Avoid common pitfalls of hospital system mergers
Experts offer road map through obstacle course
Mergers might be heady stuff, with the sort of excitement and financial prospects that kept the Donald Trumps of the world pumped with adrenaline throughout the 1980s.
But health care experts say there are as many drawbacks and potential problems as there are benefits. And it will be the smart integrated delivery system executive who steers clear of these obstacles.
Here are several of the mistakes often made and some expert advice on how to avoid them:
1. Culture clashes can kill deals.
"What I've seen is a merger creating terrible problems after the fact where differences of culture were not addressed as well as they should have been in the due diligence process," says Michael J. Eberhard, president and chief executive officer of Medical Pathways Management Corp. in Torrance, CA.
Cultural clashes may result in operational problems, decision-making problems, and even financial deterioration, Eberhard says.
Management from the two health systems should address cultural differences up front, says Marshall S. Yablon, chairman of Diversified Health Resources in Chicago.
Both entities should evaluate the management styles and cultural differences between their trustees and directors, Yablon says.
The North Shore-Long Island Jewish Health System was the result of a merger between two competing large health systems. Management of the merged entity has been working at changing staff's perceptions about the merged partner, says Rick Annis, FHFMA, senior vice president and chief financial officer of the health system.
"We're trying to get everybody to understand it is no longer 'we' vs. 'they,'" Annis says. "That's still one of our problems, but it's getting resolved."
Annis suggests a good human relations or labor relations department can go a long way toward smoothing this philosophical transition.
Cultural differences also might exist in how employees are handled. For example, the two systems might have different ways of providing employee incentives and compensation, says Richard Tompkins, EDD, president of First Chesapeake Group in Annapolis, MD.
"You may have a debate on which management approach should be used in the newly merged system," Tompkins adds.
Sometimes two hospital systems will be so different in culture - perhaps a Catholic organization and a competing community hospital or a for-profit corporation - that their managers decide that a merger simply would never work.
2. Handling physician employees or groups may be difficult.
The merged institution is so complex, with so many different physician interests, that physician employees might remain at odds with the new health system, says Robert B. Giffin, PhD, president of Health Care Strategy Associates Inc. in Washington, DC.
"A lot of times the merger takes place on paper, but the medical staff remains very separate and that creates an obstacle to the efficiencies the system hopes to gain," Giffin explains.
Health systems might avoid this problem by making the medical staff a part of the merging process from the beginning, Giffin suggests.
"If it's done in a way where the medical staffs are part of the process and feel it's a win-win situation, then it's got a good chance of success," Giffin adds.
Gaining physician support
The best strategy for handling physicians is to give them information and data about issues the merged organization will face and the decisions it will make, says Ed Pershing, CPA, president of Pershing, Yoakley & Associates in Knoxville, TN.
Also, the two institutions' medical staffs should be brought together early in the process to facilitate interaction, Pershing adds.
One obstacle to gaining physician support is that many of the physicians who use the hospitals are not employees and do not directly report to hospital management, says Stanton N. Smullens, MD, president and medical director of the Jefferson Health Network and the chief executive officer of JeffCare, a PHO in Philadelphia.
The two organizations are part of the Jefferson Health System, which has grown from mergers in recent years and now is associated with more than 600 primary care physicians and more than 3,000 specialists.
"Physicians have to know it makes sense for them, as well as for the organization," Smullens says. "So for the merger to be successful, it has to give physicians a sense that they will see some real improvement in patient care."
Health systems considering a merger should ask themselves if they have the capacity to recruit and maintain managers who know how to manage large physician group practices, says Tom Kelly, president and chief executive officer of Mercy Health Plans, which is a subsidiary of the Sisters of Mercy Health System, a large IDS in St. Louis. Kelly helped establish physician practices for the Sisters of Mercy in several of its markets.
Health system administrators should ask themselves if they are willing to share control with these managers, Kelly says.
"The end result can't be administrators hiring these group practice managers and then ending up running the whole thing themselves," Kelly adds.
3. Community support often is crucial.
A merger that might look good on paper sometimes could seem a terrible idea when it's fleshed out with all the community and human factors included.
"You have to make a case to the community and medical staff, which is hard," Giffin says.
If the community already distrusts the health system involved, then the merger may not work. One example of this occurred in Northwestern South Carolina when the Greenville Hospital System, a countywide IDS, proposed an alliance with two smaller hospital systems in neighboring counties.
The alliance was advertised to the community as a way to prevent an outside for-profit corporation from buying these hospitals and as a way to make the larger group more competitive in negotiations with insurance companies.
Finding community allies
However, some members of the community, led by a small competing Catholic hospital, began to run advertisements opposing the merger, according to news coverage of the controversial merger.
The media warfare grew, and local state legislators put a vote on the fall election ballet, asking citizens to decide whether the merger should take place,
The hospital system lost the vote by a three-to-one margin. Although the vote was not legally binding, the three hospital systems decided to stop all merger activity in light of the strong public opposition.
This scenario is not as uncommon as might be imagined, the experts say.
"Unfortunately, communities have been burned so many times by hospitals," Giffin adds. Hospital executives sometimes have promised communities that they will not close beds or shuffle services, even when they know that they will do exactly that a year after the merger.
"Savvy communities have become wary because enough systems have gone back on their word," Giffin says.
4. Carefully evaluate current management.
Health systems that are about to merge should evaluate each member of management at the same time they are evaluating the different management styles, Pershing says.
The evaluation should include the following, Pershing says:
· Identify the talents and skills of each executive.
· Find out how much experience the management has in running a large institution.
· Evaluate whether the management can adapt to changes in how the health system competes.
The merged system probably should hire outside consultants to help with developing a new management structure, Pershing advises.
A consultant will assess their skills and experience and judge how effective each manager would be in a large organization, he adds.
Merged health systems often make the mistake of arriving at a new management structure through negotiation and compromise, Pershing says. "And it may not actually reflect the best structure that would capitalize most effectively on the skills and experiences of the management team."
5. Assess whether the economy of scales will work.
Again, the devil may be in the details, or at least in the public relations of handling the details.
Accountants may decide that the community or region definitely will not need two obstetrics departments, and closing one will save money. But if the community likes having two and fights its closing, then making that economy of scales may not be practical.
Physicians also may pose an obstacle to consolidating services, Kelly says.
For example, an oncologist at a hospital that's being consolidated into another hospital might persuade other physicians and hospital managers to oppose the consolidation and keep things as they are, Kelly says. "Those specialists tend to be persuasive influences at the hospital."
These are common scenarios, Giffin says.
"Everybody wants to close hospitals because there are too many hospital beds, so all these organizations go into the merger thinking this will save us so much money," Giffin explains. "Then they consummate the merger, and they find it's very different to close services locally."
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