Governing boards have plenty to oversee once they unite with a merger partner but, in many respects, the prospects for success depend on what an organization took pains to ensure well before the agreement was struck. The proper and complementary fit, the capital and employee commitments, and a pragmatic check of a merger partner's ability to deliver on pledges all should be considered and assured.
"A hundred percent of the success of the transaction is going to be the care that you take going through the transaction," says Barry Sagraves, a consultant with Juniper Advisory. Most important for a board is to be clear about why it's seeking a partner and the objectives, he says.
The right fit may be different depending on whether the objective is access to a lot of money or access to a demonstrated ability to deliver excellent clinical performance. Determine all of that before setting out, and don't pick targets without making specific objectives known up front, says Sagraves. "It's surprising how many organizations pick the usual suspects who are nearby and then decide which one they think is best, and then talk to them for a very long time without getting anywhere."
Once in a negotiation, a contract has to enforce the realization of each side's objectives, and not only financial terms, he says. Will employees be assured jobs and existing benefits? Will charity care be kept at the same level? Will the partner meet capital promises of a certain amount?
As a hospital being acquired undergoes due diligence by the buyer, it's just as important to do "reverse due diligence" to protect its interests. "You're talking to people [at organizations] that they bought previously, you're looking into their financial condition to make sure they can keep their financial commitment, and you talk to people as to whether they're trustworthy in keeping their word on employees, charity care and that kind of thing," Sagraves says. "If you've done those things, you're more likely to be happy in five years that you did the particular transaction with the particular company."
Don't Move Forward without Physicians
Assumptions about acquisition price, business potential and more often are tied to a physician staff's willingness to stay at the hospital after the merger. Max Reiboldt, who heads the Coker Group, remembers a rural hospital client in the Northwest that was getting top dollar from a for-profit health care company; the board approved the acquisition, but principals on the medical staff pushed back. "If you don't have the medical staff behind it, it's not going to happen," he says.
The merger of Jewish Hospital and Mercy Health Partners in Cincinnati had to weather a certain amount of initial cynicism over the reasoning for the transaction, says Coker Group consultant Rick Langosch. He said doubts at one point about how many doctors could be counted on to go with Mercy "almost shut down the deal." Mercy had a critical mass of doctors in mind, says its CEO, Jim May. There was nothing written down as a minimum, just "part of our business analysis and risk analysis," May says. "We needed to make sure that the physician community would support this transaction."
"Mercy comes in knowing they're buying a hospital and its structure," says Coker consultant Aimee Greeter, "[but] to them it's not about acquiring the technology or the fixed assets; to them it's about acquiring that book of business." If some of the staff splits from the hospital "and now they're going to go to your competition," says Langosch, "you've really defeated the purpose."
For the transaction between Shamokin Area Community Hospital and Geisinger Medical Center, it wasn't whether the doctors on staff would come along, but whether they could be accepted by Geisinger, which always had operated with a closed physician staff. To work at the Danville, Pa., medical center, doctors had to be employed by the system, says Thomas Harlow, Shamokin's chief administrative officer.
"It presented some challenges, quite honestly, for the governance and the leadership at Danville, because they had to make some accommodations for the local independent physicians here at Shamokin Hospital," Harlow says. "We really did not employ any physicians and, still to this day, we do not here in the local community."
The Geisinger medical staff had to vote on the exception to its rule, and "it wasn't a slam dunk," Harlow says. In the end, "both organizations saw the benefits in coming together, both had to give something to make this work, and it was a huge change for Geisinger," he says. That now means the independent physicians on staff at the Shamokin campus also can practice at the Danville campus if they choose.
Adopt Transparency for Staffing Plans
Retaining the rest of the hospital staff may not be preferable or even possible if the merger is to achieve economies of scale through consolidation. Community fears may lead principals to pledge to keep employees post-merger, but that's "unrealistic, in a word," says Steve Gelineau, a consultant with the Camden Group. It's impractical to "adopt a Noah's Ark philosophy: two of everything," he says. Health care systems are under pressure to contain cost increases, bring costs more in line with future payment rates and improve productivity. "That is not an environment in which you say to everyone, 'We're going to adopt a no-fire, no-layoff policy,'" he notes.
Avoiding such an up-front promise was pivotal to giving CharterCare Health Partners, the organization created by the affiliation of Roger Williams Medical Center and St. Joseph Health Services of Rhode Island, the latitude to attain operational efficiencies; the consolidation of two nearby entities of similar size and service called for it. But in the Jewish and Shamokin examples, the idea was not to consolidate staff, but to keep the entities intact to serve an area the merger partner did not.
"We made a pledge for the first year of this merger that no one would lose their job, and we've stood by that," says Mercy CEO May. "Beyond that, any changes we've had to make were done almost exclusively through attrition."
Shamokin's status as a relatively complementary campus of Geisinger also made it possible to pledge no layoffs. "I believe keeping everybody employed was realistic, I really do. The last thing anyone wants to do is to have the organizations come together and then disrupt any synergy we've developed by saying, 'Oh, by the way, we're going to cut half your staff,'" Harlow says. "Also, being in an economically depressed area, we're one of the larger employers in the community, and [the board] wanted to make sure we preserved jobs and perhaps enhanced jobs in the long run."
In the aftermath of the merger, there has been an uptick in service volume rather than a decline, he adds. "This has been accretive to this community rather than detrimental."
For more, read our November/December cover story "Life after a Merger."
John Morrissey is a freelance writer in Mount Prospect, Ill.