In the latest unraveling of a high-profile hospital system merger, the board of Penn State Geisinger Health System pulled the plug on the 21/2-year-old organization last week.
System leaders acknowledged that the ballyhooed union of two of Pennsylvania's best known healthcare names had failed to meet its financial and operational goals.
The Harrisburg, Pa.-based system will begin dismantling itself immediately. Final dissolution is expected by June 2000.
The combination of Geisinger Health System, a renowned two-hospital rural health system with a 200,000-member HMO, and Penn State University Hospital-Milton S. Hershey Medical Center, a leading academic medical center, once seemed to hold great promise.
Instead, the three-hospital system with a total of 1,127 beds, forged in the merger boom that has swept healthcare for a decade, is the latest to fall apart.
Late last month, four-hospital UCSF Stanford Health Care system called it quits after two years, a casualty of a poorly executed merger plan between University of California San Francisco Medical Center and Stanford (Calif.) University Hospital (Nov. 1, p. 2). And earlier this month, Texas Health Resources, Irving, and Baylor Health Care System, Dallas, called off their proposed 18-hospital mergerlike partnership just days after the Baylor board voted to continue consolidation talks (Nov. 8, p. 22).
Last year, also in Pennsylvania, Allegheny Health, Education and Research Foundation, which had consolidated into a statewide network of 14 hospitals, declared bankruptcy. Its facilities in Philadelphia and Pittsburgh were eventually sold.
At the outset, executives projected that the Penn State Geisinger combination would yield at least $115 million in cost savings and synergies that would enhance medical education, research and clinical service across 40 counties in central Pennsylvania.
But the financial results tell another tale. Penn State Geisinger recorded a $25 million operating shortfall on patient revenues of $1.2 billion for fiscal 1999 ended June 30, up from a $21 million operating loss on revenues of about $1 billion in fiscal 1998.
In response, executives said in October that they would eliminate 500 to 600 positions over the next 18 months as part of a comprehensive efficiency campaign.
Last week, the system's top brass conceded that it had been unable to consolidate services and cut costs as fast as expected. Further, friction between the collegial academic culture at Hershey Medical Center and the no-nonsense management style at Geisinger thwarted creation of an integrated system.
"The concept was totally appropriate," said C. McCollister Evarts, M.D., senior vice president of Penn State Geisinger and former chief executive officer of Hershey Medical Center. "We failed in the implementation."
He minced no words in his post-mortem. "We probably weren't able to consolidate services quickly enough," he said. "We did not begin our cost reduction efforts soon enough, and we weren't at the same time able to expand our revenues fast enough. We were caught on both sides of the ledger."
Although some modest savings were achieved, they were insufficient to stem widening operating losses at the system, blamed partly on Medicare cuts under the Balanced Budget Act of 1997.
As pressures mounted, each partner clung more tightly to its original role.
"Penn State would revert to its core mission, which was academic, and Geisinger would revert to ours, patient care," said Stuart Heydt, M.D., the system's president and CEO and former CEO of Geisinger.
The simmering conflict over mission "was slowing us down," Heydt said, "and threatening the integrity of the system."
Employee morale also suffered.
Evarts said that many rank-and-file Penn State employees were unhappy with substantially reduced benefits offered by the merged system. Their dissatisfaction led to a union drive, which ultimately failed but distracted management from the myriad tasks at hand.
Before throwing in the towel, the system tapped outside consultants as corporate marriage counselors, but those efforts did not succeed.
"We decided we weren't going to procrastinate," Heydt said. "We just pulled the plug."
Local reaction generally supported the split.
"They made a tough decision to reconsider their strategy," said John Cramer, president and CEO of nearby PinnacleHealth System, Harrisburg, Pa. "Their communities will be better served by that decision."
Nearly every hospital merger promises cost savings and efficiency. But those goals seem hard to achieve, especially when two titans come together.
"The benefits only come through integration, consolidation and meshing the best of multiple organizations," said Dan Grauman, a healthcare consultant in Bala Cynwyd, Pa.
"The larger they are the more difficult it is to achieve," he added.
Both parties described the split as amicable, and they pledged to work together as affiliates in the future.