Achieving health system integration following a merger requires an understanding of the obstacles to effective integration and a structured planning process that includes, among other elements, a clear vision and defined guiding principles.
As hospitals continue to transition from a volume-based to a value-based payment paradigm, they face tremendous pressure to optimize care delivery on all fronts: quality, affordability, and accessibility. Health systems must continue to enhance efficiency and deliver a better experience for patients if the healthcare industry is to effectively meet consumer and payer expectations.
One widely adopted pathway to higher efficiency has been through mergers and acquisitions (M&A). Hospital M&A activity has surged in recent years, especially among large systems. a By increasing both scope and scale, the parties hope the consolidated organization will be positioned to deliver higher-quality care more efficiently to a larger population.
M&As can achieve valuable outcomes, but all too often, hoped-for gains don’t materialize. Forty-two percent of respondents to a 2017 survey conducted as part of an analysis of financial, operational, and quality metrics from more than 750 hospital M&A transactions occurring in the period of 2008-14 said they achieved less than half of the savings projected at the outset of the transaction. b Regarding quality outcomes, more than 70 percent of the patient care metrics were unchanged post-transaction.
These findings show that M&A strategies can yield positive results, but such results are not guaranteed. We see many health systems struggle to organize and optimize their newly aggregated resources to realize the future state that looked so promising on paper.
A health system is most likely to encounter such difficulties if its strategy is unsupported by a comprehensive, highly detailed plan for operational and cultural integration of the merging organizations. Without a rigorous process of integration at all levels, the newly merged entity will have difficulty achieving its intended results and is likely to bring about the exact opposite: an unchanged or more expensive cost structure, inconsistent quality, operational redundancies, and regulatory scrutiny due to failure to deliver promised efficiencies. An effective planning process has six essential characteristics, which are discussed later in this article. Before embarking on this process, however, organizations require a clear understanding of the factors that can impede success.
Why Healthcare Organizations Struggle with Integration
Merging the missions, cultures, and business operations of disparate organizations is difficult in any industry, but it is especially challenging in health care for several reasons.
Each organization brings unique patient care mechanisms to the merger. Integration can get bogged down when parties are resistant to clinical alignment and integration, no matter how thoughtfully it is managed.
The market dynamics and population demographics in different service areas often vary widely. Such variance can make it difficult for the merging entities to achieve cohesion.
Health system integration involves many stakeholders. Although the focal point in health system integration is the patient, many other stakeholders play a critical role, including physicians, employees, community leaders, and other hospitals and providers. With every initiative to improve patient care, the impact on these other groups must be evaluated as well.
Successful integration requires aligning around a shared vision and a willingness to make difficult decisions regarding changes that are in the best interests of patients and the system rather than individual facilities. When the leaders of two organizations are presented with an integration scenario that promises to deliver, say, 5 percent in efficiencies and 5 percent in growth, they see a very alluring transaction. But often they underestimate the time, effort, and subject-matter expertise that will be required—and the political minefields that must be navigated—to achieve even a baseline integration of the two operations, let alone the transformation into a new enterprise that can become a healthcare destination of choice.
The seeds of integration failure are often sown early. Leaders from the different organizations often are brought together and asked to come up with 10 or 15 suggestions for integration opportunities. These random ideas are then culled and prioritized based solely on the experiences and preferences of those in the room.
This opportunistic approach typically results in high-level plans that are unrealistic and nonspecific in terms of resource requirements and accountabilities. The plans fail to gain traction and support within the organizations, and execution proceeds sluggishly. Without clear goals, metrics to monitor the impact of integration, and active senior-level sponsors, the effort loses steam. Worse, the combined entity is now saddled with a new layer of oversight, which contributes to higher costs, operational dysfunction, and lower morale.
6 Characteristics of Effective Strategic Planning for Health System Integration
Organizations can overcome these difficulties by engaging in a structured planning process that examines the different operations function-by-function and service-by-service, with the goal of developing a comprehensive roadmap for achieving full integration across the health system’s clinical, administrative, and operational areas. This process should include input from departmental and clinical leaders with first-hand operational experience, and it is distinguished by the following characteristics.
Clear vision. The plan lays out, in detail, the health system’s vision for patient care within the communities it will serve. It’s important to remember that the patient always has the main seat at the planning table. How will the changes affect patients? How will their interactions with the hospital or clinic they’ve always used be different? How will patients in every service area experience the new brand? Taking a clear look at those issues at the outset of the initiative and deciding on a clear mission for the merged health system is crucial.
Defined guiding principles. Creating a small number of high-level goal statements will provide a compass to guide decision-making at all levels. These statements codify the system’s goals around quality, access, and costs. For example: “We will provide the right care, at the right time, at the right place.”
Validated efficiency and revenue opportunities. Objectivity and thoroughness are the hallmarks of structured integration. Using benchmarking data, every functional area is analyzed for potential opportunities to increase efficiency and to grow business as part of the combined health system. Identified opportunities are investigated further to determine barriers to implementation and the potential financial impact.
Savings opportunities typically fall into four categories: Administrative efficiencies, support and infrastructure efficiencies, clinical efficiencies, and physician enterprise alignment.
First, to achieve administrative efficiencies, organizations often look to centralization. Common strategies include streamlining senior leadership, consolidating administrative functions, and aligning contract services.
Within the second category, support and infrastructure efficiencies, materials management tends to be particularly ripe with opportunities, such as leveraging scale to negotiate better pricing, taking cost out of the supply chain through product standardization, and reducing waste through more effective asset utilization. Other key areas of opportunity that often emerge as the integration process evolves include asset and inventory optimization.
Third, achieving clinical efficiencies poses a substantial challenge because clinical programs are the most difficult to integrate. Nonetheless, they also represent the largest area of opportunity for increasing value and reducing costs. The integration design process should examine all aspects of the care continuum, including ambulatory services, inpatient programs, home health, post-acute services, and physician practice resources. As clinical efficiencies are evaluated, it is of critical importance to include practicing clinicians in the discussions. Their participation will help ensure quality and the patient experience are central to the design and activation of the integrated clinical delivery system, which is essential for establishing an effective and efficient system.
With respect to the fourth category, physician enterprise alignment, it is not essential to develop a single consolidated employed provider group to serve the system. Rather, the focus should be on aligning the collective physician practices around the common system vision and on utilizing the same guiding principles to drive clinical coordination as are used by the hospitals. The benefits of an aligned physician enterprise stretch beyond just improved efficiency. They extend directly into the system’s ability to offer an expanded breadth and depth of services to the community in a manner that will improve the patient’s experience throughout the care continuum.
Detailed integration action plans. An effective integration effort requires, perhaps more than anything else, detailed plans for redesigning each department and function to add value to the system and align to the guiding principles. Based on these plans, resources can be mobilized and deployed appropriately. Although resource requirements will vary with each merger, most major capital requirements can be identified prior to the merger so both parties clearly understand existing capital plans, future needs, and risks ahead of integration planning.
When developing such integration action plans, leaders should evaluate capital needs across the enterprise and build objective criteria, which should be widely communicated to aid in the prioritization and allocation process. Optimizing and rationalizing capital across multiple sites is difficult but essential to achieving the goals of most mergers. For example, if a health system decides to invest in state-of-the-art surgical robots, careful planning should be undertaken to determine how many and where the technology should be placed to best serve the needs of patients and system at large. Although historical hospital plans may have looked to add the technology at multiple facilities, the context of planning as a system should change the goals and assumptions utilized in the capital allocation process.
Reframed management and leadership systems. Issues related to leadership and management are among the toughest to address in an integration planning process. Key questions include whether the health system’s leadership is capable of transforming health care and disrupting existing operational norms, and whether it can lead and inspire clinical and operational teams to think boldly and challenge conventional thinking. Finding people with the right skill sets to lead transformation is essential.
Focused activation and structured monitoring. An effective approach is to establish priorities for actions over a three-year period, giving precedence to relatively easy-to-accomplish steps that can yield rapid, high-dollar or high-impact gains. Most health systems will find that about two-thirds of identified action items can be completed in year one, with clinical and IT integration taking longer. Steps to realize clinical efficiencies typically require the most extended lead times. Performance monitoring systems should be implemented to measure key outcomes at defined intervals.
A structured approach to health system integration invariably requires a significant investment of time, resources, commitment, and leadership capital. But as the effort begins to yield positive results, the newly constituted organization will begin to realize a return that far outweighs this initial investment. Success factors that define the ROI on this effort include the following:
- Creation of a unified and clinically aligned enterprise to care for patients
- Optimized scale, scope, and skills for enhancing efficiency and creating new growth opportunities
- Mitigated financial pressures and a focus of resources on enhancing the value of services
- Enhanced quality outcomes through clinical standardization and adoption of industry best practices
- Improved operating efficiency and financial performance
- Well-established stature as a healthcare destination of choice in the community, and potentially beyond
To achieve successful integration among consolidating provider organizations following a merger, health system leaders should maintain a steady, perpetual focus on three guiding principles: value creation, risk management, and employee and physician engagement.
Value creation is the primary goal. Health systems come together for one core purpose: to enhance service quality while reducing the per unit delivery cost. There is no one right way to create value; it requires optimal tension on multiple clinical, operational, and financial levers. In every meeting and every discussion, and with every proposed initiative, leaders must constantly balance meeting community needs with efficiently distributing resources if the consolidation is to deliver high-quality, high-efficiency outcomes that promote high levels of satisfaction among patients and staff members alike.
Risk management requires being clear-eyed about potential pushback from various stakeholder groups within the affected organizations and communities. Risk is inherent in every system integration initiative—often arising when, where, and how an organization least expects it. Developing preventive and contingency plans therefore is essential.
Throughout the integration process, from planning through integration and beyond, the organization should exert its utmost thought and effort toward engaging employees and physicians. They are the engine of change. Without their participation, good will, and willingness to stay the course through months of disruption, even the most detailed integration plan will fail. By ensuring that physicians are included in the planning process, with full transparency and a clear communication process, a health system can best foster acceptance, accountability, and alignment among these key stakeholders and achieve its desired outcomes.
a. Daly, R., “Industry Trends—Not Policy Uncertainty—Driving Hospital M&A,” HFMA Healthcare Business News, Oct. 26, 2017; and Byers, J., “How Hospital M&A Has Been Driven by Investors and Industry Evolution in 2017,” Healthcare Dive, Nov. 7, 2017.
b. Knapp, C., Peterson, J. Gundling, R., Mulvany, C., Gerhardt, W., “Hospital M&A: When done well, M&A can achieve valuable outcomes,” Deloitte Center for Health Solutions and HFMA, 2017.