outcomes and use of information technology to support quality improvement. Effective clinical resource utilization is also important to assess as measured by readmission rates, emergency department utilization, length of stay and cost per case. Leaders should calculate these factors' effects on quality and cost to determine the potential benefit of a partnership.

The current healthcare environment is particularly challenging for providers because organizations are in a transition period, shifting from a volume-driven to a value-oriented payment system, while the rules for accountable care organizations and related payment systems are still in the formative stages. Ms. McCarthy says, "I think a critical success factor will be to engage physicians and other clinical leaders to identify opportunities to create value by drawing on the clinical strengths and capabilities of the affiliating organizations to deliver care in the most cost-effective manner."  

3. Over-communicate. The rationale for affiliation should form the basis for initial communication with key constituents (e.g., medical staff, community leaders, political representatives) and be the touch stone throughout the process. While some aspects of partnership discussions must remain confidential, a formal communications plan with frequent, transparent and consistent communication with key stakeholder groups has proven to be most effective for providers in managing the affiliation process.

Leaders should routinely communicate both internally with hospital staff and physicians, and externally with community members. Ms. McCarthy suggests over-communicating. "One of the big challenges is effectively engaging and communicating with key constituents because a lot of uncertainty and fear is generated by merger or affiliation discussions; each one of those groups is interested in determining how the change will impact them. If leaders are able to articulate and focus on what the goals of the affiliation are and what benefits will be produced, the organization will be much more successful in building internal consensus for change and executing business plans for the new organization," Ms. McCarthy says.   

4. Blend cultures. Finally, hospitals considering a merger or affiliation should evaluate the different cultures — the beliefs and norms of behavior that guide individual actions and decisions — in each organization and how the best of each can be leveraged to benefit the combined organization. A hospital's culture includes its values; communication and decision-making styles; risk orientation; and methods for organizational learning and development, among other factors. Ms. McCarthy says hospital leaders often neglect the organizations' cultural similarities and differences in the early stages of affiliation discussions. "The commonly cited phrase — culture eats strategy for lunch — applies in merger and acquisition planning. Conducting a formal culture assessment as part of the merger planning process will identify areas of synergy and potential incompatibility and form the basis for a plan to proactively address issues and opportunities to result in a strong culture for the combined organization," she suggests. As a preliminary indicator of an organization's culture, leaders can look at existing employee satisfaction and engagement surveys, many of which include questions about the hospital's culture.

By clarifying the rationale for a partnership, creating value through the combined organization, effectively communicating and integrating hospital cultures, leaders will have a greater chance of achieving together what they cannot do alone and realizing the full benefits of a merger or affiliation.

More information on healthcare mergers and acquisitions is available in Health Strategies & Solutions' new book, Leading Your Healthcare Organization Through a Merger or Acquisition, published by Health Administration Press.

Learn more about Health Strategies & Solutions.

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