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Defining the 'good' merger: 4 key takeaways

"Out with the old and in with the new" is at the heart of many healthcare organizations' strategies to meet the future demands of healthcare.

Forward-looking hospitals and health systems realize they must change certain elements of their business models and workflow that have been engrained in their organizations for years, such as transitioning from volume- to value-based systems of pay and embracing new approaches to care delivery, including developing team-based care models and devising population health management strategies.  

As providers navigate these changes and the obstacles that come with them, many are searching for partners that can help them achieve their vision for the future. New relationships offer hospitals and health systems greater opportunities through combining resources and gaining scale, but not all mergers or acquisitions fulfill the criteria of a "good" partnership, according to The New England Journal of Medicine. Here are four key takeaways on the defining points of a "good" merger.

1. A good merger enhances the value of healthcare by lowering costs, improving outcomes, or both, enabling providers to create stronger competition. Conversely, the more common, albeit "bad" alternative is a merger that is intended to reduce competition in a given market by locking in referrals or helping providers negotiate higher prices, allowing them to avoid the challenge of actually improving outcomes and efficiency, according to the report.

2. Good intentions alone are not enough to create good mergers. It is imperative for healthcare organizations considering a merger to explicitly agree on a defined set of goals before the merger is official. Creating these goals will help both sides of the merger resist the temptation to avoid or defer the disruption that is inextricable from the reorganization of care. Additionally, stakeholders and regulators will have a clearer image of what the proposed deal will look like, and the community will have the opportunity to hold the future combined entity accountable for these goals post-merger, according to the report.

3. Does the proposed transaction generate "cognizable efficiencies"? "If a merger has the potential to reduce competition and thereby allow the merging parties to raise prices (or reduce quality), only cognizable efficiencies can offset this potential harm," the report states. Cognizable efficiencies are not vague or speculative, but verifiable, merger-specific and measurable improvements in cost or quality that are produced from the merger and offset other costs associated with the merger, according to the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission. Merger-specific efficiencies refer to the benefits or cost savings that could not reasonably be realized without the proposed merger, which are then assessed against the cost of the merger.

Identifying cognizable efficiencies could be extremely useful to organizations that are critically assessing the value that a proposed merger could produce. For instance, if a merger allows an organization to reduce or avoid an otherwise necessary capital expenditure, the waived spending is potentially cognizable, according to the report. While it is difficult to calculate cognizable efficiencies, if they are not specified in advance, they could take years to be achieved, or not at all.

4. It is up to healthcare leaders to create good mergers. Although regulators can sometimes prevent a "bad" merger, they cannot build a good one. The decisions healthcare leaders make as the trend of consolidation continues to grow will have a significant impact on the healthcare system's ability to provide people with high-quality care at lower costs. However, presently, the most consistently documented outcome of mergers is higher prices, especially when the joining organizations are located in close proximity to one another.

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