Hospitals Learning from Mergers

  1. Sept. 3, 2002

    The former interim president and CEO of Mercy Health Partners, A. David Jimenez, still recalls the day in April 2001 when it looked like the available cash simply would burn up before the system could spring back from heavy losses it had endured for two years running.

    Hard times had hit the Cincinnati-based system in 1999 following the acquisition of two financially troubled hospitals from Franciscan Health System of the Ohio Valley, a strategic move to expand into new areas of Cincinnati. While Jimenez doesn't blame the system's combined $100 million in losses in 2000 and 2001 entirely on the purchase, he says it helped tip the scales, aggravating an already grim financial forecast. Consequently, a radical-and ultimately successful-turnaround effort ensued to right the system's ailing finances.

    Mercy's experience illustrates what went wrong with a lot of hospital marriages in the '90s. In this case, since executives did some fast thinking to blend the two cultures and restructure operations, they were able to improve finances in a relatively short period. Other hospital unions, however, have not fared as well and still struggle with marital strife, several years down the line.

    Before it took on the Franciscan hospitals in April 1999, Mercy, owned by Cincinnati-based Catholic Healthcare Partners, had done "reasonably well" making small margins, says Jimenez. But the three-hospital system was also rife with high-paid executives and some nonperforming businesses such as an ambulance company, he says. When it came time to integrate with the additional two facilities, cultural problems were quick to appear. At the same time Mercy was absorbing the full effect of the Balanced Budget Act and resources were draining fast.

    Was this another merger disaster in the making? Not quite. Arriving in February 2001, less than two years after the merger, Jimenez, a turnaround specialist and executive vice president at Catholic Healthcare Partners, made some quick and difficult decisions that paid off. First, before balancing the books, he restructured the senior management team, letting a dozen people go. Next he addressed the emotional upset related to the merger within the middle management ranks. "There was this idea that Mercy was doing well and that it was Franciscan that created all the difficulties," he says. To move past those sour feelings, senior leaders began meeting regularly with the company's 300 managers and a new environment evolved that incorporated the values of both organizations. Jimenez also worked with managers to improve collections.

    It became a turnaround culture, says Jimenez, one that said the system would get things done and make "financial success critical to the mission." He let staff know up front that he would have to take unpopular actions such as eliminating 1,100 employees, shuttering a hospital and closing unprofitable businesses to break the pattern of losses. "Many managers left because the solution was uncomfortable," says Jimenez.

    The discomfort, however, led to positive results. Today, Mercy is again enjoying a profit, netting $12.5 million already this year, and employee satisfaction scores are up, Jimenez says.

    Thumbing through the list of merger dos and don'ts, industry experts still agree that the primary culprits that have unhinged many hospital relationships have been a combination of cultural incompatibility and poor strategic planning that didn't account for BBA cuts. Some attribute this to a certain herd mentality that gripped the industry in the mid-'90s.

    "Everybody was looking around to see whom they would marry because consultants and others were scaring hospital administrators and board executives with thoughts of managed care proliferation," says Craig Kornett, senior director with ratings firm Fitch Ratings, in New York City. Hospitals also aligned to achieve cost savings and expand their scope of service, experts say.

    Many mergers were problematic from the start, says Kornett, due to flawed business plans. For starters, he says, hospitals assumed their operating profitability would continue to grow and that they would remain flush from Wall Street investments. They also failed to nail down details of their joint operating agreements. When the BBA hit, he adds, those issues became "huge contentious points."

    "So often there was an underestimation of the challenges in merging two cultures into one," says healthcare attorney Mark Sterling, a partner in the Miami office of Hogan & Hartson LLP. Tough decisions like laying people off or cutting services need to be made right away, he says. Often, there is only a six-month to one-year window when these changes can be made or momentum is lost.

    Jimenez agrees. On the failure of mergers, "people don't pin down the details, then they get caught in the miasma of being politically correct," he says. "When you don't move quickly to establish that new third culture, you get caught up in a lot of stuff."

    San Francisco-based Catholic Healthcare West, a confederation of 10 hospital systems that came together in 1986, is a case in point. Seven of its Daughters of Charity hospitals, which it has affiliated with for the last five years, seceded from the organization this year due to cultural clashes. Late last year following nearly $1 billion in losses since 1997, CHW leaders decided to overhaul its management system. Instead of self-governance, under the new management model, all 10 regions would be run from a central office.

    The Daughters of Charity left because of that directive, says Kornett. "What we hear from CHW is that Daughters wanted to remain autonomous. They wanted the old model," he says, adding that Daughters was profitable under the old regime, with an operating surplus of $22.6 million in 2001, compared to the system as a whole, which lost $135 million that year.

    Still, says Kornett, centralizing operations was necessary for the entire company. Each region had been its own fiefdom, loosely run from a central corporate office. The problem with that, he explains, is that "you had a confederation of mini-systems with different outlooks on the direction of healthcare and different experiences in their local markets, and that led to cultural problems." The corporate office couldn't implement improvement tactics fast enough when there was a problem in one of its facilities. Kornett says that today because of the decision to centralize, CHW, with 50 hospitals remaining in its network, is "nowhere near the losses of the past few years."

    Mitchell T. Rabkin, M.D., former chief executive of Boston-based Beth Israel Hospital-which merged with Deaconess Medical Center in 1996-knows well how cultural conflicts can damage an organization. He recommends conducting a cultural due diligence process just as you would a financial due diligence before striking a deal.

    Although the financial reasons behind the merger with Deaconess Medical Center made sense at the time-the union would give them negotiating clout with third-party payors, provide economies of scale and allow them to compete against then-newly formed Partners Health System-management had not paid close enough attention to the fact that the two institutions had very different histories, he says.

    For example, says Rabkin, Beth Israel had been a major teaching hospital for 35 years, whereas Deaconess had been one for less than 10. This fact alone caused a lot of tension in the anesthesia department. "Where Beth Israel was a full-time academic department, Deaconess did not subscribe to the conventional academic notion that the fees for service [reimbursement] go to the office of the chief," says Rabkin. The chief then tithes part of that money toward scholarships and other efforts to bring in new physicians, he says. But Deaconess anesthesiologists refused to give up their money. "That meant two people doing the same job but one taking home a lot more money than the other." It didn't work, says Rabkin. This was followed by leaks in the press that raised questions within the community as to whether it was "the old institution," he says. Subsequently, he says, over time the hospital lost some volume.

    Today Beth Israel Deaconess Medical Center is on a two-year turnaround recovering from losses it has sustained since the merger. CEO Paul Levy, who took over in January, says flatly, "A lot of problems came from the merger." He expects to see $41 million in losses this year and says the hospital will not break even until 2004. Despite its troubles, Rabkin says, the hospital is on the upswing. "Today there is a solid feeling of one institution and in part it is because those who were not accepting have left." Volume has also picked up, he says.

    Despite the legion of problems of earlier mergers and a few well-publicized divorces, most merged hospitals have stayed together and are ironing out their differences, say industry experts. "They have taken their lumps and losses, have retooled and are doing things like divesting unprofitable product lines," says Kornett. They are also becoming more efficient at the local level, working on clinical protocols, supply chain management and getting better managed-care rates, he says.

    With the industry facing some tough lessons, can we expect to see a new flurry of merger activity?

    Not likely, say those in the know. Today there are roughly 100 or so deals a year compared to 200 a year going back five or more years.

    "In 1995 and 1996, the likelihood of failure was viewed as much more remote than it would be today," says attorney Sterling. Kornett, for his part, is philosophical about the lessons the industry has learned from the experience.

    "A lot of individual hospitals are looking at these merged systems and difficulties they have had and are saying, 'I don't see where the economies of scales were. Their bottom lines are a lot worse than ours.'"

    Michelle Rogers is assistant editor and staff writer with HealthLeaders.

    Coming Together?

    A combination of culprits has undone some recent merger attempts, industry experts agree. They are:

    *Cultural incompatibility between the merged institutions
    *Poor strategic planning that didn't adequately account for *Balanced Budget Amendment-related cuts
    *Failing to make hard decisions up front
    *Faulty business plans
    *Falling prey to a herd mentality to merge at all costs

    Source: HealthLeaders research


    I still have difficulty with the phrase "closing unprofitable business lines" especally in facilities whose mission statement is "to care for the poor" as several of the above mentioned facilities are. Will ponder and write more on this theme later. Karen
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  2. 2 Comments

  3. by   oramar
    They mentioned the "bandwagon". This merger thingy was one of their bandwagons, another was buying out doctors practice. We have all watched them line up to do these things when they had no evidence of good outcomes. Sometimes in situtations like healthcare's love affair with the Hunt group there was evidence of bad outcomes. One bandwagon they resist climbing on is one that has been tried in several places successfully. That is treating nurses like professional team members instead of labor lackies. Even though a small percentage of healthcare institutions have tried this and speak glowingly of the results most of them resist the idea like it is poison.
  4. by   sjoe
    "Today, Mercy is again enjoying a profit, netting $12.5 million already this year, and employee satisfaction scores are up, Jimenez says"

    I just wonder: 1) which employees? and 2) no mention here of patient satisfaction, increased effectiveness of healthcare delivery, improved health status of the community, etc.

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