Your Hospital is Ripe for a Merger or Acquisition: What Anesthesiologists Need to Know Now

In order to be their hospitals’ valued partners, anesthesiologists should understand the needs and forces driving the institutions’ leadership.  Some of the strongest of those forces today are creating a wave of merger and acquisition (M&A) activity. In 2012 there were more than 100 deals in the U.S., twice as many as three years earlier.  If the relationship dynamics do not encourage partnership between the group and the C-suite, it is nevertheless important to be able to gauge whether one’s hospital is going in the right direction (or staying in the right place). 

A recent report from the  management consulting firm Strategy&, Succeeding in Hospital and Health Systems M&A: Why So Many Deals Have Failed, and How to Succeed in the Future, is instructive.

In the first of a pair of studies, the authors found that the majority of hospital and health system mergers in the period 1998-2008 had failed to meet financial expectations.  Examination of a representative sample of 219 hospital and health system transactions revealed that only 41 percent of acquired facilities outperformed their market peer group.  One in five acquired hospitals (18 percent) actually went from having positive margins before a deal to negative margins two years after the acquisition.

Those troubling statistics suggest that anesthesiologists should be concerned when M&As are on the horizon, and not just because their relationship to the hospital may change with a change in ownership.  A successful acquisition can be stressful enough.  One that disappoints the parties can have direct negative consequences for collateral players, including more onerous contracts, and lower stipends, for anesthesia groups.

Typically, the medical staff or at least physician leadership has a voice in a proposed merger or acquisition.  (It was the action of five clinical service chiefs, and incompatible cultures,that led to the termination of merger negotiations between Beaumont Health System and Henry Ford Health System in the Detroit area last week.)  Knowing the characteristics of successful and unsuccessful hospital consolidations—as well as the hoped-for benefits of the M&A in which their own hospital is involved—will help anesthesiologists evaluate the deal.

According to the Strategy& study authors, the standard reasons for M&As are to lower costs, raise capital, better coordinate care, expand geographic coverage, build attractive specialties such as cardiac care and more efficiently manage a population’s life cycle of health needs.  Stand-alone hospitals have become particularly vulnerable targets and are increasingly seeking health system partners that provide access to a larger revenue base, economies of scale, breadth and scope of services, and larger investment portfolios.  Such market-related variables traditionally used to justify M&As as similar tax status or religious affiliation of the partners, geographic proximity of acquirer and target, or payer concentration in a market do not predict better performance.  Nor do operating variables, e.g., number of beds, occupancy rates, and length of stay.

What successful M&A transactions have in common is a good match or fit of “capabilities systems.” Strategy& team defines a capabilities system “as three to six mutually reinforcing, distinctive capabilities that are organized to support and drive the institution’s strategy, integrating people, processes, and technologies to produce something of value for customers,” and cites as an example:

Mayo  Clinic’s distinctive  capabilities system, which focuses on team-based medicine supported by a robust  electronic  medical record  (EMR) system and thoughtfully designed facilities, enables diagnosis  and treatment in a short  period  of time, and lies at the heart  of the institution’s destination medicine strategy.

The successful M&As either (1) enhanced the acquiring health system’s capabilities or (2) leveraged the acquirer’s current capabilities system by applying it to the new products and services.  These deals enjoyed a total premium of 27 percentage points over deals with a limited capabilities fit—while the average return for the latter deals was negative 32 percent.

There are three reasons why hospital and health system M&A deals with a solid capabilities fit outperform their peers:

1. Coherence, or the alignment of the institution’s capabilities system, its market position and its set of clinical products and service lines;
2. A sharp focus on what M&A plays are most advantageous and on how to apply capabilities to maximum effect, and
3. A deliberate approach to integration that preserves and enhances the value of the acquired capabilities rather than focus on merging assets and streamlining operations.

In short, anesthesiologists should be asking whether any proposed M&A deal their hospitals may be contemplating is opportunistic and reactive, or whether it is strategic and aimed at enhancing or leveraging capabilities.

One form of health industry consolidation is particularly unlikely to line up the capabilities of the parties in a good fit.  Increasingly popular M&A deals link up hospitals, physician groups, academic partners and even payers in vertical combinations that make the alignment of capabilities very difficult.  The odds, as analyzed by the Strategy&. team, do not favor such vertical arrangements, and anesthesiologists should take particular note of this study as they consider integrating their practices into health systems.