Strategic Partnerships Mergers and Acquisitions

After a Healthcare Consolidation: A Checklist for Making It Work

December 4, 2017 4:51 pm

After closing the deal on a merger, acquisition, or other form of consolidation, the parties involved must undergo a period of reshaping expectations and defining relationships, funds flows, managers, culture, and other key variables. They can benefit from having have a checklist of points to address during this process.

Most healthcare leaders today—whether they are CEOs or CFOs or chairs of boards, and whether they lead health systems, physician groups, health plans, or vendor organizations—are considering at least one form of consolidation. Regarding potential consolidations, one CEO of a major health system recently commented, “I’m under 10 different confidentiality agreements right now.”

Consolidations typically go through three stages:

  • Stage A. Conceptual—The transaction is being explored for the potential advantages it could offer the prospective parties.
  • Stage B. Aspirational—The parties agree the transaction makes sense, so they have decided to pursue it.
  • Stage C. Actual—The deal moves ahead.

A Checklist for Stage C

A confidentiality agreement suggests stage B. Early in stage C, based on the experiences of other organizations, we recommend reviewing a checklist that encompasses the following points.

1. Revisit expectations. This point addresses the following questions: What are we seeking to accomplish together? What is most important? What are our new aspirational goals? How do those goals differ from what we planned to accomplish before the consolidation? 

Too often, the expectations for the newly consolidated organization are based on considerations of what needs to be done to close the transaction, how combined financials will be reported, how the organizations will define the new capital plan, or what regulators have to say. Expectations also can simply reflect the reasons to organizations have given for the combination in their press releases. 

This is a critical time, however, for infusing the whole organization with a sense of purpose and direction. The message should be both inspirational and achievable. It is important to understand the very real difference between “expectations worth reaching for” (e.g., providing the same protocols and same level of care across the state) and what eventually could be exposed as being “false expectations” (e.g., unrealistically projecting costs will be cut by 10 percent). 

2. Create a road map of change. The key questions to ask here: What actions should be taken immediately, and what should be deferred for one or two years? Can various changes occur simultaneously in the first year in different areas of the organization? Will change be easier to accomplish in one of the consolidating organizations than in the other? For example, a smaller, more hierarchical organization could be more resistant to change.

Many leaders intuitively think of such an emerging road map as a combination of short-term and long-term changes that are variously easy or hard to accomplish and whose likely impacts range from small to large. Leaders also tend to agree it is important to ensure many people from different parts of the organization are directly involved and have ownership in developing the road map.

3. Be clear on what not to change. Organizations, allies, contractors, communities, and patients all make assumptions. In a consolidated entity, it is important to state clearly from the start which core assumptions are not subject to change.

4. Allow substantial margin in setting financial projections. In consolidated financial analyses, there is a consistent bias toward overestimating revenues and underestimating costs. As a matter of principle—like the force of gravity—finance leaders should question their projections until they have a greater base of experience on which they can develop the forecasts. All too often, finance leaders take great pride in the accuracy of their forecasts, only to find unanticipated costs crop up. 

It’s a matter of humility first and credibility later: Too often, financial managers find themselves wishing they had conditioned their CEOs and boards in advance to expect problems, even if it didn’t seem that problems would arise.

5. Attract old and new audiences. The lead organization must simultaneously reassure its existing audiences and attract new audiences. Inevitably, a consolidation creates closer relationships while introducing new, more distant relationships. A key element in the overall road map should be to foster new relationships while reestablishing old ones. A management team and a coordinated plan should be developed for this purpose. 

6. Optimize physician relationships. Questions to address at this point include: Which new referral opportunities should be encouraged? What changes in the organization’s plan are required to reduce referral leakage? What adjustments are needed to enhance patients’ access to physicians, and what locations need to be added, combined, or redesigned to ensure physicians can easily refer to and coordinate with other physicians? What care pathways need to be reviewed? And what new scale opportunities need to be optimized?

7. Review management roles, funds flows, and incentives. In performing this review, consideration should be given to which management positions should have oversight over the entire consolidated organization and which should have oversight only within one entity with the expectation of coordinating with new peers. Consideration also should be given to whether existing funds flows might now inhibit the consolidated organization. Similar questions also should look at managers’ incentive structures.

An effective management strategy for to building trust and understanding can be to shift some managers who know and are trusted within one of the consolidating entities to the other entity. Managers who have a new reporting relationship may need help in understanding the nuances and idiosyncrasies of the person to whom they now report. 

Loyal managers whose positions become redundant should receive help in finding a new place to fit and contribute. It also is important to recognize that the person who leads an aspect of the consolidation might not have the skills to optimize it later.

8. Leverage combined governance/board strengths. Different boards often reflect different talents and perspectives, and they often can have different governance styles and different relationships and reputations with the communities they serve and at state and national levels.

It can be beneficial to perform an informal inventory to understand these differences and make use of all the strengths among board members. Some board members should be tasked with new roles in forming the “glue” between the newly consolidated organizations.

9. Keep detractors close. Inevitably, some will oppose the consolidation. Leaders therefore should be prepared to encounter ongoing criticism and understand how it can be diffused.

It is important to stay close to detractors and work to get them to see the good sides of the new relationship. 

10. Prepare the next consolidation. Many healthcare organizations are inclined to attempt two or more consolidations simultaneously. Others move quickly from one consolidation to the next one. It is important always to carry over lessons learned from each experience to the next one so the each one goes more smoothly and accomplishes even better results. 

Next Steps

With each set of changes, we learn a bit more about the process of change during consolidations. If this process is well managed, we will learn from the experiences of others as well as our own.


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