Merger and Acquisition in Healthcare – a Solution to a Problem or Problem In Need of a Solution?

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May 23, 2016

Merger and Acquisition in Healthcare – a Solution to a Problem or Problem In Need of a Solution?

Written by Jeff Hawley

Category: M&A

Healthcare organizations, ranging from large Integrated Delivery Networks (IDN’s) to smaller independent healthcare systems and provider organizations, have been engaging in merger and acquisition activities (M&A) at an increasing pace over the past several years. Interestingly, there has been a recent downturn in M&A activity in the last quarter according to Modern Healthcare’s Merger & Acquisitions premium database. It is not clear the reason for this recent decrease in activity, however, M&A continues to be a strategy employed by a number of organizations as a hedge against erosion of profitability. Organizations need to gain market share and competitive advantage or stave off acquisition by other organizations.

M&A activity will likely continue over the next several years at a fairly robust pace. From Q1- 2015 to Q1-2016, there were 575 deals. The value of the announced deals (137) was $95.5B.

There are a number of impacts from a Merger and Acquisition when considering the integration of technology, resources and culture of both the acquiring and acquired entity. Many organizations have struggled with defining a technology integration path, faced with rationalizing application portfolios that are rarely homogenous. Often, this integration is seen as disruptive and met with resistance from the providers and staff. In some cases, changes to the application portfolio are seen as a positive, providing an opportunity to upgrade function and capability. If the acquired organization has not invested in infrastructure and kept current, there is often significant capital required to bring the acquired organization current. Understanding the status of software and hardware through due diligence of the acquired organization prior to the deal close is essential in forecasting the effort and spend in the integration process.

An often overlooked component of M&A is the integration of culture. There are numerous examples of M&A’s that were a good fit technically and provided excellent opportunity to expand service lines, but represented real challenges in meshing different cultures. An interesting approach taken by Scott & White in their merger with Baylor defined a role to evaluate the cultures of the two organizations to determine degree of similarity. This approach determined that the two organizations were more similar than dissimilar and has been a good predictor of success in blending the two cultures.

In addition to culture, there is also the consideration of resources and whether there will be opportunities for all of the staff in the acquired organization. Skill and competency is another area creating issues with integration, particularly when the acquired organization is less technically adept. Blending technically diverse teams can represent a challenge if there are significant differences in competency. A potential benefit however is the infusion of a higher level of skill in the blended organization in these situations.

So what does the “report card” on M&A look like to date? The number of recent deals has certainly resulted in larger “parent” organizations. But in the process, many of these mergers have had negative impacts on revenue – either through unexpected capital outlay, staff not understanding the level of preparation and training necessary to appropriately integrate the two organizations and the failure to integrate processes to maintain coding, billing and follow up in addition to technical considerations. Further, there have been a large number of reported “culture clashes” – where integration of cultures was not given enough attention in the preliminary stages of the deal. An interesting example of this was the merger of two faith-based organizations with similar mission and values. Intuitively, it would be expected that the two cultures would be similar and integration would be natural. It turned out the two organizations had significantly different operational environments. The cultures were in fact very dissimilar, making the integration process much more difficult.

Another side effect of M&A is the turnover of management and the loss of internal “intelligence.” The merged organizational design often cannot accommodate dual roles, leading to loss of these management roles either through a reduction in force or attrition.

So what kinds of strategies are successful organizations employing to overcome some of these obstacles? Many of the issues discussed can be identified up front and strategies developed if the organizations do their due diligence. Both organizations in an M&A transaction must understand the environments to include technology, culture, the risk profile, management styles and relative sophistication of the staff. Is the acquisition target risk averse or innovative? Are the leadership styles of both organizations similar or dissimilar?

Do the organizations, target or acquirer, have well defined governance and management practices around decision making, project intake and approval or change management? Many successful mergers have defined change management strategies for understanding and managing the culture change. Executive leadership must be open and transparent with consistent messaging to the staff of both organizations. Often, there is a Chief Integration Officer managing this change coupled with the formation of Operating Councils with continuous attention to integration and driving out cost, while attending to the integration of technology, culture and resources.

Answering these questions can assist in developing a strategy to meld two organizations together as a single operational unit.