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The ultimate transaction guidebook: How to keep your hospital from singing the post-merger blues

Numerous issues can materialize after a hospital or health system transaction has closed. However, there are steps organizations can take to help ensure they aren't a party to a failed deal.

There is rapid consolidation in the healthcare industry today. Large health systems are expanding their market presence by acquiring hospitals seeking financial sustainability, and some hospitals and health systems providing relatively the same quality of services are coming together to become more efficient.

A byproduct of increased consolidation is an uptick in relationships that are suspended or called off. Before entering into deals, hospital and health system CEOs and CFOs thoroughly evaluate the other organization involved in the transaction, but how can they ensure there won't be any post-deal dilemmas?

Is the timing right?  
When a hospital or system is contacted by an organization interested in partnering, affiliating or merging, the evaluation process begins immediately. "Systems shouldn't merge just to merge," says Jeff Hillebrand, who served as COO of Evanston, Ill.-based NorthShore University HealthSystem from 1995 to 2012 and is now the owner of JNH Consulting. "There must be sound reasoning, good strategic value and market impact to justify the time and energy required to execute a relationship," he says. If it is clear none of those items are going to be achieved through the transaction, either the timing of the deal isn't right or the other organization involved isn't the best fit.

Looking at the deal from both sides of the table

Strategic considerations
If it is the right time to pursue a transaction, there are a number of items to consider, and C-level executives must work together and undertake a structured evaluation process.

This step involves identifying key stakeholders (the community, patients, physicians, employees, taxpayers, etc.) that will be affected by the potential transaction, according to Victoria Poindexter, principal at H2C, a strategic advisory and investment banking firm with an exclusive focus on healthcare.

She says hospitals or systems considering a transaction should ask the following three questions:

  1. Does the proposed transaction result in better care, delivered with greater convenience and attention to the patient, at a lower cost?
  2. Does the proposed transaction improve my ability to compete in the market? What if the proposing partner aligns with my competitor?
  3. What does our organization bring to the transaction?

Many hospitals call off transactions over strategic objectives. For instance, last year, McCullough-Hyde Memorial Hospital in Oxford, Ohio, and Cincinnati-based Mercy Health decided to end exclusive affiliation negotiations because they couldn't align their strategic priorities. Same goes for Winfield, Ill.-based Cadence Health and Rockford (Ill.) Health System, which ended merger discussions in late January 2013. Leaders cited "differences" in strategic and operational planning, and Cadence Health then went on to finalize a merger with Chicago-based Northwestern Memorial HealthCare.

Financial considerations
If pursuing a transaction makes sense from a strategic perspective, then comes the financial and investment considerations. Phoenix-based Banner Health CFO Dennis Dahlen has been involved in several transactions this year, including Banner Health's acquisition of Casa Grande (Ariz.) Regional Medical Center in May. He says factors "such as whether the organization is a turnaround situation or requires significant capital are important" for the acquiring system to examine.

Health IT falls under the financial considerations as well. Implementing an EHR system requires a significant upfront investment, and even if the hospitals already have EHR systems in place, they will need to convert to a single EHR. Looking beyond the cost of the system itself, the expenses associated with all aspects of implementation, from training to infrastructure costs, must be considered. In addition, if a new EHR system is implemented, it may initially interrupt workflow and cause physician dissatisfaction. According to a survey from the Healthcare Financial Management Association, 46 percent of healthcare organizations took between one and two years to resume normal workflow after an EHR install, and 11 percent took between two and three years.

Following strategic and financial considerations, Mr. Dahlen recommends the acquiring hospital or system do an assessment of their organization's bandwidth or capacity to integrate a new entity before a final decision is made to pursue a deal.

Cultural considerations
Another critical part of the evaluation process is looking at the culture of the organizations entering into a deal. Ms. Poindexter says, "No partnership, affiliation or merger will succeed if the corporate cultures are incompatible." In fact, relationships between some of healthcare's bigger names — such as Detroit-based Henry Ford Health System and Royal Oak, Mich.-based Beaumont Health System — have been called off due to cultural differences months into the negotiation process.

As another example, if a non-sectarian hospital is entering into a transaction with a Catholic hospital or health system, corporate cultures may clash on what services the hospitals provide. In these transactions, it is important to discuss all potentially problematic services, such as contraceptive counseling, during the due diligence process, according to a MergerWatch report.

In any hospital merger or acquisition, post-deal governance plays a role in cultural fit. For a successful transaction, members of the C-suite and members of the boards of trustees have to be willing to make compromises and to keep in mind what both parties to the transaction value. However, if the acquiring hospital or system's values are drastically different than those of the other organization and budging on values isn't an option, both parties should consider looking to other parties to partner with.  

Avoiding post-deal problems
Even after going through a detailed and comprehensive evaluation process, there are still problems that can pop up after a transaction is executed. "The hard work doesn't start until after the effective date," says Mr. Hillebrand. After the deal closes, "management and board leadership must be committed to the new venture and passionate in their pursuit of the new reality," he says.

Some of the biggest issues that pop up post deal are attributable to indecision, delay and cultural incompatibility.

Overcoming issues associated with indecision and delay
After a deal is closed, Mr. Hillebrand suggests appointing an integration leader and putting together an integration team that meets on a weekly basis to discuss barriers to success. He also recommends developing a "100 items in 100 days plan" and holding the integration team accountable if the plan gets off path. "Flawless execution is paramount," says Mr. Hillebrand, and if issues do emerge post deal, it's important to act quickly to eliminate them. "Be decisive, thorough and fast," he says.

Overcoming cultural incompatibility
Communication is key to overcoming post-deal cultural incompatibility problems. "Hospital leaders would be well-served by reaching out to key personnel across different functional areas and various levels of seniority, as soon as practicable, in order to reinforce to all parties that their organization and their transaction partner are striving to serve the same stakeholders and share the same values," Ms. Poindexter says. This is vital because if the cultures of the organizations clash, the goals of a merger or acquisition will never be realized.

Sometimes achieving cultural compatibility requires a healthy dose of creativity. In June 2014, Richland, Wash.-based Kadlec Health System, a non-sectarian system, and Providence Health and Services, a Catholic system, signed a definitive agreement to affiliate. Kadlec was interested in affiliating because Providence had the "expertise and financial resources to keep up with the needs of the region," said Rand Wortman, president and CEO of Kadlec, in a news release. To ensure each hospital maintained its identity and to prevent cultural clash, the systems created Western HealthConnect, a non-religious organization.

Sometimes creating a new organization isn't an option, and in those instances it is vital the hospitals discuss what is important to each before a transaction is closed. If a deal involves a "merger of equals," making sure cultures are highly compatible "will go a long way to ensuring that the combined/partnering organizations can meet the inevitable post-transaction challenges," says Ms. Poindexter.

Transparency is key
Banner Health hasn't encountered any significant problems post deal, however, the system has experienced some minor setbacks. According to Mr. Dahlen, all of the issues can generally be attributed to either details that were not considered during negotiations or there not being a complete meeting of the minds concerning the transaction. "We've learned the hard way that asking and answering the hard questions and being transparent with our intentions is a good way to avoid post-closing problems," he says.

Key takeaways
When considering a merger, acquisition or partnership, hospital and system leaders need to look at transactions from a strategic, cultural and financial perspective. By asking the right questions and going through a thorough evaluation process, healthcare organizations can help ensure problems won't emerge after a deal closes. If issues do materialize after a transaction is executed, it's important members of the C-suite work together to address the problems quickly by being transparent with the other party involved in the transaction and focusing on the goals of the deal.  

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