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5 Steps to Achieve System Integration

Posted by Matthew Smith on Nov 17, 2016 4:03:24 PM

By Brandon Klar, MHSA, Senior Manager, GE Healthcare Camden Group

An effective integration plan not only aligns operations and maximizes the collective system resources, it also serves as a roadmap and a vehicle to cultural integration. Recognizing the need to balance both quantitative and qualitative inputs in the identification of the ideal strategies for each unique system integration plan, leadership should follow a proven5-step methodology to create a plan that is realistic, achieveable, and sustainable for the system.

To position the system integration planning process for success, an effective governance structure and Integration Management Office (“IMO”) should be established to guide and facilitate integration initiatives.  Capitalizing on the organizational knowledge and expertise from operational, clinical, and medical staff leaders throughout the system, the governance structure should be positioned to make critical system decisions and be nimble to adjust planning efforts in an uncertain world. With the support of an unbiased IMO to facilitate and manage integration initiatives throughout the system, communication surrounding planning and implementation should be frequent and broad band.


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Step 1: Vision for System Integration   

The vision and design of an integration plan should reflect the system’s core strategic goals and objectives, and be grounded in the unified mission of the integrated healthcare delivery system. Balancing meaningful integration initiatives that are designed to enhance value with the system’s tolerance to culturally accept and adapt to change, leaders should establish clear guiding principles to harness decision making.

The integration vision and associated guiding principles will become the foundation for departmental and service line integration efforts. When organizational or personal bias arises, the guiding principles will focus leadership and their teams on the system as a whole, break down both organizational and departmental silos, and position teams to be innovative and progressive as they plan to drive quality and control costs throughout the system’s administrative, support, and clinical services.

Steps 2: Efficiency Opportunity Assessment

Opportunity to improve operational efficiency, enhance quality, maximize existing resources, and control varies within each system. Factors including the geographic distribution of care sites, the scope and scale of operations, and community needs will all impact integration opportunities. To effectively identify integration opportunities, individual functional area work teams should be established to assess current performance both quantitatively and qualitatively. With the help of the IMO, these work teams will assess historical and projected data, utilize industry benchmarks, and gather team operational insight to catalog operational variation.

Capitalizing upon industry experience and their own internal analyses, the work teams will identify a range of integration opportunities available to the system. These opportunities should be organized by the IMO and shared with the integration governance team to ensure the opportunities have been properly vetted and do not conflict with the mission or vision of the system.


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Step 3: Operational Efficiency Plan Development

Once a preliminary listing of integration opportunities has been identified, the work teams will commence building operational efficiency plans to drive system integration. Utilizing a blend of proven horizontal and vertical integrations strategies, the work teams should build tactical plans with clearly defined action items, potential barriers, necessary resources, financial impact, implementation timeframes, and interdependencies with other departmental plans. 

Recognizing that individual departmental and service plans may conflict, the governance committee and IMO will serve as a central repository for draft plans and must identify integration plan interdependencies as well as potential strategic and political complications with implementation. Once plans have been reviewed and refined, the IMO will develop a master system integration plan for approval and adoption.

Step 4: Implementation and Communication

As the system begins implementation, broad and frequent communication to both internal and external stakeholder is essential. Communication of the overall integration plan at a system level and open dialogue regarding departmental plans with their respective teams will provide the best chance for the plans to be accepted and adopted by the workforce and the community.

Implementation of the integration plan should commence upon final approval of the plan or when permitted by regulatory agencies. With the governance committee and IMO team coordinating initiatives system-wide, both positive and negative feedback should be monitored closely. With the proper mechanisms in place, work teams can modify their plans as needed to ensure the successful achievement of the system’s integration goals.

Step 5: Plan Monitoring and Refinement

Concurrently with plan implementation, the IMO should establish an integration dashboard to monitor progress and barriers to implementation. The dashboard will serve as a tracking tool for the governance committee and system executive leadership, in addition to a communication mechanism to the system to illustrate progress and success.

It is also during this step that the governance committee will identify barriers to implementation. As all healthcare systems operate in an evolving market these changes are to be expected. It will be up to the governance committee and the work teams to adjust their plans to overcome the impediments and stay on course.

This is Part 2 in our 4-part System Integration blog Series. Parts 1 and 2 may be found here and here. Part 4 will examine common challenges experienced during a system integration process and solutions to overcome those challenges.

For more details surrounding health system integration planning, please download our PDF via the button, below:

Health System Integration


B_Klar.jpgMr. Klar is a senior manager with GE Healthcare Camden Group with over 12 years of experience in healthcare management. Mr. Klar specializes in strategic and business planning advisory services, including service line planning, master facility planning, and transaction work (e.g., mergers, acquisitions, affiliations, joint ventures). He has extensive experience in the creation of strategic partnerships, the facilitation of inaugural health system strategic plan development, as well as the creation and implementation of business plans of operational efficiency, system-wide integration plans, and clinical programmatic alignment plans. He may be reached at [email protected].

Topics: BPOE, Hospital mergers and acquisitions, Brandon Klar, Mergers and Acquisitions, Health System Integration

Stay Focused While Developing Your System Integration Plans

Posted by Matthew Smith on Oct 20, 2016 4:00:21 PM

By Brandon Klar, MHSA, Senior Manager, GE Healthcare Camden Group

As the healthcare industry continues to experience consolidation and health systems evolve to meet industry challenges, operational integration initiatives present great opportunities to enhance system-wide performance.

Many health systems speak to the integration goals as they design their strategic partnerships, but only a portion develop realistic, achievable, and sustainable integration plans and even fewer accomplish the goals set forth in those plans.

System integration plans fall short and occasionally fail to achieve their desired outcomes most frequently because they lack effective solutions, fail to consider the impact of system operations on the community, and don’t have the necessary support from the workforce. As much as a well-orchestrated integration planning process and an invested leadership team can work to position a system for integration success, a system integration strategy must be grounded in value creation, risk management, and employee engagement to ensure any integration plan to reach its goals.

Value Creation

To achieve success in a value-based world, health systems must actively seek to enhance the value of their clinical services. Defining value as healthcare outcomes per cost, a health system’s pursuit of value creation will involve enhancing the quality of its services while reducing the per unit delivery cost.

Value creation through health system optimization can be achieved through both horizontal and vertical integration strategies. Horizontal integration strategies are focused on reducing unnecessary duplicative resources, enhancing system operational performance, and aligning/optimizing clinical programs and resources. While duplication of select resources and clinical services may be warranted to maintain access in select geographic areas, plans must carefully balance community needs with efficient resource distribution to deliver high-quality cost-effective clinical programs.

Conversely, vertical integration strategies are focused on enhancing the value throughout the continuum of care by effectively positioning access points, redesigning the care model, and promoting information technology and data sharing. As systems form and evolve, seamless handoffs between system providers and multidisciplinary care plans will reduce unnecessary resource utilization and provide for the efficient navigation of patients through the system with high quality and high satisfaction outcomes.

Risk Management

Risk is inherent within every system integration initiative. The term “system integration” can often trigger employment uncertainties and high employee and physician anxiety which heightens the internal challenge to achieve a successful integration. Community resistance or concerns for the planned integration efforts are also possible based upon the drivers that prompted the system to take action. While identified risks may become realities and unanticipated challenges can arise with little warning, effective risk management planning is essential.

Identification and analysis of the integration risks by the system integration leaders and their teams are foundational to the planning process. Balancing the benefits of integration initiatives against the probability of the risk may prompt either the development of preventative and contingency plans, or the abandonment of the integration initiative all together. Regardless, every risk should be thoughtfully analyzed in the context of the benefits of the system integration plan and weighed carefully.

Employee and Physician Engagement

The third pillar to effective health system integration is employee and physician engagement. While system integration planning is overseen and led by senior system leaders, it is imperative that employees and physicians have a voice within the planning process to foster effective integration results.

Solicitation of ideas, involvement in plan development, transparency in the planning process, and frequent communication will provide systems with the best chance for developing an effective integration solution, and fostering acceptance, accountability, and alignment among the stakeholders. This planning approach will also provide the system with the platform to accelerate the change process, and achieve and sustain its integration goals and objectives. While some confidentiality is warranted in the integration planning and implementation process, employee and physician engagement is necessary for success.

As health systems take on their integration planning and implementation process, a focus on the three pillars will provide the foundation to strategically position themselves to be nimble and efficient in a value-driven world.

This is Part 2 in our System Integration blog Series. Part 1 may be found here. Part 3 will examine the 5 steps in a successful system integration planning process.

For more details surrounding health system integration planning, please download our PDF via the button, below:

Health System Integration 


B_Klar.jpgMr. Klar is a senior manager with GE Healthcare Camden Group with over 12 years of experience in healthcare management. Mr. Klar specializes in strategic and business planning advisory services, including service line planning, master facility planning, and transaction work (e.g., mergers, acquisitions, affiliations, joint ventures). He has extensive experience in the creation of strategic partnerships, the facilitation of inaugural health system strategic plan development, as well as the creation and implementation of business plans of operational efficiency, system-wide integration plans, and clinical programmatic alignment plans. He may be reached at [email protected].

Topics: Business Plan of Operational Efficiency, BPOE, Mergers & Acquisitions, Health System Efficiencies, Brandon Klar, Health System Integration

Health System Integration: You Need a Plan!

Posted by Matthew Smith on Oct 3, 2016 1:25:10 PM

By Brandon Klar, MHSA, Senior Manager, GE Healthcare Camden Group

Success within population health is grounded in a health system’s collective ability to improve the health and wellness of those in its communities, and other patient groups it may serve. With a goal of achieving the Triple Aim, systems are restructuring their operations to strengthen the value proposition of their clinical services. With a desire to enhance access, improve quality, and control costs, many systems are looking towards formal strategic partnerships as a means to attain the necessary scope and scale to be successful.

As systems expand, they have the opportunity to achieve system-oriented efficiencies. Through both horizontal and vertical integration strategies, systems desire to position themselves within the market as high-quality and cost-effective providers to attract patients and payers. While many systems pursue these objectives, some fail to achieve full integration due to a lack of effective planning, poor management collaboration, or subpar implementation. Regardless of the reason, a sound integration plan focused on the goals of the system and dedicated true integration will increase the odds of success.  

System Integration plans can be developed both pre-transaction and post-transaction, as well as by systems that have been operating for some time, but in more of a “loose federation” model than as a truly integrated system. Below, you will find an overview of system integration plans, the critical factors in developing them, and associated benefits and limitations.

Pre-Transaction Integration Plans

The development of pre-transaction integration plans provides the aligning entities a road map to achieve their partnership goals and objectives once the transaction is final. Developed prior to the signing of a definitive agreement, these plans serve to lay the foundation for administrative, support, clinical, and service line integration across the continuum as it relates to the location of services, management and staffing, and the optimization of non-salary resources and contracts.

Pre-transaction integration plans allow the entities to build upon their shared strategic vision and construct a newly integrated operating model by which the two entities can optimize their individual strengths and maximize their collective resources. Recognizing that each entity brings with it their unique resources and capabilities, pre-transaction planning is focused on:

  • Cataloging the collective resources and capabilities of the newly proposed system
  • Understanding the existing operating models and functional area interdependencies
  • Framing a new operating model for the integrated system functions
  • Selecting horizontal and vertical integration strategies to align operations
  • Developing action plans with clearly defined goals, resource requirements, barriers, accountable parties, and quality and cost impact analyses
  • Designing an implementation governance structure to oversee the capture of short-term wins post-transaction while coordinating for long-term integration

In addition to preparing the system for operational integration, pre-transaction integration plans can also serve a role in supporting regulatory approval of the proposed transactions by Departments of Health, Attorneys General, and the Federal Trade Commission. While the burdens of proof and detail required may vary by state and regulatory agency, these plans illustrate that the transacting parties are committed to the transaction, have a roadmap to integrate operations at a systems level, and possess a plan to reduce overall system costs. These plans have been proven helpful in demonstrating the value that can be derived by a transaction for a community, but are limited in their detail as the parties are unable to exchange competitively sensitive information prior to the transaction.

In the preparation of these pre-transaction integration plans, parties have utilized both anti-trust counsel and a system integration consulting firm to prevent undue disclosure of sensitive information and support in the development of a more meaningful integration plan.

Post-Transaction Integration Plans

Post-transaction integration plans seek to enhance the integration of entities with a system both horizontally and vertically outside of the confines and limitations of the transaction process. These plans are developed to support system operational integration at two points in a system’s journey: (1) Immediately following a transaction, and/or (2) Years post transaction to optimize a system’s operational performance.

As systems pursue integration post-transaction, they should build upon their pre-transaction plans or previously completed integration initiatives. As the parties are now able to share competitively sensitive information, the integration plans can be further refined, enhanced, and validated. To efficiently drive system integration planning and implementation, the newly formed system should:

  • Activate a system integration governance structure to oversee operational integration
  • Establish an Integration Management Office (“IMO”) in line with an integration governance structure to manage processes, team collaboration, and track progress
  • Convene functional area integration teams to drive integration plan refinement and implementation
  • Engage employee and physician stakeholders to keep them informed and solicit ideas
  • Construct a community communication plan to highlight benefits and any changes to care design and delivery

Integration plan refinement and implementation immediately following a transaction can both position the system for success, or doom it for failure. While integration planning and implementation will drive efficiency, attention must be paid to cultural alignment. Individual functional plans and strategies should have their benefits objectively weighed against the cultural or political turbulence that could result. This process requires collaboration between the integrated management teams, and will require input from both internal and external system stakeholders if the plans are to successfully drive acceptance, accountability, and alignment within the system.

Many systems fall short of achieving full integration immediately following a transaction, and thus have opportunity to further optimize system performance years later. These systems may have either decided not to pursue specific integration opportunities in fear of cultural turbulence, stakeholder resistance, or a lack of guidance, will-power or resources to do so. Regardless of the reason, systems should reassess their degree of integration at least annually to identify new opportunities that may have arisen or determine if previous barriers to implementation or resistance to change have been mitigated. It is not uncommon for systems to achieve between 5 to 10% in sustainable, operational annual cost savings years after a transaction as a direct result of future integration plans.

As consolidation trends and cost pressures accelerate, the keys to a successful integration initiative are to focus on value creation, risk management, and employee and physician engagement in order to develop a realistic, achievable, and sustainable plan that positons the system for success.  

For more details surrounding health system integration planning, please download our PDF via the button, below:

 Health System Integration


B_Klar.jpgMr. Klar is a senior manager with GE Healthcare Camden Group with over 12 years of experience in healthcare management. Mr. Klar specializes in strategic and business planning advisory services, including service line planning, master facility planning, and transaction work (e.g., mergers, acquisitions, affiliations, joint ventures). He has extensive experience in the creation of strategic partnerships, the facilitation of inaugural health system strategic plan development, as well as the creation and implementation of business plans of operational efficiency, system-wide integration plans, and clinical programmatic alignment plans. He may be reached at [email protected].

Topics: Business Plan of Operational Efficiency, BPOE, Mergers & Acquisitions, Health System Efficiencies, Brandon Klar, Health System Integration

A Business Plan of Operational Efficiency for a Value-Based World

Posted by Matthew Smith on May 17, 2016 10:34:14 AM

By Brandon Klar, MHSA, Senior Manager, GE Healthcare Camden Group

As health care continues its rapid evolution toward value-based reimbursement, health system leaders face escalating pressure to reduce their cost structure and enhance their value propositions. For many, the solution is to join forces with another provider through a formal partnership agreement. 

But once a new partnership has cleared the planning hurdle and avoided early pitfalls, it still faces a big challenge. How do you make sure the combined system achieves the full benefits of operational integration?

Our experience with providers nationwide has indicated that successful healthcare partnerships rely on one indispensable tool — a business plan of operational efficiency ("BPOE"). A detailed BPOE helps partnering organizations achieve the large-scale cost reductions necessary for value-based care and declining reimbursement.

The Business Plan of Operational Efficiency

A health system BPOE is a comprehensive, action-oriented system integration plan. It is designed by and for organizations that are forming a single corporate structure strategically and operationally. Simply defined, a BPOE is a road map for achieving the full benefits of an affiliation — operational efficiencies, cost savings and enhanced clinical value.

The most effective BPOEs are developed from the ground up. Departmental leaders identify detailed action items for aligning administrative, support, infrastructure and clinical functions. The key is to capitalize on the operational strengths of each organization and each department. A BPOE should:

  • identify and quantify specific affiliation-related cost-saving opportunities within each department;
  • identify barriers to achieving the efficiencies;
  • identify the resource and time requirements necessary to implement the action plans;
  • lay out a game plan for aligning specialty programs throughout the system;
  • ensure accountability by specifying the individuals responsible for implementing the plan.

Ultimately, the goal is to develop a clear list of achievable and sustainable performance improvement initiatives that will enhance efficiency and reduce the underlying cost structure of the system.

When Should You Develop a BPOE?

Many partnering organizations craft a BPOE before any affiliation agreement is signed. This lets system leaders proactively identify savings opportunities after the transaction. A pre-transaction BPOE also might be required for regulatory approval by the state department of health, state attorney general, Federal Trade Commission or the Department of Justice.

An inherent limitation of a pre-transaction BPOE is that the prospective partners are unable to share competitively sensitive information before closing. This limits the specificity and detail of cost-saving opportunities and action plans. But provisional BPOEs developed before the transaction are directionally accurate; they can also ensure that the prospective partners are strategically and culturally compatible.

A BPOE can be developed or refined with specificity and clarity after the transaction, even if the merger or affiliation took place some time ago. Many systems that have merged or affiliated in recent years have yet to realize the full benefits of operational integration. If this is your situation, commission a multidisciplinary team to revisit previous efforts. The team should develop a BPOE that identifies redundant costs as well as new strategies for better integrating, standardizing and consolidating functions.

Four Reasons to Invest in a BPOE

Every affiliation, merger or acquisition is unique. Every health system's story — and how it came to exist in its current form, with its current culture — is unique. In the background are variations within the consumer and payer markets, differences in strategic and operational strengths and weaknesses, and cultural nuances. These factors drive the need for a customized integration plan for every new partnership. A well-designed BPOE offers four important benefits:

1. A clear leadership structure. The most contentious point in transactions often centers on a single question: Who will be in charge? While it is critical to clearly define the executive hierarchy for the system and its business units (e.g., hospital, physician group, post-acute), it is just as important to outline the cascading leadership structure throughout all departments within the system.

Effective BPOEs identify the leadership positions most appropriate for consolidation; they also establish centralized management for all administrative, support and infrastructure functions. This not only creates consistency in decision-making, it facilitates and streamlines integration efforts. Adopting matrix organizational and reporting structures also will foster standardization of system processes, while allowing for moderate variation when needed to account for distinct organizational variables. In addition, developing a centralized leadership structure as part of the BPOE will help middle managers align interdependent integration plans through multidisciplinary teams.

2. Clear ground-level integration plans. For most system integrations, success or failure occurs at the department level. Effective BPOEs use a ground-up planning process to develop detailed departmental action plans that identify specific opportunities, obstacles and accountabilities.

Department-level plans set clear goals that are consistent with the system's integrated vision. Objectives should include standardization of policies and procedures, optimization of staffing resources, alignment of contracted services, standardization of equipment and supplies, and cost reduction through joint purchasing. Departmental plans also should address specific resource requirements, interdependencies with other unit plans, implementation timelines and responsibilities, and specific cost-saving targets.

Departmental action plans provide a detailed implementation path that can be monitored and measured. This establishes a platform for consistent and timely communication about integration activities and milestones. Collectively, the departmental integration plans will lead to a more integrated and streamlined system.

3. Realistic and sustainable cost-saving targets. Carefully developed BPOEs can lead to annualized system cost savings between 4 and 7 percent. However, during the development of the departmental integration plans, all savings opportunities should be validated by both the responsible department and the financial team prior to inclusion in the plan.

BPOE action items should be incorporated into budgets and could require capital resource allocation for implementation, so it is critical to quantify and rigorously validate cost-reduction opportunities in administrative, support, infrastructure and clinical departments. Operational and financial leaders should assess each savings opportunity to ensure it is realistic, achievable and sustainable. This applies to both salary and non-salary savings opportunities.

Non-salary savings opportunities are often easier to implement culturally. Health systems can achieve significant early cost reductions by standardizing equipment and supplies and aligning contractual services. These savings are not only typically achievable in the short term, but are also sustainable.

Salary savings typically are realized over a longer period. While centralizing management leads to early savings, staffing integration and optimization can take time and resources to fully achieve.

4. A strong foundation for a system-oriented culture. Joining two disparate business entities within a single consolidated health system is inherently difficult, and effectively integrating long-standing legacy cultures is a critical hurdle that can cause a partnership to succeed or fail. Leaders must encourage a cultural transition that moves the organizational focus from business unit priorities to collective system goals and overall performance. A robust BPOE process can aid this cultural transition.

BPOE development uses a structured approach that includes a blend of objective quantitative analyses and key stakeholder engagement. Stakeholder meetings provide a thorough understanding of the existing cultures and organizational barriers to integration. This helps to engage key stakeholders in the process while grounding discussions and action plans in organizational realities. Ultimately, the BPOE process challenges the existing provider organizations individually and collectively to think beyond current practices and strive collaboratively to improve performance as a system.

Protection Against Inaction

In a world that is becoming less hospital-centric, hospitals and health systems are trying to refashion themselves as care continuum organizations through strategic mergers and affiliations. But too often, good intentions fall by the wayside as inertia, politics and other obstacles prevent partnering organizations from realizing the opportunities of integration.

A well-designed business plan of operational efficiency guards against inertia by providing specific, achievable integration goals and action plans. Whether your organization is pursuing a new affiliation or is looking to maximize existing health system performance, a BPOE is an essential tool to achieving true system-level operational integration.


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Mr. Klar is a senior manager with GE Healthcare Camden Group with over 12 years of experience in healthcare management. Mr. Klar specializes in strategic and business planning advisory services, including service line planning, master facility planning, and transaction work (e.g., mergers, acquisitions, affiliations, joint ventures). He has extensive experience in the creation of strategic partnerships, the facilitation of inaugural health system strategic plan development, as well as the creation and implementation of business plans of operational efficiency, system-wide integration plans, and clinical programmatic alignment plans. He may be reached at [email protected].

 

Topics: Value-Based Care, Payment-for-Value, Business Plan of Operational Efficiency, BPOE, Brandon Klar, Value-Based Payments

Charting a Path to Health System Efficiencies Following a Merger

Posted by Matthew Smith on Mar 7, 2016 4:16:28 PM

By Brandon Klar, MHSA, Vice President, GE Healthcare Camden Group

Healthcare reform is driving an increase in health system mergers and acquisitions. Almost without exception, these moves are billed as an opportunity to reduce costs and leverage scale to improve care delivery. Unfortunately, many merged organizations fail to fully realize the operational health system efficiencies envisioned before the transaction.

Once select management positions are integrated and group-purchasing contracts have been consolidated, integration efforts often slow considerably or grind to a halt entirely. This pattern is seen both with true mergers, where two organizations are combined to create a new entity, and with transactions in which an organization acquires and absorbs another organization.

This failure to achieve the full potential of a merger or an acquisition carries two risks. First, incomplete integration can actually increase system costs, particularly when the combined organization creates a new layer of corporate oversight on top of the two merged entities. Second, poor integration can create trouble with regulators. The Federal Trade Commission, state attorneys general, and other agencies often approve health system mergers based in part on promised operational efficiencies. When these efficiencies fail to materialize, regulatory bodies can take action.

Please click the button below to continue reading this article in its entirety:

BPOE, Business Plan of Operational Efficiencies

Topics: BPOE, Mergers & Acquisitions, Brandon Klar, Value Management

Mergers and Acquisitions: Key Considerations for Creating Efficiencies Through Consolidation

Posted by Matthew Smith on Aug 11, 2015 4:36:39 PM

By Brandon Klar, MHSA, Vice President GE Healthcare Camden Group

Originally published in the August 2015 issue of Compliance Today. Used with permission.

As a result of the Affordable Care Act ("ACA"), healthcare mergers and acquisitions ("M&A") have increased dramatically as providers attempt to consolidate to achieve economies of scale and provide a full continuum of services in support of population health. However, at the same time, there are specific anti-trust regulations that must be considered when contemplating a merger or acquisition ("M/A"), and recent compliance and enforcement activity shows that it is not just hospital-to-hospital consolidation that creates a concern; acquisition of physician practices can also be subject to anti-trust enforcement action. Healthcare providers must conduct effective due diligence and analyses to ensure that the efficiencies and business justifications for the M/A support the transaction, and that the benefit to the market in terms of quality and cost of care are apparent and fully achievable. Integrating anti-trust compliance into the due diligence phases of M&A considerations is imperative.

Incentives associated with the ACA, growing financial pressures, and infrastructure needs have led hospitals and other providers to seek partners in order to survive in the new healthcare delivery system. As shown in Graph 1 (below), hospital transactions have risen significantly during the post-ACA years. In this period, hospitals have attempted to align in order to provide the full continuum of care and capture the maximum patient population needed to transition to population health-based methodologies, all while seeking to create greater efficiencies from consolidation.

At the same time, hospital acquisitions of physician practices have increased for many of the same reasons, but particularly because of the financial needs of the practices and the desire of hospital systems to employ physicians as an alignment strategy in the population health transition. According to the American Medical Association, as of 2012, 53 percent of physicians were self-employed as compared to 76 percent in 1983.1 Simultaneously, the Medical Group Management Association reports that annual financial losses per provider (all multi-specialty) have increased from $143,834 in 2013 (based on 2012 data) to $235,866 in 2014 (based on 2013 data), representing a 64 percent increase in annual losses per provider. Historically, hospitals have not excelled at managing physician practices. Concurrent with the rapid increase in hospital-hospital M&As and hospital-physician group acquisitions is the evolution of healthcare antitrust laws in the post-reform era. Long-standing evidence shows that consolidation of hospitals reduces competition and drives up market prices in a fee-for-service environment. This effect is counter to the goals of the ACA and thus has received increasing scrutiny from the Federal Trade Commission (FTC). In fact, Edith Ramirez, Chair of the FTC, recently stated:

The success of health care reform in the United States depends on the proper functioning of our market-based health care system. The current consolidation wave could have substantial consequences for health care reform efforts that depend heavily on competition to control costs and improve quality.… Consolidation risks upsetting this competitive dynamic and harming consumers.2

In line with the FTC’s concerns, there have been more challenges to consolidation activities, including the Promedica-St. Luke’s case in which the U.S. Court of Appeals for the Sixth Circuit upheld the FTC decision to block the hospital merger of ProMedica and St. Luke’s Hospital in the Toledo, Ohio market due to the reduction in competition and likelihood of increasing prices in the way of premiums and copays for consumers.3 Further, in a historic case the FTC challenged the acquisition of Saltzer Medical Group ("Saltzer") by St. Luke’s Health System in Idaho based on the tenet that it would violate federal and state anti-trust laws. Although St. Luke’s argued that the acquisition created better coordination of care and supported the goals of the ACA, they could not show that the efficiencies would decrease the overall costs of care while improving quality.4

Although consolidation by way of M&As may be the best alternative in some cases in order to succeed under value-based payment and population health based models, it is imperative that hospitals and medical groups are able to demonstrate the efficiencies of the consolidation outweigh the risks under reduced competition. Ultimately, these systems must show not only the improved quality and reductions in costs associated with the M/A, but also illustrate how the efficiencies and cost reductions are translated to reduced cost of care that is passed on to consumers, and why these efficiencies can only be gained through M/A. Key considerations when considering new mergers or acquisitions include:

  • In hospital-hospital transactions, what efficiencies can be created between the entities that will reduce overall costs, and how can that translate to reduced costs of care for consumers?
  • In hospital-medical group transactions, what efficiencies can be created between the hospital and medical group that will reduce overall costs, and how can that translate to reduced costs of care for consumers?
  • Is the merger or acquisition the only way to accomplish the stated goals? Is there another structure that can produce similar results while keeping the organizations independent?

Hospital-Hospital Transactions

Efficiencies associated with hospital-hospital transactions are regularly cited by the organizations’ boards and senior leadership as a fundamental driver to formally merge operations, yet many newly formed firms are ill prepared to achieve and sustain these savings without significant planning or external consultation. It is for this reason that the FTC has increased its scrutiny of submitted Business Plans of Operational Efficiency ("BPOE") associated with proposed transactions as a means by which to overcome the potential anticompetitive effects of the transaction.

Successfully merged firms have achieved efficiencies across the myriad of administrative, support, infrastructure, and clinical hospital functions while demonstrating their ability to enhance quality through care model redesign and clinical programmatic alignment. Efficiency plans for such integrations were framed and constructed pre-transaction with the support of external healthcare experts, respecting each party’s inability to share competitively sensitive information. The plans were further refined and enhanced post-transaction with dedicated multidisciplinary teams composed of representatives of the transacting parties focusing on specific functional integrational plans. These efficiency plans were built around a clearly articulated vision for the merged firm and maintained well-defined action plans specifying how and when each efficiency would be achieved, the likelihood of achieving each efficiency, the associated quantifiable savings, and any related capital or operating costs of implementation. When well-constructed plans are developed and implemented, the operational and financial benefits are often the first advantages illuminated. But with time, these efforts drive cultural alignment that regularly translates into further collaboration and efficiencies beyond those previously highlighted.

Short-term efficiency savings opportunities can be achieved by integrating back-office functions such as finance, human resources, and legal services. Full consolidation of staff and contract services will lead to substantial savings, because these efficiencies can be clearly achieved and sustained through a merger. The centralization of management and joint contracting for services and supplies represent efficiencies in the support and infrastructure departments that can be achieved in the shortto mid-term range post-transaction. These efficiencies are often challenged by regulatory agencies, because hospitals are frequently unable to provide reasonable means to verify or quantify efficiencies savings pre-transaction. Clinical efficiencies have been proven to yield the largest efficiencies of merged firms, but the likelihood of achieving such efficiencies varies greatly, because they will often require further vetting and stakeholder support that is unattainable pre-transaction, leaving these efficiencies speculative to a degree.

Despite the challenges with identifying and quantifying efficiencies associated with mergers, BPOEs have been able to translate to lower costs of care for patients in two principle ways. First, the alignment of both administrative and clinical operations of two previously independent hospitals into a merged firm has provided a platform by which to reduce unnecessary, duplicative testing. Integrated electronic health records (EHR) and alignment of clinical programs across locations can reduce unnecessary utilization and subsequent out-of-pocket expenses for patients. Second, the merged firm’s efficiencies, driven by the cumulative effect of lowering the per-case costs of services by way of achieving multiple efficiencies, can be significant enough to prevent commercial plan price increases in a market that may be sought if the existing cost structures of the two independent hospitals were to remain in place.

Hospital-Medical Group Transactions

When hospitals acquire medical practices, it is often done with the good intention of fully integrating the practice(s) and supporting the transition to population health-based models. However, it is common practice for the acquired medical groups to continue to operate autonomously, with limited integration into the hospital system for efficiency gains. In fact, acquired medical groups frequently perform worse under a hospital-employed structure than when they were independent. Part of the reason is that integration is not easy, and most hospital systems are either in the early stages of population health transition or have not started, and thus put medical group acquisition at the forefront of their population health strategy. Consequently, acquisitions are occurring and often driving up prices in the market, because competition is being reduced. Larger systems have greater leverage to negotiate favorable reimbursement in the market, and the benefits of population health and value-based contracting are not yet realized.

The economics of medical practice change significantly when a physician transitions from independent practice to hospital employment. Not only are payer contracts negotiated by the hospital, which often has greater negotiating power, but cost structures may rise from more robust benefits structures, staff wage ranges, and physician compensation. Additionally, when operating as an independent practice, physicians have to cover their overhead expenses—there is no subsidy. When they are employees, their salary is negotiated with the hospital and may not reflect their productivity or contain incentives to keep expenses in check. Changes in reimbursement related to the site or type of service also occur when medical groups are acquired by hospitals— specifically, hospitals are able to charge facility fees or move ancillary services from medical practices to the hospital, thereby increasing costs. And, historically, hospitals have not efficiently managed physician practices overall.

Furthermore, the St. Luke’s-Saltzer decision shows that even when systems are taking initial steps toward value-based care, such as sharing an integrated EHR, it is not enough to justify an acquisition. And, although systems need aligned primary care physicians in order to grow their patient base and capture attributed lives under value-based contracting, the St. Luke’s-Saltzer case also shows that is not reason enough to promote acquisition of medical groups, because other alignment structures could produce similar results without harming competition. When considering an acquisition of a medical group in the post-reform era, hospital systems and their compliance team need to have a clear plan for how the acquisition will increase quality and reduce costs. This proposal must include consideration of not only how the action will reduce operating costs of the medical practice and make it more efficient, but also how the acquisition will reduce overall costs to the consumer. For that, a much more detailed financial impact analysis, managed care strategy, and operational implementation plan are necessary.

Merger and Acquisition Alternatives

Although M&As once dominated healthcare transactions, today many healthcare entities are looking for innovative affiliation models that do not require fully relinquishing their independence, but still offer operational efficiencies. Accordingly, new models are becoming more prevalent that allow these entities to seek partners that can satisfy their unique financial, operational, and quality needs, while still maintaining a level of control, in an effort to meet their key strategic objectives.5 The details of these alternative affiliation models will vary from transaction to transaction, but the basic principles of three increasingly common models will remain consistent.

Joint Operating Agreements

Within a joint operating agreement ("JOA"), the assets and governance of the two partners are not merged, but considerable management and financial authority is transferred to the joint operating entity. This model provides the platform for the partners to achieve significant efficiencies by way of the integration of operational and financial results, while also protecting the partners’ rights to religious directives and major corporate decisions, including the sale of assets. This model is highly complex in nature, but allows the joint operating entity to collectively borrow to satisfy the capital needs, undertake care model redesign to enhance quality, and achieve operational efficiencies that will drive cost savings for the partners. Operational efficiencies within a JOA can, in some instances, reach levels attainable through full mergers or acquisitions. In addition, the FTC does not deem these arrangements to be anti-competitive and thus, the two partners may be able to contract jointly.

Joint Ventures

In addition to JOAs,non-profits are also looking to pursue joint ventures to attain needed capital infusions and operational expertise while maintaining a reduced level of control. With the non-profit contributing its assets and business operations to the joint venture, a partner organization contributes capital to ascertain a majority share within the joint venture. The joint venture is then overseen by the majority stakeholder by way of a management contract, while the non-profit provides clinical services to the joint venture. This model yields moderate operational efficiency outside of consolidated administrative services offered by the majority stakeholder, and gives the non-profit the ability to ascertain the expertise and capital required to sustainably maintain operations to fulfill the community need.

Clinically Integrated Networks

Another model being pursued more frequently in light of the ACA are clinically integrated networks ("CINs"). This model provides the platform for healthcare entities to develop collaborative networks that support care coordination throughout the continuum while sharing in the infrastructure costs associated with managing a defined population. In a CIN the partners do not merge their assets or relinquish control of their organizations. Instead, the partners establish an alliance that maximizes the existing clinical expertise of their independent organizations, while sharing the costs of infrastructure and information technology required to participate in new accountable care payment plans and in preparation for population health. This model often maintains its own board and management team, which is directly responsible for clinically integrating the two partners and reducing cost (both operational and capital) through the achievement of clinical and operational efficiencies.

Conclusion

As health systems prepare for success in the new value-based world, M&As are often a major part of their strategy. However, federal anti-trust laws must be considered, not only in hospital-hospital transactions, but in hospital-medical group transactions as well. The BPOE and assessment of efficiencies must demonstrate the need for the M/A and how those efficiencies will lead to reduction in the cost of care, not just improvement in the system’s cost structure and bottom line or overall improved quality of care for the market. There are significant opportunities to improve the cost structure when organizations come together—those must be explored, verified, and ultimately, have a succinct implementation plan as well as a plan for translating savings to consumers. Further, alternative structures must be reviewed to determine if the stated goals and efficiencies may be accomplished in another manner. These considerations should be included in the due diligence phase of planning to assure ongoing compliance in a rapidly consolidating environment.

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Hospital Consolidation, Mergers and Acquisitions, The Camden Group


  1. Carol K. Kane and David W. Emmons: “New Data on Physician Practice Arrangements.” The American Medical Association. Available at http://bit.ly/1dbtuoP
  2. Edith Ramirez: “Anti-trust Enforcement in Health Care — Controlling Costs, Improving Quality.” The New England Journal of Medicine, December 11, 2014; 371:2245-2247. Available at http://bit.ly/1QM65q5
  3. Marlene Harris-Taylor: “Promedica ordered to drop St Luke’s: Court declares merger anticompetitive.” Toledo Blade, April 22, 2014. Available at http://bit.ly/1RpDR62 
  4. Jonathan L. Lewis, Lee H. Simowitz, and Sean T. Hartzell: “In the Wake of the FTC’s St. Luke’s Victory in Idaho, What Does the Future Hold for Hospital-Physician Acquisitions?” ABA Health eSource, vol 10, no.7. Available at http://bit.ly/1Je71Gg
  5. Jonathan Spees: “Choosing the Right Affiliation Structure.” Hospital and Health Networks Daily, October 9, 2014. Available at http://bit.ly/1Lw59WP

Mr. Klar is sa vice president with GE Healthcare Camden Group with over 12 years of experience in healthcare management. He specializes in strategic and business planning advisory services, including service line planning, master facility planning, and transaction work (e.g., mergers, acquisitions, affiliations, joint ventures). He may be reached at [email protected]

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Topics: Clinically Integrated Network, Mergers, Acquisitions, Hospital mergers and acquisitions, Brandon Klar, Mergers and Acquisitions

Charting a Path to Health System Efficiencies Following a Merger

Posted by Matthew Smith on Jun 11, 2015 9:43:24 AM

A business plan of operational efficiencies can help a health system achieve large-scale gains in cost performance and organizational alignment following a merger or an acquisition.

By Brandon Klar, MHSA, Vice President, GE Healthcare Camden Group (via the June, 2015 issue of HFM Magazine)

Healthcare reform is driving an increase in health system mergers and acquisitions. Almost without exception, these moves are billed as an opportunity to reduce costs and leverage scale to improve care delivery. Unfortunately, many merged organizations fail to fully realize the operational health system efficiencies envisioned before the transaction. Once select management positions are integrated and group-purchasing contracts have been consolidated, integration efforts often slow considerably or grind to a halt entirely. This pattern is seen both with true mergers, where two organizations are combined to create a new entity, and with transactions in which an organization acquires and absorbs another organization.

This failure to achieve the full potential of a merger or an acquisition carries two risks. First, incomplete integration can actually increase system costs, particularly when the combined organization creates a new layer of corporate oversight on top of the two merged entities. Second, poor integration can create trouble with regulators. The Federal Trade Commission, state attorneys general, and other agencies often approve health system mergers based in part on promised operational efficiencies. When these efficiencies fail to materialize, regulatory bodies can take action.

Please click the button below to continue reading this article on the Healthcare Financial Management Association's ("HFMA") website:

BPOE, Business Plan of Operational Efficiencies, The Camden Group

Topics: HFMA, Mergers, BPOE, Mergers & Acquisitions, Health System Efficiencies, Hospital mergers and acquisitions, Brandon Klar

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