the art and science of a successful merger and acquisition - mohammed ahmed, baystate health...
TRANSCRIPT
M.S. Ahmed, MD, MBA, FACOG
Chief Operating Officer/ Chief Medical
Officer- Baystate Health Eastern Region
National Healthcare CMO Summit- March 7, 2016
Choluteca Bridge (Honduras)
Choluteca Bridge- before Hurricane Mitch
Objectives
Review background on merger and acquisition (M&A) issues
Review alignment models and basic strategies
Review “capabilities” approach to M&A decisions
Share case study
Review success factors
A Changing Landscape
Significant trend in the past decade-
Number of deals in 2012 topped 100, compared to ~50 in 2009
Decreased reimbursements increased margin
pressure (government and commercial payors)
Increased competition amongst providers to retain market share
Volume to Value plans are not easily transferrable to current Fee for Service system- New capabilities may be needed
A Changing Landscape (cont.)
ACA/ State level changes may be challenges for hospitals that have challenged operating margins
Mix of larger systems looking to expand and smaller facilities looking to “partner”
2012 survey of hospitals showed that 87% were considering alignment in their strategic plans 1
1 Media Intelligence, M&A: Hospitals Take Hold, Jan 2012
M&A- “Ideal” Outcomes
Assistance with alignment/ employment strategies with physicians
Achieve “economies of scale”
Potential for “new service lines” in different markets
Increasing revenue opportunity
Access to capital – helps fund increasing IT expenses and infrastructure needs
Draw on partner’s unique clinical or managerial strengths
M&A results…
“Strategy&” survey of 219 hospital/ health system M&A deals (1998-2008)-
Only 41% outperformed market peer group (up to 2 yrs. after deal)
18% went into negative margins 2 yrs. after deal
Unaffected by change in number of beds or geographic proximity
Types of Alignment
Affiliation-
Flexible (strong vs. weak), Used to increase “footprint,” minimal change in governance, may improve economy of scale
Joint Venture-
Profit/ risk sharing element, can be used to create a “new” limited activity, shared governance
Joint Operating Agreement-
Virtual merger, new overarching board created but independent boards remain, larger than JV beyond one activity
Types of Alignment
Merger-
Absorb each other’s debts/ assets, leadership can be combined or from outside, increases market share
Acquisition-
Purchase of one entity by another, may function semi-independently or transform to match buying entity
Common Operating Model Strategies
Scaled Portfolio (ex. LifePoint Hospitals)-
Portfolio of care delivery assets across broad geographic footprint
Shared Capabilities- EMR, revenue cycle, etc.
Shared clinical best practices
Geographic Cluster (ex. Steward Health Care)-
Concentrate care delivery assets in contiguous geography close to patients
Value creation through enhanced market power and physician relationships within network
Common Models (cont.)
Hub and Spoke (Ex. Oschner Clinic)-
Establish “feeder” system for tertiary/ quaternary care facility
Benefit by maximizing utilization for all system assets
Learning curve benefits at hub (i.e. complex procedures)
Innovation systems (Ex. Cleveland Clinic)
Deliver distinctive product or service
Co-branding by codifying intellectual capital
Common Models (cont.)
Location- based systems-
Most common model – typically rural community
Channel demand from captive local population
Need more cost-effective ways to deliver care
May need to be part of other models when market is outgrown
Case Study
Geisinger Health System and Hershey Medical Center(1997-1999)2
Penn State Geisinger Health System
Difficulty with understanding cultural differences between both organizations
“Business as usual” was persistent leading to separate and competing services- unable to realize economy of scale
Leaders unable to gain buy-in from middle managers and physicians
2 Sidorov J. Case Study of a Failed Merger of Hospital Systems.
Managed Care: Nov 2003
Case Study (cont.)
Theoretical cost savings failed to occur
Consolidation and cost cutting failed to deal with inevitable “winners/losers”
Competitive advocacy emerged from any attempts to make changes (academic vs. non-academic)
Community physicians did not see the advantage of the newly combined health plan and sided with local community hospitals
Growing budget deficit heightened consolidation efforts- “last straw” was planned consolidation of microbiology away from HMC campus
Case Study (cont.)
Lessons Learned
Superior leadership needed for health system mergers involving competing, tertiary care programs
Cultural differences are underestimated
Health system mergers do not automatically result in economies of scale (organizational complexity can create further stress)
Not all stakeholders in the surrounding community will welcome the merger (public mistrust, increased regulatory scrutiny)
Focus on “Capabilities”
Coherence is achieved by seamless alignment of
Capabilities System (how value proposition is delivered to customers)
Market Position (distinctive way of serving stakeholders)
Lineup of products and services (clinical offerings and targeted patient segments)
Goes beyond a focus on merging assets (financial and operational metric focused)
Capabilities (cont.)
Capability “lens” permits organization to have a clearer understanding of how capabilities can be applied effectively in a given context
Aims to prevent “unlike” mergers that can destroy uniquely acquired capabilities
End-state business model drives integration as opposed to a focus on synergies
Strategies for success
Facilitate a mutual understanding of the transaction’s value- leadership teams and boards must be ready
Understand the nature of the operating model and stay true to the choice
When potentially facing acquisition, try to aim for discussion before developing a “burning platform” for change
Differentiate between acquisition and merger – clarity helps in planning pro-actively as opposed to mixed messages for stakeholders
Success (cont.)
Evolve capabilities deliberately, not opportunistically
Clear understanding of your own organization’s capabilities
Select markets that will thrive within your capability system as opposed to pursuing “attractive” targets
Success (cont.)
When pursuing integration, do not destroy the capabilities system at the core of long-term value creation
Acknowledge the winners and losers needed for the ultimate benefit of the hospital
Use appropriate governance model – risk of separate governance bodies is risk of weakening strategy
Success (cont.)
Over-communicate to all stakeholders throughout the process
Do not assume that all physicians will be on board with integration/ Understand the risks with moving forward
Take time to perform due diligence prior to signing LOI
ACKNOWLEDGE CULTURE!!
ACKNOWLEDGE CULTURE!!
ACKNOWLEDGE CULTURE!!
Personal learning…
Baystate Health acquisition of Wing Memorial Hospital from Umass Medical Center
References
Saxena S et al. Succeeding hospital and Health System M&A; Why so many have failed, and how to succeed in the future. Strategy&: 2013
Yanci J et al. What hospital executives should be considering in hospital mergers and acquisitions. DHG Healthcare: Winter 2013
Myers C and Lineen J. Hospital consolidation outlook-Surviving in a tough economy. Healthcare Financial Management: Nov 2009
Stybel L. 5 reasons to consider an acquisition over a merger. Becker’s Hospital Review: Oct 2010
Christenson C et al. The big idea: The new M&A playbook. Harvard Business Review: March 2011