Column | Leadership

Realizing the economic benefits of a merger starts with integrating post-merger operations

Column | Leadership

Realizing the economic benefits of a merger starts with integrating post-merger operations

 

For many health systems, the primary objective for mergers and acquisitions (M&A) is to achieve potential economies of scale that deliver clear financial benefits once administrative functions are merged.[a]  

Achieving this objective is not a foregone conclusion, however. The health system’s leaders must have a clear sense of precisely how they will combine operations after the transaction is completed. Requisite steps encompass a broad range of tasks, including fully evaluating the shared operations departments to understand their current performance, strengths and weaknesses, policy and procedure gaps, third-party technologies, outsourced business partners and other critical components.

Strategically integrating operations after a merger

For each department of the merging organizations, the operational consolidation will result in a new department landscape unlike what existed prior to the merger. Even though one entity might have had more advantageous metrics on factors such as quality, financial performance and staff satisfaction, simply expanding the footprint of that entity to the enterprise rarely will extend similar results organization wide. Moreover, it could very well degrade overall performance.

Studies have shown that a range of specific steps are required to extend best practices across the newly merged organization. With respect to operations, the collected wisdom is that strategic planning and execution should include the following fundamental steps.

Start with a focus on culture. Culture and staff satisfaction clearly are critical factors in successful integrations, and they require executive attention from the start because they tend to be at greatest risk of being undermined during periods of uncertainty, such as an M&A integration. Yet the ambiguities inherent in measuring these factors pose a significant impediment to understanding how best to manage this area. Effective communication from executives has proven to be among the most consistent means to ensure staff understand the rationale and desired goals, and feel empowered to contribute to them in a meaningful way. Culture and change management are required to ensure everything else works effectively to maintain historical productivity levels and successes that made the M&A transaction appealing in the first place.

Conduct an inventory and internal evaluation. Another critical initial step is to conduct an inventory of the merged organization’s current state, evaluating performance, staff satisfaction, cost and redundancy of solutions. The process not only can help identify gaps or redundancies, but also expose under-performing vendors, thereby helping inform the decision of which solutions to keep in place in the consolidated organization.

For the latter purpose, the organization’s executives should pull up all vendor contracts and itemize the solutions they provide to each organization. This information should be stored in a contract management tool or, if one is not available, in spreadsheets.

The list also should include the team members, including management and staff, who interact with each vendor (for example, as a user of software or as a liaison charged with oversight of an outsource partner). Brief surveys should be sent to team members asking them to rate the vendors with which they interact. This will enable the organization to paint a picture of how each team perceives each of the products and services in use, which can help reduce leadership bias based on personal relationships with individual businesses.

The surveys also should solicit team members’ input on other vendor-related considerations, including:

  • Ability to integrate with the future combined system’s EHR or accounts receivable system
  • Cost structure under the new combined system (percentage of collections or new license- rate based on new user projections)
  • Overall solution categories that the vendor provides (e.g., propensity to pay, patient financing, claim scrubber, denials analytics, claims status, authorizations)
  • Relevant contract details such as termination clauses and contract expiration dates.

At this stage, it is important to consider opportunities for adopting new technologies and market offerings. Even if one legacy process clearly has better outcomes than the other, for example, that does not preclude the possibility of considering a third option.

In sum, on completing this evaluation, the health system should have identified where it may have gaps to fill, which existing vendors are more likely to be the final choice in the combined system and where it might be able to eliminate some vendor partnerships

Perform a market analysis. The health system next should scan the market for new businesses and innovations that could improve its current state. The system’s leaders should access review sites and examine its peer network and market research reports to identify businesses within each vendor category. Vendor consolidation and technological innovations have spawned a rapidly evolving market for software and services, which warrant the ongoing attention of health system leaders, particularly when they are intensively engaged in strategic planning or consolidation after a merger or acquisition.

Assess opportunities for automation. Before making the final selection of vendors, health system executives should systematically assess each category and workflow area to determine whether some portion of the work could be automated. With advancements in robotic process automation (RPA) and artificial intelligence (AI), automated solutions may prove to be an effective way to obviate the need for certain vendor relationships or augment the productivity of their workforce. (By automating a significant number of claim follow-up tasks, for example, a health system may not need a low-dollar insurance outsource partner.) RPA and machine learning solutions also have the potential to enable digital workplace models that replace manual process and allow for staff reductions or retraining for other essential purposes. Health systems will likely find the low-hanging fruit for gains to be realized through these technologies are most prevalent in administrative areas.

Set priorities. Through the preceding steps, a health system should have developed a road map for integrating existing and new vendors. And even if there was a clear winner between two vendors during the internal evaluation phase, the health system should have performed due diligence with multiple other companies and the current partners to get updated pricing, scope and market capabilities. That said, factors such as contract expiration dates will invariably create time constraints, making it imperative that the health system prioritize areas where requests for proposal or information are most critical and start working on those areas. Factors to consider in setting priorities include where opportunities might exist for the greatest cost reduction through economies of scale and where staff satisfaction could be greatly improved or runs the risk of being degraded. Organizational leaders also should take time to identify policy and procedure changes that can be implemented independent of third-party vendors, versus policy and procedure changes that need to be rolled out with vendor changes.

Manage change and performance. Selecting new partners is only half the battle. As health systems begin to integrate systems, they will require dedicated resources (internal or external) to focus on implementation and overall change management. Staff may be perplexed by an array of difficult-to-anticipate, nuanced workflow changes, and the organization may find that staff require considerable training just in its EHR and AR systems. Studies have shown that the most effective large-scale change initiatives (e.g., EHR or global workflow overhauls) spend as much as 50% of their implementation budgets on training and change management activities. That expense may be more than most organizations can afford. Yet such efforts remain critical to the success of a merger.

Close management of the process is key to reducing burnout and returning quickly to steady state. Other steps for managing change include making sure new vendor contracts have performance guarantees (poor performance penalties and high-performance rewards) and implementing processes to reconcile invoices, report on actual vendor impact and continually track staff satisfaction.

Beyond steps

There are countless considerations when integrating operations following an M&A transaction of any size or scale, and the steps enumerated here provide only a broad overview. Success also depends, however, on organization’s stance toward these processes from day one. In this respect, to achieve desired results, organizations must do three thing   

  • Empower management teams and bring them into the broader vision.
  • Make the difficult decisions that impact employees at a deep level.
  •  Take into account, fully and meaningfully, the impact of the transaction on the staff who make the whole operation run.

Capturing the perceived return from an M&A integration

Administrators efforts to calculate the potential financial return from an M&A transaction should begin prior to any consolidation activity, with an effort to map out the expected joint entity, particularly when the entities being consolidated are as large and complex as hospitals, health systems and physician groups. Factors that should be considered include the ability of the transaction to accomplish the following:   

  • Create operational efficiency and economies of scale across operating units
  • Reduce overall third-party vendor costs for duplicative software and services
  • Normalize operations performance and cost structure across the entire organization
  • Spread the cost of large capital purchases such as electronic health records and devic   Increase leverage for health plan negotiation
  • Cull excess workforce reductions or retrain some staff on higher value-add activities

For many of these perceived benefits, operations are the key to capturing and maintaining the opportunities. Being able to seamlessly merge operations quickly will help recover the inherent costs of the consolidation. For example, being able to leverage reductions in third-party or labor costs after consolidating functions allows the best-practices to begin sooner rather than later. At the same time, reducing the period of uncertainty among staff about job retention can substantially improve morale and increase loyalty through a clearly articulated and consistently communicated strategic plan. 

Footnote

[a] This rationale tends not to be a driving factor in such transactions only where massive systems are merging that have already presumably achieved scale and leverage.

About the Authors

Phil Rogerson

is a co-founder, Venddy, and vice president of solution design, Olive, Chicago.

Erick McKesson

is a co-founder, Venddy, and vice president of solution design, Olive, Denver.

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