Analysis: 8 steps to ensuring hospital mergers result in projected cost savings

• A revised AHA analysis of the impact of hospital mergers and acquisitions shows that outcome measures improve for recently acquired hospitals and include reductions in rates of post-discharge mortality and rates of readmission.
• Economies of scale occur via mergers, including a 2.3% reduction in annual operating expenses at acquired hospitals, according to AHA’s revised analysis of the impact of hospital mergers and acquisitions.
• The HFMA 2017 report Hospital M&A: When done well, M&A can achieve valuable outcomes has identified eight actions management teams take during the integration process that increase the likelihood that mergers are successful.

The American Hospital Association (AHA) recently updated its 2016 quantitative and qualitative analysis of the impact of hospital mergers and acquisitions (M&As) on the cost and quality of care delivered at merged hospitals.

The revised analysis adds approximately 100 transactions from the 2015 to 2017 timeframe. Similar to the 2016 report, the updated study finds that hospital mergers:

• Create economies of scale: Hospital acquisitions are associated with a statistically significant 2.3% reduction in annual operating expenses at acquired hospitals. Executives interviewed attributed this to reduced overhead costs and data-driven improvements in clinical care pathways.
• Improve outcome metrics: Recently acquired hospitals show a reduction in rates of post-discharge mortality and rates of readmission resulting from efforts to implement clinical best practice care protocols.
• Reduce revenue per admission: Compared to non-merging hospitals revenue per admission declines by 3.5%.

Takeaways

The AHA study results are similar to the findings from the HFMA 2017 report Hospital M&A: When done well, M&A can achieve valuable outcomes.

Although a 2.3% reduction in hospital costs is nothing to sniff at, HFMA’s study found that less than 30% of executives surveyed report that the M&A transactions they were involved with achieved more than half of the projected transaction efficiencies.

8 factors that help entities capture projected efficiencies from a merger

What separates those who were able to capture the projected efficiencies from a transaction from those that weren’t? Executives from our survey and interviews indicated that a M&A was more likely to succeed when leaders: 

1. Developed a strong strategic vision for pursuing the transaction.
2. Had explicit financial and non-financial goals.
3. Held leadership accountable, often at the vice-president level, for integration efforts.
4. Identified cultural differences between the organizations.
5. Made clear and upfront decisions on executive and mid-management leadership.
6. Aligned clinical and functional leadership early in the process.
7. Followed best practices for integrating the acquired or merged organization into the parent organization.
8. Implemented project-management best practices, with tracked targets and milestones from day one of transaction close until two years after.                         

It’s more or less everything they teach you in business school about corporate strategy and change management. However, actually doing that requires incredible discipline that can be hard to maintain when the gravity of the endeavor starts to press down on leadership teams.

On a separate but related note, Chas Roades and his colleagues at Gist Healthcare have a good take on the rationale for health system M&A that’s worth reading.