As merger and acquisition (M&A) activity continues to trend upward, most hospitals and health systems will likely find themselves in the midst of such activity, if they haven’t already. M&A transactions come with high expectations for the finance department to reduce costs. Once the ink is dry, the clock starts ticking and the pressure’s on, particularly for the CFO, to realize savings.
Some health systems don’t realize savings for two years after an M&A, according to a 2017 report by Deloitte and HFMA. But health systems that put dedicated teams in place can make the integration happen more quickly and begin realizing savings within six months.
A good place to start is the supply chain. Supply chain integration can account for 3 to 8 percent in total cost savings or roughly 50 percent of the value of the overall M&A deal synergies. The supply chain also is the second largest expense for a health system—and it is growing. Supply costs will surpass labor costs by 2020 according to a blog post from Definitive Healthcare. The sizable integration of catalogs and contracts during an M&A process increases the need to effectively manage the health system’s supply chain.
Let’s consider two key steps for effectively integrating the supply chain in a merger or acquisition.
Conduct a Contract Analysis
Evaluating the existing medical and surgical instrument contracts can be helpful. The approach will vary depending on the type of transaction. Generally speaking, when a large health system acquires a smaller health system, the process is easier. The smaller system likely entered the acquisition because it was no longer financially viable on its own, so it is a logical first step to buy off the smaller health system’s contracts. When merging two large health systems, however, a deeper analysis of which contract is realizing the most value and who has the best contracts is required. In both instances, there is an opportunity to find savings.
Evaluating the contracts can be complex. When deciding which contract to keep, it is important to take into account the cost savings, as well as differences in quality and how long or hard it will be to transition and onboard physicians. The current parameters of the contracts in place also should be considered, including timing and volume commitment that needs to be achieved before the contracts can be exited. That information can play a role in deciding which contract can help the organization realize the greatest savings, quickly.
Consider this example: The supply chain department for one of the nation’s largest academic medical centers (a 1,100-bed system) was tasked with overseeing the integration of the supply chain during an acquisition. When the two health systems came together, the supply chain department immediately implemented a comparative analysis of all items, vendors, and contracts. The department was able to share this information with the contracting department to help them during negotiations with the group purchasing organization to consolidate contracts. Although the effort was huge on the front end, it provided big dividends over the long haul. The health system was able to reduce special purchases from 28 percent to nearly 13 percent in just one year. It also achieved a 70 to 80 percent monthly contract compliance rate within one year of the acquisition’s close.
Maximize the Operational Benefits of Economies of Scale
Let’s first look at processes. On day one, the newly expanded health system likely will have considerable duplication—two chief supply chain officers and two enterprise resource planning systems, for example—and will need to evaluate which organization has the better structure from a cost-savings perspective. Although some health systems look at the number of employees and their efficiency, the smartest health systems look at talent and what modern or cutting-edge processes are in place. For example, entering contracts and transactions manually might be manageable for a 40-bed health system, but it would be too costly and time-consuming for a larger organization.
Another process that can often be maximized is the purchase process. Once the contracts are analyzed, requestors should be able to find the right item, at the right time, at the right price. After a merger or acquisition, the organization is likely to have two item masters from which requestors can make purchases, but consolidating that information into one item master can help increase efficiency and contract compliance. However, many health systems’ item masters lack product details or images, or use different vernacular between the two health systems for the same product. This disparity makes it difficult for one health system that is party to the merger or acquisition to adopt the purchase process using the other health system’s data file. Therefore, it is important to not only consolidate the item master but also enrich it with product details and images to help ensure efficiency and maximize patient safety.
No matter the type of M&A transaction, the C-suite will expect reduced costs. Whether it is a merger or an acquisition, standardizing the supply chain is a logical starting point that can realize savings quickly.
Michael DeLuca is executive vice president of technology and client services, Prodigo Solutions, Cranberry Township, Pa.