Life after a Merger

Shamokin Area Community Hospital, a 70-bed medical facility in the anthracite coal region of north central Pennsylvania, was still profitable, had finished an extensive expansion and renovation, and had a usable foundation of information technology. But its board looked at coming financial pressures, sized up the chances of preserving local services for a large Medicare population, and decided it had to be part of something bigger. It's now a campus of Geisinger Medical Center, 15 miles away.

Jewish Hospital in Cincinnati had it all — except scale. The renowned medical center "was highly effective, very financially able, an excellent bottom line, and very effective medically," says Rick Langosch, a consultant with the Coker Group, which advises on health care mergers and acquisitions. But the foundation governing the hospital elected to sell it to Mercy Health for $175 million, gaining economies of scale and pledges of ample resources to compete in an era of pay for performance.

Two longtime competitors in Providence, R.I., had separately slipped into challenging financial straits, and both realized they could no longer go it alone under pressures to invest more while spending less. So Roger Williams Medical Center and St. Joseph Health Services of Rhode Island engineered a close affiliation, called CharterCare Health Partners, and proceeded to save millions of dollars.

These three unions couldn't be more different from one another in circumstance and structure, but they all were driven by the same set of forces affecting all of health care, experts say. From the particulars of the Affordable Care Act — including value-based purchasing and accountable care initiatives — to the uptake of reform models by private payers of care, a growing demand for higher-quality care is calling for access to capital and technology on a scale outside the reach of the typical hospital.

Add to that pressure on payment from all directions — including the Obama administration's estimate of an $11.1 billion cut in Medicare payments next year under a deficit-reduction law — and you have a set of imperatives "that drive many hospital boards and chief executive officers and chief financial officers to pause and say, 'Is it possible to achieve all of that on our own? Do we have the financial, managerial and infrastructure resources to be able to meet the challenges of this evolving environment?' And for many, the answer is, 'Likely not,'" says Steve Gelineau, a senior vice president with the Camden Group.

"So that drives many organizations toward evaluating whether or not they need to be part of some larger enterprise that has large scale, that has better access to capital, that has a better bench in terms of their approaches to clinical integration, that has the ability to update its physical plant, and to stay current with state-of-the-art clinical and information technology," he says.

A decision to seek a merger makes executive leadership and governance responsible for reaching an agreement that will net the benefits they're looking for in administrative and clinical effectiveness. That means planning intelligently for not only the merger, but life after the merger.

"Once the ink is dry and the letter of intent is signed and after you close, the real work begins on the post-merger integration," says Max Reiboldt, president and CEO of the Coker Group. It requires a "very definitive process" for operations and management transition, and a timeline to finish it. "You could really do a lot of harm that would take years to repair by coming in and not having this process organized."

What to Watch

On Day 1 of the merger, each side has to be clear as to how benefits, pledges and promises embodied in the agreement are going to be fulfilled, Gelineau says. "So, in addition to monitoring the day-to-day operations of the enterprise, the board now has to monitor the fulfillment of the terms and conditions of the merger," he says.

To get some perspective on common elements and unique issues surrounding this critical period, Trustee interviewed leaders behind three merger transactions as well as expert counsel. The following components of a merger rollout were pivotal to engineering a successful union:

Ensuring access to capital. Health care requires never-ending capital to construct facilities, implement sophisticated technology and meet ever-higher performance standards, says David Gordon, co-founder of Juniper Advisory LLC. Access to capital is diminishing for smaller organizations, he says, and the gap between the cost of capital for big and small hospitals is significant. A bigger partner can furnish that capital, but such pledges have to be enforced, says Barry Sagraves, an adviser with Juniper. "You don't just go away and say, 'They promised to spend a hundred million bucks.' Someone's got to keep an eye on them and make sure they spend a hundred million bucks."

Merging and streamlining operations. A prime objective of the CharterCare affiliation, formed in late 2009, was to cut costs of two hospital systems that were a few miles apart and served a similar patient population, says Kenneth Belcher, CharterCare president and CEO. "From just pulling together the support functions, we have been able to glean over $27 million worth of savings at this point, and continue to have other opportunities in front of us," Belcher says. Single hospitals joining large organizations, however, may not have duplication to eliminate. The Shamokin and Jewish hospitals kept existing services and employee count post-merger rather than undergoing system consolidation.

Gaining IT efficiency and power. Shamokin's IT system "was usable but did not give us the ability to really dig down into the details," says Thomas Harlow, president and CEO before the merger and now its chief administrative officer. Geisinger replaced Shamokin's IT on the first day of the merger, bringing "the ability not only to data mine but to make that data actionable to us." But such an implementation, with the larger partner usually leveraging its IT to the smaller one, often "creates tremendous challenges of adjustments and acclimation," Reiboldt says. A double transition of IT in the aftermath of Jewish Hospital's entry into Mercy's network, for example, was hard on the acquired hospital's staff, says Aimee Greeter, a Coker consultant involved in the IT work.

Enhancing geographic coverage. Improving population health under reform requires a strategic focus on spreading into new population bases. When the Jewish Hospital foundation decided to leave the health care business and put its hospital up for sale, Mercy Health was attracted partly because the service area of Jewish Hospital was the only one in which it didn't have a presence, says Jim May, president and CEO of Mercy Health. "It was very accretive in terms of our ability to create a network of care across the entire Cincinnati region," he says. In Rhode Island, CharterCare consolidated patient bases, and Shamokin added to the covered lives of Geisinger Health System in central Pennsylvania.

Keeping the physicians. Good facilities and complementary location notwithstanding, the value of an acquisition or affiliation partner rests on the business it brings, and physicians on staff are the ones bringing it, Reiboldt says. "There's no deal, no matter how good it may look, that is viable without a strong and definitive plan for working with your medical staff" to keep them. When Mercy considered the Jewish merger, says May, "if we hadn't been able to attract the physician base, the hospital would have been less interesting to us." For the Shamokin transaction, a physician-ownership model at Geisinger Medical Center had to be relaxed to permit Shamokin's independent staff to continue practicing, an accommodation that was "not an insignificant hurdle for Geisinger," Harlow says.

Big Hospital, Small Hospital

Now called Geisinger-Shamokin Area Community Hospital, a campus of Geisinger Medical Center, the first year has been about operating under the new reality of that descriptive title. The two hospitals in Danville and Coal Township share a medical record and patient-number system, their physicians travel back and forth, and similar services are available at each site. But they're still a car ride apart: One of the pledges made by Geisinger was to maintain Shamokin's local presence in Coal Township and not consolidate in Danville.

That was important for a significant segment of the population served. The Shamokin board "wanted to preserve these facilities here," Harlow says, "because of our demographic, an elderly population [that] doesn't travel well. So we want to make sure we can continue to deliver the good primary and secondary care services here in the community." Medicare has accounted for 56 to 58 percent of net patient revenue over the past five years, according to Shamokin's annual reports to the state.

Shamokin was able to offer Geisinger "an up-to-date, well-maintained, high-quality community hospital that would benefit their system by bringing it in," he adds. As the sides began talks, Shamokin was in the midst of a capital campaign that included a 33,000-square-foot addition for surgical and lab services, a new medical/surgical unit and updated diagnostic imaging. In addition, "Shamokin had a good balance sheet, so we weren't coming in with our hand out and saying, 'Give us something.' ... Geisinger met us halfway and said, 'Let's do something good for the community long-term.'"

In the past, the two facilities were competitors for some services. Part of an integrated delivery system, Geisinger focused a lot on tertiary and quaternary care, Harlow says, but "there were people who would still travel to Danville for other services, surgeries and things like that, that we were capable of doing."

Now the travel sometimes goes the other way. For example, if operating rooms on the Danville campus are capacity-constrained, surgeons can divert procedures to the ORs at Shamokin and "doctors can move interchangeably between the locations," he says. "We bring capacity to the system."

As promised, Geisinger is providing technological and analytical expertise that Shamokin couldn't have afforded, to enable it to coordinate care and improve performance by discerning care patterns. With the single patient record and identification system, "If a patient had surgery two years ago at Danville, that information is accessible to our physicians here today," he says. If a patient has to have a procedure there today, "the primary care physician here in our community knows that and can read and see all of the notes and everything."

Overcoming IT Hurdles

Like the Geisinger-Shamokin merger, the acquisition of Jewish Hospital by Mercy Health in March 2010 "was accretive in that the goal was not to diminish what they're doing at Jewish in any way, but to enhance it and grow it," says CEO May.

Jewish Hospital also had clinical strength to bring to Mercy, says May: the area's strongest cancer program, with the only adult bone marrow transplant unit; the site of the first U.S. open-heart surgery and a strong cardiac-care program; a strong surgical program; and a very strong primary care base — Mercy was able to acquire the practices of 40 primary care doctors as part of the acquisition.

In turn, Mercy made a promise to continue to invest in Jewish facilities and some new programs, $30 million to $40 million already so far. Plans for at least another $70 million in coming years are being finalized and "dirt will move in the near future," says May. Projects include renovating the Jewish campus, rebuilding the emergency department, the bone marrow unit and ambulatory surgery, and moving all patients to private rooms.

Mercy also had to fill a back-office gap: Jewish had no IT department or system of its own, contracting for those services with the remnants of a hospital network that broke apart in 2009. With Mercy, normally integration of those services calls for central consolidation, "but because Jewish had no back office to bring with them, the natural transition of using our back office happened seamlessly," says May. "It wasn't easy, but it wasn't like you had to pick billing group A vs. B [and] lay a bunch of people off."

The rest of the IT transition was a much different story. On the Jewish side, there were 162 mostly clinical software applications. On the Mercy side, a systemwide clinical IT replacement initiative was getting off the ground but was centered on a process to convert existing users of a system from McKesson Corp. to a new platform from Epic Systems Corp.

Mercy decided to first migrate the newly acquired hospital to the then-current McKesson system. "The recognition was that McKesson was only going to be an interim step until Jewish went on to Epic," says Coker's Greeter. "Rather than trying to move Jewish from whatever they were on straight to Epic, which they knew wouldn't come for another year-plus — and then it would be a different process from what all the other Mercy hospitals were transitioning [toward] — they opted to do McKesson first."

That was "a source of contention" at Jewish Hospital, she adds. "Jewish struggled with this for a few reasons. First, they were going to bear a lot of expense to transition to McKesson and then transition to another system. A lot of expense, sure, on economic outlay, but training their staff on two systems in two years — they had a lot of hardship, and they were worried about losing staff." The Jewish hospital operation went live with Epic in June 2011; its physician offices, in May 2010.

Competitors to Collaborators

In Providence, the outcome of the CharterCare union wasn't a complete success. On the expense-reduction and efficiency side, the consolidation of services at Roger Williams and St. Joseph's has far exceeded expectations of savings. On the capital investment side, that savings has not been enough to generate the necessary scale to compete in the era of population health management.

"Being geographically so close together, we were able to take some initial steps fairly early on," says CharterCare CEO Belcher, who was CEO of Roger Williams before the affiliation. "It was clear we did not need two purchasing functions, two HR functions." Other areas — case management and medical records — also came together. IT has been consolidated, he says. "The convergence happened earlier this year, so now physicians are able to view [records on] patients from either heritage hospital."

All this is despite a challenging separation of revenue functions required to satisfy the Catholic Church that St. Joseph's isn't violating ethical and religious directives. That's why CharterCare is pointedly described as a "close affiliation" rather than a merger. "Without going through the list, it's easy for me to say that virtually all of what we would call support or back-house functions have all now been consolidated to where that would look to the common person as though it were a merger," Belcher says.

Since the launch of CharterCare, part of the $27 million in savings has come through the reduction of about 300 staff positions; there are 3,000 employees today. Management first used scheduled retirements and other attrition, and some employees losing jobs in one area were retrained for other areas. "We were very clear as we came together, through the press discussions, through all of our talks with any of the [government] agencies responsible for approving our affiliation, that there would be some reductions," he says. "As we continue to move forward with health care's changing environment, there'll certainly be additional reductions, as well as some areas that will be growing."

But now the affiliation is seeking further affiliation. The system board decided that "despite all of our hard work, we were not going to have the necessary capital available for us to continue to grow and progress to the level and extent and speed that we wanted," Belcher says. The next logical step: See who can bring additional size, scope and capital. The first pass went widely to systems within and outside Rhode Island as well as some of the larger national systems.

"The process has been productive, helpful and now [has] been narrowed down to a short list," he says. Another merger and post-merger adventure awaits.

John Morrissey is a freelance writer in Mount Prospect, Ill.

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