In a merger, finance should be a key participant on the leadership team that sets strategy, identifies business objectives, consolidates services, and develops new clinical programs, says Henry J. Franey, CPA, executive vice president and CFO at the University of Maryland Medical System (UMMS), a 12-hospital health system that is moving from an affiliation to a full asset merger with another not-for-profit health system. Franey recently shared with hfm his insights into how mergers can achieve efficiencies in administration and care delivery, and the role finance plays.
hfm: Recent reports show an increase in hospital merger and acquisition activity in the face of healthcare reform. In 2009, UMMS entered into an affiliation agreement that is expected to lead to a full merger with the Upper Chesapeake Health System (UCHS) by 2013. What are your organization's merger strategy and objectives? How are you working to achieve those objectives?
Franey: To understand the UMMS's strategy, it is helpful to understand the Maryland hospital market. With only 46 acute care hospitals and revenues just under $14 billion, Maryland's hospital industry is relatively small. However, it does include two strong academic health centers. It is also home to the only all-payer hospital rate-setting system in the country.
UMMS is a private, not-for-profit health system consisting of 12 hospitals, including an academic medical center (our flagship tertiary care provider), eight community hospitals, and three specialty hospitals. Our overall merger strategy is designed to expand geographic reach, increase market share, and create scale sufficient to be indispensable to patients and purchasers of health care in the state of Maryland. To successfully execute this strategy, we must create value for both UMMS and our potential affiliation or merger partner.
Certainly, our partners want to benefit from our large scale, access to capital, and corporate services. However, a more significant goal of our partners is to develop or enhance the clinical capabilities of their hospitals. With the help of our physician partner, the University of Maryland School of Medicine, we work to identify and implement those programs that can create the greatest value for our hospital partners. One of UMMS's goals in an affiliation or merger is to create the opportunity to develop a relationship with the community hospital physicians to earn the tertiary referrals.
If we enter into an affiliation agreement as opposed to a full asset merger, we are able to work with a hospital to develop select clinical programs and to identify other opportunities to create value. As the relationship proves its value to both parties and trust is established, then a full asset merger can be an option to further solidify that relationship. UCHS has developed such a history and relationship with UMMS, and we are moving toward a full merger in 2013-14.
As with all UMMS affiliations or mergers, our partnership with UCHS is expected to demonstrate value for both organizations. Fortunately, there was a high degree of trust immediately among the UCHS and UMMS senior management teams. The challenge for the management teams was to take action quickly and effectively to create the expected value. A dedicated team of senior executives worked to identify the high-volume, high-impact program development opportunities and develop realistic implementation plans.
hfm: What role is finance playing in implementing the merger at UMMS? Is it strictly an accounting and negotiating role (which is crucial), or are there other areas where finance is involved?
Franey: It is important for finance to play an expanded role in the development and implementation of an affiliation or merger. Finance should assume a key leadership role with other members of the combined executive management teams to develop the overall strategic and business objectives of the partnership. The plan will then guide the implementation and define the goals and expectations of the merger.
Finance, as a member of an implementation team, will work to identify, evaluate, and implement opportunities that maximize the partnership. Of course, the team will evaluate opportunities to consolidate select support functions, such as finance, IT, supply chain, clinical quality management, legal services, and others. But the work extends beyond those functions and focuses on the development of key clinical programs at our partner's hospital, and the establishment of new physician relationships between our partner and our academic medical center.
hfm: What should healthcare finance executives do to prepare for a merger involving their organization?
Franey: Affiliations and mergers are challenging to both parties. A lot seems to be at risk, so although you may be relaxed about the transaction, your partner might not be. CFOs should be
- Define and focus the executive team on the value the affiliation or merger brings. Don't lose sight of that value; keep it alive throughout the negotiation and implementation process.
- Develop trust with your new partner's leadership team.
- Know the past successes of your new partner's organization.
- Understand the cultural differences of the organizations. This understanding will affect realization of the value of the partnership.
- Do your due diligence to prevent surprises.
hfm: What lessons have you learned from your experiences in planning to centralize and standardize services and to merge the corporate cultures?
Franey: Each organization is different. Cultures are different, and those cultures will determine the speed with which your plans to consolidate or standardize services will occur.
A key to a successful consolidation is to keep everyone focused on the goals of the overall merger. Certainly one of those goals is to create economic value. Change is difficult for most people, but smart people will recognize the organization has made a strategic long-term decision and understand there is work to be done.
You must prioritize the work. Recognize that everyone on the transition team already has a job and they are busy doing it. You don't need to consolidate or centralize everything. Get some early wins. Include hospital executives in the leadership roles of the consolidated services. For example, if you are consolidating the finance function, identify the CFOs with the strong talents in a specific area and appoint them as the corporate executive of that area.
Stay focused and be patient.
Henry J. Franey Executive Vice President and CFO University of Maryland Medical System Baltimore
Publication Date: Friday, April 01, 2011