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Sponsored Content Provided By Deloitte
This content was created by and paid for by an advertiser. The Crain's editorial department was not involved in the creation of this content.
October 25, 2017 12:00 AM

Hospital M&A: When done well, M&A can achieve valuable outcomes

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    Hospital merger and acquisition (M&A) activity has increased significantly in the past decade, with buyers and sellers looking to create operational, strategic, and financial value. A main driver is the pursuit of economies of scale, the ability to decrease unit costs or improve productivity and outcomes through increased volumes. The assumption is that, through M&A, health system investments in technology, quality improvement, ancillary services, or shared services can be spread across a broader base post-transaction. But does M&A actually achieve these outcomes? The answer is “yes, it can,” with well-conceived strategic intent and thorough planning and execution.

    The Deloitte Center for Health Solutions collaborated with the Healthcare Financial Management Association (HFMA) in 2017 to analyze how M&A impacts a hospital's performance—and to learn why some transactions have more favorable results than others. Between 2008 and 2014, there were more than 750 hospital acquisitions or mergers. We conducted a quantitative analysis of these hospitals' financial, operational, and quality metrics. We also fielded a qualitative online survey of 90 hospital financial executives from organizations in our data set and conducted phone interviews with an additional 13.

    Download "Hospital M&A: When done well, M&A can achieve valuable outcomes"

    Overall, we learned that higher operating margins did not immediately follow M&A for acquired hospitals. Indeed, once our analysis took into account market and hospital characteristics—including the fact that hospital margins in general improved over the analysis period—acquired hospitals, on average, experienced a post-transaction decline in operating margins, revenue, and expenses that typically lasted two years. We also saw no evidence that quality measures changed at an acquired hospital, though measure reporting lags the patient experience and survey respondents confirmed quality improvements.

    However, the M&A experience varied a great deal among acquired hospitals. With proper integration planning and execution, some hospitals did experience higher operating margins following acquisition. Among a sample of transactions with better outcomes, executives reported spending more time on integration planning and execution than those from transactions that did not meet cost and quality goals. Moreover, we found other positive outcomes associated with M&A in our survey—including the ability to make capital investments and achieve cost efficiencies from economies of scale.

    Capital investments:

    • Nearly a third of surveyed executives from acquired hospitals sought M&A to improve their access to capital, the top-reported driver among those acquired.
    • Close to 80 percent of all survey respondents said significant capital investments were made in the acquired facility after the transaction concluded.
    • Nearly 40 percent of all survey respondents used the capital to upgrade or implement clinical information systems, the top-reported use of capital.

    Cost efficiencies:

    • Twenty-nine percent of acquirers and 24 percent of acquired hospital executives in our survey sought M&A to improve efficiencies.
    • Seventy percent of survey respondents said they achieved at least some of their transaction's projected cost structure efficiencies.

    Executives from our survey and interviews indicated that M&A was more likely to succeed when leaders:

    • 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; and
    • Implemented project management best practices, with tracked targets and milestones, from day one of transaction close until two years after.

    Hospital M&A shows no signs of slowing down. Financial, market, competitive, and regulatory forces are likely to drive further consolidation. As hospital board members and executives contemplate participating in this trend, either as a buyer or a seller, they may benefit from lessons learned by those who preceded them.

    Read more in: Hospital M&A: When done well, M&A can achieve valuable outcomes.


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