The pace of healthcare mergers and other partnerships has increased during the last decade.
Substantial cost synergies are available to merger partners, and can be accelerated if the partners conduct pre-merger planning. With the proper planning, organizations can start to achieve synergies in three to six months after the partnership is finalized; without it, realization of cost reductions might take 12 to 18 months. To ensure the merger achieves its goals, here are five foundational questions to ask before executing a partnership agreement.
1. How does your organization’s market position and value-based-care strategy affect your choice of a partner?
Before selecting a merger partner, leaders of healthcare organizations (HCOs) must understand their current position in the market, define their desired role in healthcare delivery, and identify gaps between the current reality and capabilities required to achieve the vision.
An assessment of the HCO’s current position starts with a review of regional market fundamentals, such as population growth, competitors, physician platforms, and health plan development, as well as a financial/credit analysis. Leaders must also consider the HCO’s big-picture strategic alternatives. Among these are remaining a standalone entity, partnering with other providers through alternative integration models, acquiring entities as a growth strategy, and pursuing nontraditional partnerships.
Finally, HCO leaders should evaluate the local market’s shift toward value-based care to determine how quickly the organization needs to develop population health management capabilities. The right partnership could provide needed competencies and the resources to build the requisite infrastructure.
2. What is the value proposition of the partnership?
A partnership’s value proposition is based on an analysis of benefits, costs, and the overall advantage the partnering organizations can deliver to their “customers”—physicians, patients, community members, health plans, employers, and others.
To understand the value proposition, the HCO’s leaders should consider what strategic goals the partnership could address (e.g., growth in geographic footprint, expanded patient population, primary care physician network, consumer engagement and access, information technology, data analytics) and how these priorities would be better executed together than separately. The value proposition also should address how the partnership would enhance community services and create financial synergies.
3. How do you develop a business case for the partnership?
A business case captures the strategic and financial reasoning behind a proposed partnership. It describes for stakeholders the fundamentals of why it is worthwhile to continue exploring a particular partnership.
Among the key questions the business case should answer are:
• What is the partnership vision?
• Why are we the right partners?
• What will we accomplish together?
• Why should we pursue a formal partnership instead of collaboration under a looser agreement?
• What are the financial benefits to be achieved through partnership synergies?
• What do the strategic and financial futures of the partnering organizations look like apart, and what do they look like together?
• Why is now the right time?
For example, two HCOs decided to merge to increase their scale so that they can expand efficiency opportunities to reduce the cost of care, address complex socioeconomic issues in their communities, enhance access, and make the required investments in value-based care. The partners believed that full integration would enable them to reduce organizational redundancies and drive synergies while accomplishing joint objectives, such as offering expanded access to healthcare in rural communities.
4. How do partner organizations set targets for potential synergies?
To comply with laws and regulations, HCOs contemplating a merger normally use a third party, which obtains relevant data from both organizations without sharing competitively sensitive data between them. The third-party firm may use either an internal or an external peer-to-peer best-practice method to estimate the merger’s potential cost and growth synergies.
Ideally, the management teams of the merger partners each should have a high-quality software tool that enables them to engage in an integrated planning process for their organization, encompassing finance, operations, and strategy. Among other things, this application should enable executive teams to identify whether specific strategies can be supported financially, develop multi-year financial projections and plans, and run analyses of the financial and operational impact of meeting or not meeting partnership synergy targets at various levels and time intervals.
5. What are the key components of transition planning?
Following the execution of a Letter of Intent, the partners’ planning teams should consider synergy benefits, risks and barriers to realization, initial investment requirements, ongoing costs, time lines, impact on operations, and the merged organization’s ability to start work promptly, post-merger, to deliver the projected outcomes. Additionally, a broad base of operating executives identifies critical success factors and ensures that the transition plan addresses opportunities, costs, and risks.
Conclusion
Pre-merger planning can help HCO leadership teams maximize their ability to select the right partner for the right reasons. In addition, pre-merger planning enables the combined organization to start realizing the benefits of the merger as rapidly and efficiently as possible.
Dawn Samaris is a managing director of Kaufman Hall.
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