The smaller slice of hospitals that improve both quality and margins can offer lessons to hospitals considering such deals.


Oct. 12—The finances of acquired hospitals generally suffer for two years after mergers and acquisitions (M&A), according to a new analysis.

HFMA and Deloitte studied the finances of organizations involved in 750 hospital M&A deals between 2008 and 2014 and found that, contrary to expectations, there was no immediate turnaround in the finances of acquired hospitals.

In the two years post-M&A, acquired hospitals generally had a decrease in operating expenses but an even larger decline in operating revenue, resulting in a decline in operating margins.

“Conventional wisdom is that these transactions happen and in some cases they drive up revenue, but we found in the results that revenue per adjusted admission actually went down in the period after the transaction,” said Chad Mulvany, director of healthcare finance policy, strategy and development, for HFMA.

The findings echoed other research, including a Charles River Associates and American Hospital Association analysis of 2009-14 hospital deals, which found a 2.5 percent reduction ($5.8 million on average) in annual operating expenses and a 3.9 percent decline ($9.1 million on average) in per-admission revenue at 375 acquired hospitals.

Such decreased revenue “appears inconsistent with studies that link hospital consolidation with higher prices paid by managed care organizations,” the authors wrote.

However, the negative trends in hospital margins leveled off two years after the transaction, according to the latest research.

“That would imply that things were turning around and some of the efficiencies were beginning to take hold after that first lump of investments had been made,” Mulvany said.

Thomas Hawk, a partner at King & Spalding, agreed that one to two years after M&A deals “may be too short a time period to make a conclusive judgment on how the combination will ultimately fare.”

The short-term financial hit for acquired hospitals occurred despite elimination of redundant functions because immediate investments were needed in capital projects, additional staffing, and value-improvement initiatives, according to the HFMA-Deloitte report’s online survey of 90 financial executives and phone interviews with 13 others from hospitals involved in M&A deals in that period.

“When the acquiring systems for a lot of these transactions came in and started to roll up their sleeves and do the integration work, they realized they needed to make significant investments beyond what they initially thought in clinical IT and staffing,” Mulvany said.

That capital infusion was directed toward costly health IT improvements, according to 37 percent of surveyed executives; and building construction, according to 33 percent of respondents.

Lessons Learned

The findings could carry significance for organizations involved in the ongoing waves of hospital M&A deals, Mulvany said. Hospital deals have continued at an aggressive pace in recent years, totaling 102 in 2015 and 90 in 2016, according to Irving Levin Associates.

“There was a group of hospitals that performed better because they were much more intentional,” Mulvany said.

Executives involved in the small share of acquisitions that both improved quality and met cost-saving goals cited a “defined operating model,” which included several features:

  • A strategic vision for the combined entity
  • Identified and validated areas for value capture
  • A strategy to realize revenue growth and cost-reduction opportunities
  • An understanding of key enablers

When a hospital or health system receives an M&A request for proposal, executives should develop a strategic rationale and rigorously test the transaction’s hypothesized value drivers, authors of the analysis said.

A key factor in an acquired hospital’s likelihood of meeting quality-improvement and savings goals was leadership. Specifically, top executives needed to develop a strong strategic vision for pursuing the transaction; determine explicit financial and nonfinancial goals; hold staff accountable, often at the vice president level, for integration efforts; and address cultural differences between the organizations.

Many of the hospital finance executives who were interviewed and involved in acquiring or merging hospitals admitted that they underestimated how cultural, competitive, and market differences of acquired organizations could limit the ability to realize post-transaction value.

Among the additional steps they urged to improve post-transaction value was ensuring culture compatibility between the two organizations in a deal, using a transparent communication strategy, and utilizing an integration plan that incorporates the strategic rationale for the deal.

“And a lot of that started while the transaction was being negotiated, in that the management teams were having very clear conversations about what happened after the merger,” Mulvany said.

A strategic focus—beyond merely looking to increase economies of scale—was an important part of what elevated successful deals, according to the executives.

Market Trend

Meanwhile, the hospital M&A market appears to be focusing on a strategy of increasing market share for the combined hospitals in order to improve earnings, according to Hawk.

That trend is seen in the strategies of several investor-owned hospital chains, which have stated in public filings that they are focusing on markets where they can be among the top two or three players.

“The larger not-for-profit chains have figured the same thing out,” Hawk said. 

Driving the trend are the beliefs that attaining efficiencies is easier when hospitals are in the same or nearby markets; that the shift toward population health management requires a certain amount of scale for success in a particular market; and that growing market share can ease negotiations with payers.

“By contrast, deals where hospital A in market B buys hospital X in market Y often don’t move the needle meaningfully in terms of improved earnings, unless one of the hospitals is just mismanaged in the first place and there is low-hanging fruit to fix,” Hawk said. “Those instances are rare by now.”


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Thursday, October 12, 2017