Hospitals

Consolidation growing among health providers but many leaving money on the table

While M&As bustle among providers, the average U.S. health system acquirer is leaving a whopping $30 million annually on the table, according to a new report.

Hospital consolidation is a common phenomenon but it’s still surprising to learn the pace of these transactions.

M&A activity saw a whopping 34 percent compounded annual growth rate over the last 10 years to $98 billion as many providers turn to consolidation to steer their way through industry-altering changes like profit compression, talent shortages, new payer and customers dynamics, according to a new Accenture report.

The flurry reflects the hope of health systems to, for example, upgrade cost structure, gain market share and broaden the customer value proposition, the report found.

Yet, while M&As bustle among providers, the average U.S. health system acquirer is leaving a whopping $30 million annually on the table, described by the report as a sign that the focus of acquisitions today might not translate into an improved future. Hardly anything to shrug at, considering unclaimed value can fuel margin erosion and market scrutiny.

The report further pointed out that the traditional M&A playbook is obsolete. Historically, in healthcare, of course, M&A revolved exclusively around costs. But these days it’s also about generating tangible and intangible synergies to gird against disruption.

So, given the playbook’s antiquation, and the ability to maintain synergies key to helping to cope with disruption, it seemingly goes without saying that providers need to think about M&As with a different mindset, the paper said. The answer? Turning to comparable industries, the paper stated, which have withstood similar macro forces and are seizing greater value following a merger by assuming a holistic approach to M&A.

In doing so, providers must shelve the notion that healthcare’s unique, which means eschewing the idea that healthcare’s so unique that best external practices virtually never apply. Among providers, it comes down to choosing between realizing the promised of M&A or losing out on value.

Now, as the volume of M&A transactions topples records, conversely, outcomes of these deals have fallen well short of expectations, as customers — both in terms of their experience and financially — come out on the short end. According to Accenture research, the average Net Promoter Score for providers remains just 28 out of 100. That’s more than 40 points lower than top retailers’ scores. One in five customers who don’t receive good value for the dollar switch providers.

Another consideration: the impact of mergers on prices. In the years following mergers, the average price of a hospital stay spiked 11 percent to 54 percent, the report indicated. Meantime, there’s been no improvement in cost structures while, surprisingly, there’s been an 18 percent post-merger boost in supply chain costs — a functional area that’s typically low-hanging fruit for cost savings.

What’s more, providers are coming up empty on the chance to leverage post-merger integration as a “catalytic moment to generate a culture of performance and excellence in the new organization,” the report said.

Meantime, quite notably, in terms of their performances after consolidation, it’s a profoundly different story for companies in other asset-heavy, service-oriented industries like telecommunications, financial services and hospitality. And it’s not exactly an apples to oranges comparison either; these industries have experienced M&A drivers and characteristics comparable to those faced today by providers.

Obviously, it begs the question: what do industries like those do in M&A that providers don’t to generate value? Besides aligning the operating model, it’s really important to focus on value. Wall Street, including shareholders, analysts and regulators, are paying close attention to other industries where value generation will be rewarded. Under that spotlight, these merged companies have no option other than to tighten the screws on value. They often apply very strict approaches and smart techniques to try to capture value both over the short term as well as sustained value over time.

However, among most providers, the growing need to focus on value is unchartered territory; they simply don’t face external ownership downright demanding value delivery. Still, if providers can do the following — win the customer; embrace a zero base and rally around culture — providers can start to infuse a value mindset into their M&A strategies:

  • Win the customer: Hard value is fueled by customer experience —the lifetime value for an individual healthcare customer is around $1.4 million. Mergers create opportunity for providers to multiply this value, but they’re not leveraged. Their focus is on patients and the past, not customers and the future. In other industries, the customer’s king of the M&A universe
  • Embrace a zero base: Typically, providers abide by traditional cost reduction techniques based on standard benchmarks that plan to what is normal rather than what’s possible following consolidation. On average, other comparable industries realize a 7 percent reduction in operational expense reduction compared to just 1 percent reduction for providers post-merger, leading to the average health system missing upward of the aforementioned $30 million in direct cost savings per M&A transaction per year.
  • Rally around the culture: Culture doesn’t always snare center stage for providers in M&A. Instead, often, leaders are inclined to believe culture merely refers to the degree to which people are engaged in the office environment and that the culture of the new company will fall into place naturally. However, that assumption’s rife with risk. Cultural gulfs and poor fit can play a role in the fact that 70 percent to 90 percent of deals across industries don’t attain stated goals like merger-driven cost reduction or quality improvement.

While M&A and hospital consolidation is a trend expected to continue, it’s important to consider one more element: hospital M&As often also include unanticipated expenses such as technology integration, clinical staff investments, employee benefit packages and staff reductions, per a Deloitte report. That report advised health systems would be wise to undertake financial and operational due diligence, settle valuation and deal terms, set structure governance and, by all means, be ready for possible regulatory reviews.

Photo: baona, Getty Images

 

 

 

 

 

 

 

 

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