The Value of IT Due Diligence During Hospital M&A
Engaging clinical, operational, and IT stakeholders early during a merger or acquisition can have a strong positive impact on associated costs and outcomes.
A multitude of factors have fueled recent consolidation trends in health care. Increasing financial pressure on providers has produced a wave of merger and acquisition (M&A) activity as physician practices have sought the capital and administrative shelter of hospital ownership. Value-based care models also have spurred regional partnerships among healthcare organizations working to achieve population health management goals and operational economies of scale. Whether motivated by competitive pressures or service-line diversification, M&A activity in the healthcare market requires due diligence on many fronts, including IT systems and services, as organizations seek to rationalize technology across diverse platforms and technical environments.
A study on hospital M&A activity conducted in 2017 by the Deloitte Center for Health Solutions and HFMA revealed that, following such transactions, acquired hospitals saw a decline in revenue and operating margins lasting two years, on average, post-transaction. a This trend is not unique to the healthcare industry. Although the acquiring organizations typically issue a statement about the additive value of the transaction to shareholders, that increase in value often is not realized unless there is a disciplined approach to tracking the performance of the underlying businesses.
A small subset of high-value transactions identified in the study were able to realize cost savings and quality improvements sooner than others. Researchers found that hospitals were more likely to succeed when leadership developed a strong strategic vision and engaged clinical and functional stakeholders at the onset of the acquisition process. The key to a successful merger is early and effective alignment of people, processes, and technologies across all levels of the organizations involved. One functional area where the alignment of these three elements is particularly important is in the IT department. The focus here is on the requirements to obtain and sustain that alignment.
Technology’s Role in Hospital M&A Success
During any merger or acquisition, it is important to create the right integration team. The integration team is responsible for achieving the identified synergies and is typically organized by functional areas, such as human resources or IT business units. Large multiregional organizations may include regional teams. These teams further refine the processes to deliver synergies and create the operating model for each function and business unit.
Early involvement of the IT team in M&A planning is essential in setting realistic project, budget, and timeline expectations within the organization. Today, one would be hard-pressed to find an area of the organization where IT does not play a role. Stakeholders should evaluate the IT assets, architecture, and capabilities of both parties to understand the risk, cost, and complexity of the transaction.
IT involvement in M&A planning lends clarity to three specific areas.
Appropriate integration strategy. Addressing the deal’s core business goals and objectives with IT ensures that the organization doesn’t waste resources over-integrating or fail to provide needed support for primary business objectives. Leadership should address the following questions with team members:
- What is the intent of the transaction (e.g., expanded capacity, additional services, new markets)?
- Can the goals of the merger be reached through use of existing systems?
- What is the financial valuation formula for identifying an M&A target?
- What are the components of the budget for this integration?
- What is the timeline for integration, and how does that affect the budget? That is, how will the organization separate the costs of the transaction from the costs of running the business once the transaction is complete?
Visibility into the target company’s IT capabilities. Having insight into the acquired entity’s IT staff, assets, and capabilities is essential. This visibility helps uncover expenses that will need to be planned for, including those related to fragile infrastructure or legacy data migration, and it helps avoid unnecessary costs, such as prolonged support of duplicative applications. The acquiring organization also will be better able to assess the acquired IT staff’s technical capabilities and work culture.
Integration execution timing. IT should be considered one of many parts of integration and not treated as an isolated entity. Early communication and planning of IT priorities will help establish a realistic timeline for communicating to those affected by the merger or acquisition. Treating IT as one key component of integration also supports ROI planning and mitigates the potential for costly, slower-than-planned integrations.
A shortchanged IT due-diligence process will fail to reveal key issues that can pose short- and long-term risks to the organization. On the tactical side, there may be risks associated with lack of good security, wth the result that the entire organization is exposed to the possibility of data theft, HIPAA violations, and other types of cybersecurity attacks. On the strategic side, there may be advantages or disadvantages to integrating with local physician and other ancillary practices that ultimately would have revenue potentials. To avoid resource redundancies, integration challenges, and unexpected costs and delays, IT leaders must work collaboratively with other executives in planning for an M&A transaction.
The Healthcare M&A Integration Strategy
During the M&A IT due-diligence process, the following areas should be carefully examined:
- Applications, including contracts, upgrade or deployment cycles, and the criticality of each system
- Application integration and interoperability as well as broader health information exchange initiatives that could be affected by the merger or by a change in IT systems
- Workflows, processes, and operational and service-level agreements
- Network and wireless infrastructure and IT asset inventory
- Personnel assessments, staffing models, and current operation budget
- In-flight and planned IT projects and initiatives and their budgetary impact
- IT service delivery maturity and capabilities
- IT and data risk security posture of the organization
Today, even corporate boards are getting involved in understanding a company’s cybersecurity posture. There are ample concerns to warrant a deep dive into an acquisition target company’s risk posture. The challenge is that breaches can occur during the integration process even if major security risks are not identified during the due-diligence process.
Information gathered from this assessment should be factored into the organizations’ integration approach. For example, based on what is discovered, does the organization plan to completely overhaul the IT infrastructure of the acquired entity or retain some of its systems and processes? Budgetary considerations and product lifecycles will be key drivers when making such determinations.
Budget considerations. Heading into a merger or acquisition, a detailed integration plan should be developed itemizing all resources needed from both IT organizations and the business and clinical units impacted by the transaction. Integration plans should include information on the cost of the resources as well as any anticipated productivity losses. Additional considerations that often influence M&A integration project budgets include the following:
- Office locations and any temporary locations needed for staging or other activities
- Number of data centers and potential impact during merger activity
- Legal or regulatory issues that may add to the cost and complexity of the merger
- Offshore locations that need to be included in planning and execution
- Disaster recovery and business continuity plans in case a calamity occurs during the merger
- Resources needed to manage on-call and emergency management events
- Additional Internet connectivity needs during the process
- Existing skill and staffing gaps or departures that may require standardization of roles, responsibilities, and progression plans, or additional placement of temporary or permanent contractors
Cost-saving opportunities. Overlapping IT assets represent a quick cost savings lever that can help healthcare organizations offset the cost of M&A transactions. Most often, however, the biggest cost of a M&A undertaking is related to staffing. This area should be carefully considered and, where applicable, consolidated as quickly as possible to secure savings.
The next big-ticket savings opportunity typically relates to contractual agreements with vendors. Consolidation in this area can help reduce expenses. Updating and rationalizing contracts with vendors also reduces risks related to IT failures and can yield opportunities to secure better terms. Leveraging cloud-based services also can dramatically improve IT operations and reduce costs. Finally, a careful examination of in-flight and planned IT projects can enable the organization to consolidate or shut down unneeded projects, potentially realizing major cost savings while reducing staff burden.
Unexpected points of influence. Organizations should be cognizant of the cultural and personnel-related issues that could potentially interrupt or derail M&A implementations. First and foremost, culture matters. Downplaying the impact of the potential cultural clash is one of the primary reasons for M&A failure. The commitment of executives to ensuring everyone understands and supports the rationale and desired end state of the acquisition is paramount to realizing the intended synergies from the deal.
People have a high need for direction during a merger. Team members need to know they are doing the right things and they need direction in prioritizing short-term business objectives and work tasks. Communication is key in the process. Leadership should provide transparency through a detailed communication plan accessible to staff throughout the project.
Before the integration team disbands, it also is important to ensure that systems will work as planned post-integration.
A Proactive Approach to Health IT Governance
In an environment where health care and health IT are now virtually synonymous, systems will undoubtedly grow in complexity over the years to come. Appropriately documenting IT infrastructure, resources, and capabilities will support not only M&A and divestment activity, but also the approach to care coordination and value-based care. Productivity improvement and cost reduction are key components in these activities, and IT clearly has an important role to play. Healthcare organizations that take a proactive approach to IT asset, contract, and resource governance will be better able to appeal to new partners and navigate health care’s evolving digital demands.
a. Deloitte Center for Health Solutions and HFMA, “ Hospital M&A: When Done Well, M&A Can Achieve Valuable Outcomes,” 2017.