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As health systems pursue scale, M&A could get bigger, more complex in 2018 and beyond

Over the past several years, consolidation among hospitals and health systems has grown. Even more interesting than the number of mergers and acquisitions (M&A) are the sizes of the transactions, which also have increased. In 2018, we expect hospital and health system M&A trends will likely continue and that these transactions will become larger and more complex.

Executives from acquiring or merging health systems tend to pursue transactions as part of a strategy to build scale and to expand their reach into new markets. In the post-Affordable Care Act world, scale is often king. A desire to increase market presence is the top driver for transactions among acquiring organizations, according to a joint hospital M&A research project conducted by the Deloitte Center for Health Solutions and the Healthcare Financial Management Association (HFMA).

In many markets, standalone community hospitals and smaller health systems are finding it increasingly difficult to compete against substantially larger players. For a hospital that is not one of the top two or three players in a market, viability could become increasingly difficult. In an effort to expand their footprint and take advantage of synergies, many large and broad health systems are beginning to merge with each other to attain capabilities that can be essential for competing in the new health care eco-system. According to our research, there is some variability in the outcomes of M&A. But we also found that a purposeful and planned approach to M&A is often essential for transactions to achieve their goals.

Majority of hospitals are now part of a health system

As community hospitals and small-to-midsized health systems merge or become acquired, there are not nearly as many stand-alone hospitals or health systems as there were just a few years ago. Of the nearly 5,000 hospitals in the US, nearly two-thirds are part of a health system.

In surveys and interviews, hospital and health system executives agreed that increased market share can help a health system broaden its physician network and expand its access to patients. Both of these can be critical factors for taking on increased financial risk in an evolving, value-focused health care market. To keep a seat at the table, more hospital and health system executives are deciding that M&A might be the best way to maintain financial, operational, and market strength.

Five strategies to help ensure M&A success

Every deal, regardless of size, includes many of the same risks. However, when more than one multi-billion health system is involved, there is little room for error. The balance sheets are bigger, which means post-transaction performance can be even more complicated. Maximizing cash flow, cutting expenses, and improving clinical performance can be even more critical.

In our research, we looked at the impact M&A has on performance of the acquired hospital. We wanted to determine why some transactions have better results than others. We analyzed financial, operational, and quality data of more than 750 hospitals that were acquired between 2008 and 2014. We also fielded a survey of 90 hospital financial executives who were involved in hospital M&A, and conducted interviews with 13 others.

When acquirers employ a proactive, purposeful, and sustained approach to M&A, they can increase the potential for every transaction to have valuable outcomes. Through our research, we identified five pillars – strategy, governance, physician alignment, cost containment, and quality – that can be considered to support successful M&A deals:

  • Strategy: The vast majority of executives who were involved in high-value transactions said the deals included a defined operating model that incorporated a strategic vision for the combined entity, and a strategy to realize revenue growth and cost-reduction opportunities. Leaders from both sides should analyze potential value drivers and consider whether to collapse service lines, reduce duplicative services, relocate services, or vertically integrate and add assets. Along with scale M&A can bring, health system executives should evaluate what the acquisition might allow the combined entity to do that it couldn’t do before.
  • Governance: Before an agreement to merge is reached, it is important that executives on both sides determine what powers the acquired hospital or system’s board of directors will retain if an acquisition is finalized. They should define the roles that executives in each organization will play in the combined organization. They also should talk about decision-making authority at each level of the organization. Although such conversations can be time consuming and can slow the transaction process, they can help ensure both sides achieve long-term strategic goals.
  • Physician alignment: In any transaction, the dynamics within the medical staff can be complicated. It is important to designate system-wide physician leaders and a system-wide quality leader. Overlooking this step can make it more challenging to develop a common clinical culture. As a result, medical staff at both organizations might wind up working in silos rather than taking advantage of an opportunity to share best practices and intellectual property.
  • Cost containment: Executives from 29 percent of acquiring health systems, and 24 percent of acquired hospitals, said improving efficiencies was a goal for the transaction. The vast majority, about 70 percent of survey respondents, said the M&A resulted in at least some of the projected cost-structure efficiencies.
  • Quality: Many executives list the ability to improve quality as rationale for an M&A transaction. Quality improvements typically can’t be addressed until medical staff and leadership roles are determined, and all entities are on the same electronic health record (EHR) platform. But quality can be just as important as cost initiatives and should not be overlooked. When it comes to integration planning and execution, leaders should prioritize quality-specific goals and metrics to track.

The quest for a bigger footprint among health systems isn’t surprising. The health ecosystem is consolidating – from health plans to physicians – and there is a strong belief among many health system executives that scale is vital for competing in the broader industry. With M&A transactions getting larger and more complex, there is more reason to be judicious in planning and integration. Regardless of size, leading M&A strategies tend to be universal. As we look to 2018, these strategies might be helpful for organizations that intend to travel down this path.

Author bio

Bryan Martin is the Partner, Deloitte Health Care M&A, Deloitte & Touche LLP. He is a partner in Deloitte’s health care M&A services group and leads Deloitte’s national provider M&A Transaction Services practice. Bryan has spent the past 15+ years in public accounting focusing on the health care and life science sectors. In both public and private sectors, Bryan consults with boards of directors and senior executives on M&A strategy and execution. His experience includes advising both private equity and corporate clients on many aspects of acquisitions including: due diligence, accounting structuring, financial reporting, valuation considerations, financing documents, and the preparation of pro forma financial statements. He also assists clients with many aspects of dispositions such as: sell-side & vendor due diligence, the preparation of data room materials, deal structuring, and the preparation of carve-out financial statements.
Ion Skillrud is a member of the Deloitte Consulting LLP Life Sciences and Health Care Practice where he focuses on serving health care provider clients. Ion’s engagement experience includes merger planning, post-merger integration, functional carve out, and a variety of sustainable margin initiatives. Ion resides in Saint Paul, MN with his wife and three children.