Dive Brief:
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Mergers and acquisitions reduce expenses for hospitals, but they can also cut revenue and hurt margins in the first two years, according to a new report by the Deloitte Center for Health Solutions, in collaboration with Healthcare Financial Management Association (HFMA).
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In a review of 750 hospital acquisitions or mergers between 2008 and 2014, researchers found that operating expenses in many acquired hospitals decreased after a merger. However, operating revenue plummeted faster.
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The report suggested that M&A can achieve positive outcomes for hospitals with the “proper integration planning and executions.”
Dive Insight:
Hospitals and health systems often view M&A as a way to improve operating margins, consolidate services, grow their footprint and realize economies of scale. That belief has led to M&A growth over the past decade, including a recent report that found hospital and health system M&A activity increased 15% in Q2 of this year.
In the new study, researchers examined financial, operational and quality metrics related to the mergers and acquisitions. They also conducted 90 online surveys and 13 telephone interviews with hospital financial executives from those organizations.
The survey found that almost 80% of acquiring organizations made “significant capital investments” in the acquired facilities shortly after the transaction. The highest percentage of survey respondents (nearly 40%) said they used the capital to “upgrade or implement clinical information systems.” However, many of these investments canceled out gains made through consolidating overhead and supply chains, according to the report.
“These investments can affect financial performance in the post-transaction period,” according to the report. “Many acquired organizations were in financial distress, or required investments in staff, health information technology, physician recruitment, facilities, medical equipment or pension funding to improve operations and quality of care.”
The researchers pointed to eight strategies and business practices that led to high margins in the health systems studied:
- Developed a strong strategic vision for pursuing the transaction
- Had explicit financial and non-financial goals
- Held leadership accountable, often at the vice-president level, for integration efforts
- Identified cultural differences between the organizations
- Made clear and upfront decisions on executive and mid-management leadership
- Aligned clinical and functional leadership early in the process
- Followed best practices for integrating the acquired or merged organization into the parent organization
- Implemented project management best practices, with tracked targets and milestones, from day one of transaction close until two years after.
HFMA President and CEO Joseph Fifer said the study shows mergers will not likely succeed “unless leaders tackle the tough decisions early on.”
“Prospective merger partners should sit down together and figure out what the organizational structure and management team will look like after the merger. They should also recognize that it takes sustained effort to blend organizational cultures,” he said.
Not only are M&As not always resulting in improved margins, another recent report found M&As are also causing lower healthcare worker wages. The Center for Economic and Policy Research’s “Organizational Restructuring in U.S. Healthcare Systems: Implications for Jobs, Wages, and Inequality” said savings realized through M&As are not going back into staff training or improving healthcare workers’ wages.
The report found hospital worker wages are stagnant, and outpatient center worker wages dropped 6% over the past decade. One factor is that consolidating health systems gains more market share, but the lack of robust competitors in the market can create lower wage structures.