- Don't assume that a temporary governance model didn't succeed.
- Strive to keep your messaging positive, even when a deal falls through.
- Attaining scale doesn't meet the need for a mission in the local market.
Here are a few of the interesting themes we unpacked in our coverage of merger and acquisition activity among healthcare providers in 2019.
Merger and acquisition activity among healthcare providers was major news throughout 2019, both when deals were consummated and when they fell apart.
Deals completed this year include HCA Healthcare’s $1.5 billion acquisition of nonprofit Mission Health, the formation of Beth Israel Lahey Health in Massachusetts, and the marriage of Dignity Health and Catholic Health Initiatives, which created the $29 billion Catholic system CommonSpirit Health.
Major deals that were ditched this year include Baylor Scott & White Health’s plans to join forces with Memorial Hermann Health System, Sanford Health’s plans to link up with UnityPoint Health to create an $11 billion system, and the on-again, off-again talks involving Partners HealthCare and Care New England.
Here are three lessons we unpacked in our HealthLeaders Strategy coverage this year about the industry’s M&A transactions:
1. Just because a dual CEO model was temporary doesn’t mean it failed.
The news that Advocate Aurora Health ditched its dual CEO model last summer might be viewed by some as the inevitable outcome of what was always an unworkable model. But others contend the dissolution of this particular leadership dyad says nothing about the viability of dual CEO models in principle.
“Each consolidation agreement is unique,” says Sarah E. Wilson, principal analyst of market access insights at Decision Resources Group in Nashville. “For mergers between a larger system and smaller system, I don’t think a dual CEO model makes sense. But I think in the case of large and/or multistate mergers, a dual CEO model can certainly help ease the transition of combining entities.”
“Eventually, though, a dual CEO model will cease to make sense,” Wilson adds. “There may be too many cooks in the kitchen, so to speak. You could have a situation where there are conflicting strategies or visions, which may do more harm than good to the organization.”
Advocate Health Care and Aurora Health Care merged in 2018, bringing together 27 hospitals and hundreds of other facilities. But the post-merger health system maintained both CEOs and both of its legacy headquarters: one in Downers Grove, Illinois, and the other in Milwaukee, Wisconsin.
After maintaining a dual CEO model for about 15 months, the Advocate Aurora Health board picked Jim Skogsbergh to serve as the system’s sole president and CEO moving forward, releasing former co-president and co-CEO Nick Turkal, MD, to “pursue other interests.”
Advocate Aurora Health isn’t the only major health system to keep both CEOs after a merger. CommonSpirit Health similarly kept both Lloyd H. Dean and Kevin E. Lofton on board after its 2018 merger. So news of Advocate Aurora’s C-suite drama prompted questions about CommonSpirit.
“It would not surprise me if, eventually, one of CommonSpirit’s CEOs leaves,” Wilson says.
A spokesperson for CommonSpirit confirmed that this is, in fact, what the system has planned.
“Ultimately, we anticipate that there will be a single CEO for the organization,” the spokesperson says, describing the dual CEO model as a practical and temporary tool to ease the massive organization through its post-merger integration. It will be up to the board to determine whether, when, and how CommonSpirit’s dyadic structure will end.
When a health system like Advocate Aurora or CommonSpirit abandons its post-merger dual CEO model, then, the question isn’t whether the dyad ever had potential. The question is whether the CEOs accomplished their plans.
2. You should think twice before criticizing a potential M&A partner that walked away.
Sanford Health President and CEO Kelby Krabbenhoft found himself in an uncomfortable position in November: rejected by a potential M&A partner near the end of an extensive due diligence process.
The Sioux Falls, South Dakota–based health system had been in merger talks with UnityPoint Health, based in Des Moines, Iowa, to form an $11 billion enterprise with 76 hospitals—then UnityPoint backed out.
The news prompted some finger-pointing from Krabbenhoft, who had been expected to serve as president and CEO of the post-merger organization. Krabbenhoft expressed disappointment that UnityPoint’s board “failed to embrace the vision.”
In most cases, when a deal falls through, the parties say respectful things about each other and indicate a willingness to explore other opportunities in the future, but Krabbenhoft apparently didn’t feel obligated to take that kind of approach, says Allan Baumgarten, a consultant and long-term observer of healthcare industry trends in the Midwest.
The fact that Krabbenhoft publicly expressed disappointment in UnityPoint’s board may give other health system CEOs a reason to hesitate if he approaches them to initiate an M&A dialogue because there may be a perception that those who don’t let Krabbenhoft have his way will get “smacked around in the newspapers” for it, Baumgarten says.
“I think interpersonal relationships are important,” he says. “It’s not unlike divorces or engagements that end up being broken up before the wedding takes place. What do you say about the other person? Do you burn bridges? Do you try and make it look like you were the good guy and the other was the bad guy?”
“There is something to be said for a communications strategy that is respectful and cordial and that is all positive, rather than remarks of disdain and disrespect,” he adds.
David Jarrard, the CEO of healthcare strategic communications consultancy Jarrard Phillips Cate & Hancock Inc., offered some key steps leaders should take to keep their messaging on point when a potential partnership falls through.
3. Even as you pursue scale through M&A deals, you need to keep a local-market mindset.
As mergers and acquisitions among healthcare providers continue at a frenzied pace in certain markets, some healthcare executives are prodding their peers to scrutinize their own M&A motivations more thoroughly.
The prospect of gaining an upper hand at the negotiating table across from insurers is a tantalizing reason to pursue scale. But getting bigger for the simple sake of protecting your business interests is a questionable rationale for mission-minded healthcare organizations, according to several senior strategy leaders who attended this year’s HealthLeaders CEO Exchange gathering.
Instead, they say, health system executives have a responsibility to steer any consolidation in a way that serves the local market. That steering continues long after a deal is finalized, as C-suite leaders figure out how tightly to control each component of the post-merger system.
Toby Freier, MBA, FACHE, president of Allina Health’s New Ulm Medical Center, a critical access hospital in New Ulm, Minnesota, says leaders need to consider carefully how they define success for any deal and whether that definition aligns with the community’s best interests.
“It’s hard to think that our communities have won over the last decade through consolidation, if our measures of success are the health outcomes and affordability of healthcare,” Freier says.
That’s not to suggest hospitals should abstain from M&A activity altogether. Sometimes leaders stall too long, Freier says.
“Hospitals, especially in rural communities, are waiting until financially they feel like they are out of options, rather than more proactively seeing what a system affiliation or partnership could do to extend and enhance care and services to their community or at a population health level,” he says.
“When we approach it only from the economic side of it,” he adds, “I think we miss what’s the end game—the triple aim with better access and support to our community.”
Although numerous academic studies have shown mergers among healthcare providers tend to lead to higher costs, the American Hospital Association has pushed back against that conclusion, arguing that patients have benefited from consolidation because hospitals can operate more efficiently in larger systems.
Michael Ugwueke, MPH, DHA, FACHE, president and CEO of Methodist Le Bonheur Healthcare in Memphis, Tennessee, says the actual benefits of M&A activity vary from one market to the next.
“In most markets, operating still as a holding company makes it very hard to really take costs out, take advantage of synergies brought together by an acquisition or merger,” Ugwueke says.
While leaders who take a holding-company approach to running a post-merger system may preserve some degree of local autonomy, thereby remaining responsive to local-market needs, those who take more of an operating-company approach can centralize control in a way that reduces administrative redundancy, thereby capitalizing on the merger’s cost-saving potential. There are tradeoffs depending upon where a given system lands on the spectrum between those two extremes.
“I think the jury is still out ultimately on what benefits accrue to patients,” Ugwueke says.
Chris Woleske, JD, president and CEO of Bellin Health in Green Bay, Wisconsin, says the bottom line in this conversation is that healthcare is too expensive.
“At the end of the day, we need to find a way to reduce the total cost of care, and I don’t see big systems in a position to achieve that more effectively than independent organizations that are community-based and focused on achieving quality, affordability, and improving health and well-being for the communities,” Woleske says.
“That will be key, so that’s what we’re putting our energy and effort into.”
Source: Healthleaders Media