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Strategic Hospital Unions: Considerations for a Healthy Merger

David C. Guth Jr. spent three decades as a non-profit behavioral health executive and observed many successful and non-successful mergers during his career. His new book, "Strategic Unions: A Marriage Guide for Health Non-for-Profit Mergers," shares his observations on what makes a successful merger and provides examples of mergers that improved both organizations, as well as those that failed. Here, he discusses some key concepts from his book and his thoughts on current M&A activity in the healthcare industry.

Question: Merger activity among healthcare providers seems to be continual and increasing. Can you summarize some of the forces causing this consolidation that you discuss in your book?   

David C. Guth Jr.:
I think it is important to make a distinction between some of the commonly occurring reasons organizations are seeking consolidation and what should be the reasons for the consideration of a merger or affiliation strategy. As I discuss in the book, some of the drivers I encounter while listening to participants in my workshops include: 1) fear of being the one being left behind as mergers occur all around; 2) a corollary to the first is simply moving into merger discussions because everyone else seems to be; 3) considering merger simply because another organization has come courting; and 4) external payors or regulators are requiring or compelling consolidation.  

Good reasons to merge always begin with a well-researched and constructed strategic plan. That plan should address the following questions: 1) Where are the revenue streams, technologies and competition likely to impact my current and emerging marketplace? 2) How might an ideally configured organization be structured and configured within that future to be most competitive? 3) What would need to change within our organization to position us as the most competitive organization within those scenarios?

When you take a look into the crystal ball of healthcare you see a couple of significant factors that can serve as drivers for considering merger or affiliation. There are some long overdue changes such as expanded coverage and real provider accountability, coupled with continued pressure to reduce cost, all in the context of a virtual explosion in the advancement of treatment and information technologies. All of these drivers speak to scale and infrastructure.  

Q: What are some of the reasons a hospital or health system may merge with another organization? Are certain motivations linked with a higher likelihood for a successful union? 

In my experience, the most successful mergers occur when the merging entities have a shared vision for the future of their sector, a common understanding of the unique advantage their particular union might provide, a compatible set of values and guiding principles, and a clear roadmap for using the union to reinvent the merged organization rather than collocating the legacy partners within common corporate walls. In my book I address many of these considerations one of which is this: Look for an organization that is compatible — not identical — to yours. Both parties gain when the other party brings strengths to the table not possessed by the other. And approach the merger with the humility of knowing that no matter how smart you are and how much careful planning you do, you cannot know all of the answers until you are living in the post-merger environment. This is much like parenthood. Ask any parent and they will tell you that you can have read and study all there is about being a parent, but you still won't know all you need to know until you are raising your child — if then!

Q: Chapter three in your book discusses types of potential partners and recommends avoiding a few: the Tease, the Harlot and the Sinking Ship were among them. Can you explain why these types of partners should be avoided?

Let's take these one at a time. In describing the Tease, I talk about the CEO who enjoys the process of exploration, but is never likely to commit. We all know some of the leaders within our communities and associations. They are eager participants in any conference or forum where new ideas are introduced and discussed, but their history tells you they are always late (or never) adopters. These are typically good, smart and generally interested people, they are just so change and risk-aversive they never pull the trigger on a major decision. If they are consistently the last in the field to adopt a new technology or program or strategy, why would they suddenly be willing to move forward with something as significant as a merger or affiliation? The truth is that they probably won't. Be careful to not expend too much of your time and resources in negotiations with those in this category. In my book I share how you might safeguard you and your organization from prolonged dead-end negotiations.

The second category is the Harlot. This describes the CEO whose love is for sale. In other words, they are exclusively seeking a home run for themselves by brokering their organization in exchange for a rich personal deal. This is not to be confused with CEOs who want to ensure a safe and comfortable landing as their organization moves forward in a merger. The Harlot enters the negotiations as if he/she personally owns the company and expects to be compensated accordingly. My rule of thumb is this: If you wouldn't feel comfortable with the state attorney general and the press knowing the full parameters of the deal, don't do the deal.

The third category is the Sinking Ship. In the book, I address the caution with which a merging entity should approach a potential acquisition that is in trouble, financial or otherwise. I know a few organizations that have done very well with a strategy of absorbing troubled and failing organizations. But this involves a great deal more than simply absorbing another organization into your successful business. As there are no acquisition costs associated with two not-for-profit organizations merging or affiliating, there is no discount for merging with one that is failing. If you are going to take the time, energy and expense of going through a merger, why not do that with a healthy organization than a troubled one?

Q: Your book includes a section on considerations for executive roles in the newly merged organization, and you mention that the "marriage" of two CEOs can sometimes be more difficult than the marriage of their respective organizations. Can you summarize some of your recommendations for assigning responsibilities for the new organization's leaders? 

Roles of the CEO are always a critical consideration. Boards and executive teams of successful not-for-profit organizations hold their CEOs in high regard and are generally unwilling to consider an affiliation that does not offer a responsible and respectful place for the CEO. In my experience as a consultant, I find that this is often the most serious sticking point and one for which an outside consultant can make all the difference. There are literally dozens of scenarios that can be considered. I always begin with a confidential interview (or survey) with each of the CEOs to discover their concerns, interests and aspirations. I then work with the CEOs to explore scenarios that are likely to meet the needs of all the parties. Usually this results in scenarios the CEOs wouldn't have known to consider by themselves. I have had many CEOs tell me this step alone is worth the full cost of the consultation.

But I also want to say that roles, compensation and titles alone are not the end of the story. Successful mergers involve a working relationship going forward that supports and respects the legacy leadership group.

Q: Finally, you include a considerable discussion in the book about how to communicate a merger to key stakeholders, including staff, physicians and the community. Can you share some of the best practices in this area? 

This is all about having a deep respect for the men and women working within your organization and understanding and appreciating how critical their work is to their life and their family. I am generally transparent to a fault. My 2,000 plus staff know they can ask me anything, and once a quarter I do an agency-wide call in which I encourage and even plead with them to ask me the tough questions. But not so with merger conversations and here is why. Mergers and affiliations have the potential to dramatically impact the personal livelihood and wellbeing of the employees. It is only human nature to experience enormous fear and anxiety if you hear your organization is involved in these discussions. This anxiety will not go away until you can answer very specific questions related to each employee. I like to announce the merger conversation when the plan is clear enough that these questions can be addressed for each and every person. In the book, I say a great deal about the importance of this and exactly how you manage this process. I always tell my consultation clients, if they ignore everything else I suggest — which they are welcome to do — please, please consider what I am suggesting around the communication plan!

More Articles on Mergers:

Hospital M&A Value Plummets 66% in 1Q 2013
Sebelius: PPACA, Antitrust Law in "Constant Tension"

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