Hospitals and health systems continue to expand beyond their historical acute-care focus. This ongoing diversification over nearly a decade is driven in large part by changes in reimbursement and the transition of many services from the in-patient to the out-patient setting.
Hospitals and health systems frequently turn to mergers, acquisitions, affiliations and partnerships as they strive to provide services more broadly across the continuum of care, diversify their sources of revenue and increase their geographic reach.
As these types of transactions move further away from the acute-care core to include, for instance, digital for-profit organizations, they can challenge the traditional notions about integration, harmonization and cultural alignment. The acquired groups may have very different employee demographics and cost structures. For example, home health care has a much higher percentage of lower skilled labor than acute care. Even with reimbursement pressures, the margins in acute care still exceed those in long-term care. And the economics of a community hospital are quite different than those of a teaching hospital.
These factors translate into different employee value propositions and reward structures. How well the acquirer addresses these differences can significantly impact the success of the arrangements.
From a rewards perspective, health care systems need to tackle some important philosophical questions, key among them — the amount of emphasis to place on internal equity versus market competitive rewards. Strict adherence to internal equity can lead organizations to overpay for certain positions in lower-cost labor markets. Although it may be a difficult transition for some systems, this expansion and diversification outside a core operating model often requires segmenting employee populations and tailoring rewards to each discreet segment.
Perhaps the most dramatic example is in the for-profit digital space, where mining health care data and deriving insights is in demand these days, and many start-ups are developing innovative and compelling tools. Health care systems amass vast amounts of data they may wish to leverage or monetize, taking systems further from their acute-care core, in many respects, and putting human capital challenges into sharp focus.
Many of these technology firms have venture capital or private equity backers. The compensation packages provide for short- and long-term incentive programs with significant upside potential to balance the considerable risk associated with these new ventures. Perquisites (e.g., free/subsidized meals or sabbaticals) may be as, or more, important to their employees than basic health and welfare benefits. Employee agreements tend to be customized around the individual rather than around roles. Perhaps, most importantly, they do not necessarily share the mission-driven, purpose-based values that exist in the health care environment.
Whether and how to integrate or harmonize these organizations can be a conundrum. The approach to integration should be dictated by the strategic rationale for the combination. Is the goal to expand the continuum of care, or is it to incubate and develop a new technology and spin-off as a new business once it matures? If the former, full integration may make sense in order to foster “systemness.” The latter might suggest more of a holding company approach that permits segmentation of this new population and differentiation of rewards and other elements of the employee experience from other parts of the system.
If the system pursues a path of segmentation, how will it make these new employees feel they are part of the broader organization — that is, foster systemness? How can it help the new groups benefit from the rest of the system’s overall culture without watering down the secret sauce that made the target so attractive in the first place?
The starting point is understanding your own culture and identifying your nonnegotiables — i.e., those elements of your culture and the way you operate that are essential to how you define yourselves. The next step is gaining a deep appreciation of what makes the new part of the organization successful. Finally, it is essential to have a comprehensive road map detailing how the cultural alignment will be implemented through structure, systems, processes and communication. While culture is critically important in any deal, it can play an outsized role in health care. The board of directors, deal leaders and/or team need to determine early on whether this should be a go/no-go decision.
What can systems do to ensure the most optimal outcome?
Here are a few tips:
- Involve HR in the deal process as early as possible to identify cultural and transition challenges.
- Be clear about your intent as a system and then translate that into the people impact.
- Decisions about whether or not to segment need to be made thoughtfully and intentionally, and align with the goals and objectives of the transaction.
- If you are going to segment your employee population, you need to introduce flexibility into the talent and reward plan design and delivery.
Authors
Ellen Federman is a member of Willis Towers Watson’s Global M&A practice and the lead for U.S. East Division, with a particular focus on the health care sector.
Susan Sulisz is a managing director in Willis Towers Watson’s Detroit office and leads executive compensation consulting to not-for-profit health care organizations.
Lindsay Wiggins is a senior consultant in Willis Towers Watson’s Los Angeles office and serves as the Rewards lead for the health care providers’ industry group.