M.S. Ahmed, MD, MBA, FACOG

Chief Operating Officer/ Chief Medical

Officer- Baystate Health Eastern Region

National Healthcare CMO Summit- March 7, 2016

Choluteca Bridge (Honduras)

Choluteca Bridge- before Hurricane Mitch

Objectives

Review background on merger and acquisition (M&A) issues

Review alignment models and basic strategies

Review “capabilities” approach to M&A decisions

Share case study

Review success factors

A Changing Landscape

Significant trend in the past decade-

Number of deals in 2012 topped 100, compared to ~50 in 2009

Decreased reimbursements increased margin

pressure (government and commercial payors)

Increased competition amongst providers to retain market share

Volume to Value plans are not easily transferrable to current Fee for Service system- New capabilities may be needed

A Changing Landscape (cont.)

ACA/ State level changes may be challenges for hospitals that have challenged operating margins

Mix of larger systems looking to expand and smaller facilities looking to “partner”

2012 survey of hospitals showed that 87% were considering alignment in their strategic plans 1

1 Media Intelligence, M&A: Hospitals Take Hold, Jan 2012

M&A- “Ideal” Outcomes

Assistance with alignment/ employment strategies with physicians

Achieve “economies of scale”

Potential for “new service lines” in different markets

Increasing revenue opportunity

Access to capital – helps fund increasing IT expenses and infrastructure needs

Draw on partner’s unique clinical or managerial strengths

M&A results…

“Strategy&” survey of 219 hospital/ health system M&A deals (1998-2008)-

Only 41% outperformed market peer group (up to 2 yrs. after deal)

18% went into negative margins 2 yrs. after deal

Unaffected by change in number of beds or geographic proximity

Types of Alignment

Affiliation-

Flexible (strong vs. weak), Used to increase “footprint,” minimal change in governance, may improve economy of scale

Joint Venture-

Profit/ risk sharing element, can be used to create a “new” limited activity, shared governance

Joint Operating Agreement-

Virtual merger, new overarching board created but independent boards remain, larger than JV beyond one activity

Types of Alignment

Merger-

Absorb each other’s debts/ assets, leadership can be combined or from outside, increases market share

Acquisition-

Purchase of one entity by another, may function semi-independently or transform to match buying entity

Common Operating Model Strategies

Scaled Portfolio (ex. LifePoint Hospitals)-

Portfolio of care delivery assets across broad geographic footprint

Shared Capabilities- EMR, revenue cycle, etc.

Shared clinical best practices

Geographic Cluster (ex. Steward Health Care)-

Concentrate care delivery assets in contiguous geography close to patients

Value creation through enhanced market power and physician relationships within network

Common Models (cont.)

Hub and Spoke (Ex. Oschner Clinic)-

Establish “feeder” system for tertiary/ quaternary care facility

Benefit by maximizing utilization for all system assets

Learning curve benefits at hub (i.e. complex procedures)

Innovation systems (Ex. Cleveland Clinic)

Deliver distinctive product or service

Co-branding by codifying intellectual capital

Common Models (cont.)

Location- based systems-

Most common model – typically rural community

Channel demand from captive local population

Need more cost-effective ways to deliver care

May need to be part of other models when market is outgrown

Case Study

Geisinger Health System and Hershey Medical Center(1997-1999)2

Penn State Geisinger Health System

Difficulty with understanding cultural differences between both organizations

“Business as usual” was persistent leading to separate and competing services- unable to realize economy of scale

Leaders unable to gain buy-in from middle managers and physicians

2 Sidorov J. Case Study of a Failed Merger of Hospital Systems.

Managed Care: Nov 2003

Case Study (cont.)

Theoretical cost savings failed to occur

Consolidation and cost cutting failed to deal with inevitable “winners/losers”

Competitive advocacy emerged from any attempts to make changes (academic vs. non-academic)

Community physicians did not see the advantage of the newly combined health plan and sided with local community hospitals

Growing budget deficit heightened consolidation efforts- “last straw” was planned consolidation of microbiology away from HMC campus

Case Study (cont.)

Lessons Learned

Superior leadership needed for health system mergers involving competing, tertiary care programs

Cultural differences are underestimated

Health system mergers do not automatically result in economies of scale (organizational complexity can create further stress)

Not all stakeholders in the surrounding community will welcome the merger (public mistrust, increased regulatory scrutiny)

Focus on “Capabilities”

Coherence is achieved by seamless alignment of

Capabilities System (how value proposition is delivered to customers)

Market Position (distinctive way of serving stakeholders)

Lineup of products and services (clinical offerings and targeted patient segments)

Goes beyond a focus on merging assets (financial and operational metric focused)

Capabilities (cont.)

Capability “lens” permits organization to have a clearer understanding of how capabilities can be applied effectively in a given context

Aims to prevent “unlike” mergers that can destroy uniquely acquired capabilities

End-state business model drives integration as opposed to a focus on synergies

Strategies for success

Facilitate a mutual understanding of the transaction’s value- leadership teams and boards must be ready

Understand the nature of the operating model and stay true to the choice

When potentially facing acquisition, try to aim for discussion before developing a “burning platform” for change

Differentiate between acquisition and merger – clarity helps in planning pro-actively as opposed to mixed messages for stakeholders

Success (cont.)

Evolve capabilities deliberately, not opportunistically

Clear understanding of your own organization’s capabilities

Select markets that will thrive within your capability system as opposed to pursuing “attractive” targets

Success (cont.)

When pursuing integration, do not destroy the capabilities system at the core of long-term value creation

Acknowledge the winners and losers needed for the ultimate benefit of the hospital

Use appropriate governance model – risk of separate governance bodies is risk of weakening strategy

Success (cont.)

Over-communicate to all stakeholders throughout the process

Do not assume that all physicians will be on board with integration/ Understand the risks with moving forward

Take time to perform due diligence prior to signing LOI

ACKNOWLEDGE CULTURE!!

ACKNOWLEDGE CULTURE!!

ACKNOWLEDGE CULTURE!!

Personal learning…

Baystate Health acquisition of Wing Memorial Hospital from Umass Medical Center

References

Saxena S et al. Succeeding hospital and Health System M&A; Why so many have failed, and how to succeed in the future. Strategy&: 2013

Yanci J et al. What hospital executives should be considering in hospital mergers and acquisitions. DHG Healthcare: Winter 2013

Myers C and Lineen J. Hospital consolidation outlook-Surviving in a tough economy. Healthcare Financial Management: Nov 2009

Stybel L. 5 reasons to consider an acquisition over a merger. Becker’s Hospital Review: Oct 2010

Christenson C et al. The big idea: The new M&A playbook. Harvard Business Review: March 2011