Hospital mergers can take more than 2 years to realize cost, quality benefits

Operating revenue fell faster than operating expenses for two years at hospitals which had been merged into or acquired by a new system, with no evidence of improvement on quality measures, according to a report released by the Deloitte Center for Health Solutions and Healthcare Financial Management Association (HFMA).

The report examined 750 hospital acquisitions or mergers between 2008 and 2014. It found acquired hospitals typically experienced a two-year decline in operating margins, revenue and expenses after a transaction, which then tended to level off. The study also included a survey of hospital finance executives (90 completing it online and 13 conducting it over the phone), with almost 80 percent of respondents saying “significant capital investments” and additional staffing were needed at acquired facilities post-transaction, which could cancel out gains made through economies of scale.

“We expected to see better financial and operational performance following M&A (mergers and acquisitions) given that many typically have a goal of cost efficiencies, so it was surprising to learn that acquired hospitals as a group did not normally improve their overall financial and operational performance in the first two years post-transaction,” the report said.

Most respondents said it took longer than two years for these investments to pay off. When asked how much of their originally projected cost efficiencies were realized, 40 percent of respondents said their organizations achieved 25 percent of more of their goals. Another 31 percent, however, achieved less than 25 percent of their estimated savings and 30 percent didn’t know how much of the expected savings were realized.

Quality was unchanged at acquired hospitals on 20 of the 28 measures analyzed by the study. There was a slight decline on patient satisfaction scores with facilities which had scores of 9 or 10 on a 10-point scale prior to the transaction. In other areas, however, there was improvement. There was almost immediate improvement at acquired hospitals in surgical patients being given beta blockers. Two years after the transaction, acquired hospitals did show improvement in 30-day readmissions on hip and knee replacement patients.

Like the delayed cost efficiencies, survey respondents felt efforts to improve quality took more than two years to come to fruition—27 percent said patient satisfaction scores went up, 23 percent said readmissions were reduced and 17 percent said wait times to see a physician went down.

To come out ahead after an acquisition, the report offered lessons learned from the 17 survey respondents who said they were involved in transactions which met both their financial and quality goals. The common thread was having a “clearly defined operating model,” beginning with having a strategic rationale for the transaction, beyond just growing the system’s market share, and test the “value drivers” of the deal.

Those plans shouldn’t be limited to quality measures and cost efficiencies, according to survey respondents, but should also address potential barriers between the two organizations and get them working together on sharing best practices and intellectual property, not working in “silos on quality improvement initiatives.”

“While an acquisition’s strategic rationale might look perfect on paper, meeting the post-transaction goals of a combined organization may be difficult if company cultures aren’t compatible,” the report said. “According to surveyed financial executives who had participated in a recent merger or acquisition, the importance of culture and communications cannot be overstated.”

M&A activity among hospitals and health systems has lived up to predictions it would be “brisk” in 2017, with major transactions like Steward Health Care and IASIS Healthcare’s $2 billion merger and the proposed joint venture between Carolinas HealthCare System and University of North Carolina Health System to create the 10th largest system in the U.S.

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John Gregory, Senior Writer

John joined TriMed in 2016, focusing on healthcare policy and regulation. After graduating from Columbia College Chicago, he worked at FM News Chicago and Rivet News Radio, and worked on the state government and politics beat for the Illinois Radio Network. Outside of work, you may find him adding to his never-ending graphic novel collection.

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