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The "Curse" of Academic Medical Center, Community Hospital Mergers

Many academic medical centers are expanding by acquiring independent community hospitals, particularly as a means to strengthen population health management and expand market share. But Paul Levy, former president and CEO of Beth Israel Deaconess Medical Center in Boston and author of the blog Not Running a Hospital, wrote a post saying this strategy may end in a "winner's curse." 

A winner's curse is a phenomenon that might occur in common value auctions with incomplete information. A common value auction describes an auction in which the good being auctioned has the same value to every participant, although none might not precisely what the value is. In those auctions, the winner tends to overpay or be "cursed" in two main ways, according to the blog.

One is when the winning bid exceeds the value of the auctioned asset, making the winner worse off in absolute terms. The second is when the value of the gained asset is less than the bidder expected, so the bidder might still have a net gain but will be worse off than they had anticipated.

Mr. Levy linked this phenomenon to healthcare M&A using a specific analogy. A community hospital with substandard earnings and difficulty recruiting physicians lets academic medical centers know it is "up for adoption." The AMCs begin bidding.

"Since these are all nonprofit organizations, there is not a 'price' that gets paid from one party to another, but there are commitments that must be made to win the auction," wrote Mr. Levy. "The mother ship must promise to invest a certain number of dollars in renewal and replacement of buildings and equipment; it becomes the guarantor of your outstanding debt and takes on the obligations of your retirement system; it promises to help with recruitment and retention of local primary care and specialty doctors; and it must permit you to have representation on the governing board of the ACO."

Once the acquisition is made, the AMC devotes time and effort to clinical integration, business system alignment and governance integration. The "mother ship" might pay so much attention to aligning these realms that it "neglects the kind of process improvements" necessary at its own organization.

In the end, the AMC may realize its acquisition is not a profit center. The acquired community hospital is a cost center. But here's where timing comes into play, says Mr. Levy. "Since this takes a few years, by then the CEO who negotiated the deal is off to another job, but the board of trustees remains, wondering how their new CEO is going to solve the problem of a steadily growing erosion of earnings."

More Articles on Hospital M&A:

9 Recent Hospital Transactions and Partnerships
Consolidation Nation: Where Will the Hospital Industry Stand After the Tenet-Vanguard Merger?
10 Must-Read Stories on Consolidation in Healthcare

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