case study of a failed merger of hospital systems

56 MANAGED CARE / NOVEMBER 2003

competing programs need to plan ag-gressively and execute carefully theirclinical consolidation; cultural dif-ferences and the impediments theycause can be easily underestimated;health system mergers do not auto-matically result in economies of scale;and not all stakeholders in the sur-rounding community necessarily willwelcome a merger.

INTRODUCTIONIn November 1999, the dissolution

of the merger between Hershey Med-ical Center (HMC) and GeisingerHealth System (Geisinger) was an-nounced. Despite significant trendsin the delivery and financing of healthcare, medical education, and researchfavoring the merger, it ultimatelyfailed. What happened, and what canbe learned from this situation?

Anatomy of a mergerOne of Pennsylvania’s largest

health care systems was created inJuly 1997 when Penn State Universityleased the HMC to the newly formedPenn State Geisinger Health System.HMC was combined with Geisinger,yielding a single health care entitywith 1,342 hospital beds, three hos-pitals, a drug- and alcohol-treatmentfacility, a managed care organization,77 outpatient clinics, and more than1,000 physicians scattered through-out 40 counties in northeastern andcentral Pennsylvania. Two of the hos-pitals, Geisinger Medical Center inDanville and HMC in Hershey, pro-vided tertiary-care services within 70miles of each other.

While the board of directors of thenewly created system was split evenlybetween appointees from Penn State

University and the former Geisingersystem, the chairman of the boardwas appointed by Geisinger and wasgranted the power of a tie-breakingvote. In addition, the membership ofthe executive committee of the boardwas weighted in favor of Geisinger— 4:3. The CEO of the new system,Stuart Heydt, MD, previously hadserved as Geisinger’s CEO, while thedean of the Penn State College ofMedicine, C. McCollister Evarts, MD,retained his title but also served asthe new system’s president and chiefacademic officer. Both had votes onthe board of directors. While the newboard of directors governed the clin-ical enterprise, Penn State Universityretained control of the College ofMedicine, which remained attachedto HMC at the Hershey campus.

Geisinger Health Plan, an HMOstarted by the Geisinger System in1972, simultaneously was renamedthe Penn State Geisinger Health Plan(PSGHP). It quickly was announcedthat HMC was a participatingprovider in PSGHP’s network, effec-tively giving the HMO new access tosouth central Pennsylvania and a po-tential customer base of more than amillion people.

Day to day, the Penn State Geis-inger Health System operated as fourgeographic regions, modeled on theoriginal Geisinger style of manage-ment. Before the merger, there werethree geographic regions (east, cen-tral, and west), and HMC and its out-patient clinics were adopted opera-tionally as a fourth, southern, region.Each region was led cooperatively bya pair of physician and administratorregional vice presidents, each ofwhom served with other senior ad-

ABSTRACTThe failed merger between

Geisinger Health System and Her-shey Medical Center is an instructivecase study. The advantages of merg-ing include: 1) support of financiallythreatened academic health centers,2) access to greater capital, and 3) in-tegration of managed care principlesin the delivery system. Nevertheless,if the leadership of the new organi-zation fails to deal effectively with theinevitable winners and losers, under-estimates the role of cultural differ-ences, does not have the managementskills necessary to achieve cost savingsand address the operational ineffi-ciencies resulting from a larger clini-cal enterprise, does not anticipate thedistrust of other local health careproviders, and fails to anticipate themarket forces that determine the suc-cess or failure of a managed healthcare system, mergers can fail. Lessonsto be learned include: mergers in-volving health care systems with

Author correspondence:

Jaan Sidorov, MDMedical Director —

Care CoordinationGeisinger Health PlanHughes Office Building NorthWoodbine LaneDanville PA 17821Phone: (570) 271-8763Fax: (570) 271-7860E-mail:

[email protected]

This paper has undergone peer review by appropriate members of MANAGED CARE’S Editorial Advisory Board.

Case Study of a Failed Merger of Hospital SystemsJAAN SIDOROV, MDMedical Director — Care Coordination at Geisinger Health Plan, Danville, Pa.

What went wrong between Penn State and Geisinger, and what lessonsshould be learned?

NOVEMBER 2003 / MANAGED CARE 57

CASE STUDY OF A FAILED HOSPITAL-SYSTEM MERGER

ministrators on a clinical practicecommittee that was chaired by thePenn State Geisinger CEO. The pur-pose of this committee was to ap-prove new clinical programs, reviewexisting program content, determineclinical priorities, and act as a forumfor ongoing review of the clinical en-terprise. There was also a system op-erations committee focusing on legalservices, human resources, finance,and facilities management.

The right step?Tertiary care and academic health

centers were threatened. At the timeof the merger, HMC and Geisingerwere both financially healthy, yetleaders of both institutions endorsedpredictions that local hospitals andphysician groups would aggregateinto large health care systems. Theysurmised that in addition to domi-nating local markets, larger systemswould create economies of scalethrough the efficient provision of ser-vices throughout the care continuum.

Newspapers reported at the timethat the new Penn State GeisingerHealth System was expected tobroaden medical services and expandaccess to treatment while concur-rently reducing costs by $105 millionover the course of three years. Greaterleverage in negotiating prices com-bined with lower costs were intendedto ensure that HMC and Geisingerwould survive in a marketplace in-creasingly penetrated by for-profitproviders and managed care insur-ance plans.

According to Heydt, the Penn StateGeisinger CEO, the Penn State Uni-versity leadership also had little con-fidence that it would be able to leadHMC through an increasingly tu-multuous health care market and“wanted to get out of the health carebusiness.” Penn State welcomedGeisinger’s national reputation forhealth care management as a solu-tion to HMC’s increasing vulner-ability.

Geisinger and Hershey no longer

had to compete. Geisinger officialswere quoted in local news reports asstating that the two health caregroups would generate significantsavings by not competing with eachother and by sharing resources.

HMC and the medical schoolneeded access to greater revenue andmore capital. During the late 1980s,HMC undertook significant con-struction while also supporting theconsiderable costs of postgraduateand medical education with revenuefrom clinical operations. Adminis-trators there surmised that the capi-tal markets would find the broader fi-nancial base of the newly mergedsystem better able to support the fu-ture servicing of debt. In addition, anacademic support formula was cre-ated, based on a percentage of rev-enue in excess of expenses, to tap intothe more than a billion dollars in pro-jected revenue and thus guarantee thefinancial health of the medical schooland postgraduate education pro-grams for the foreseeable future.

Geisinger wanted the luster of anaffiliation with an academic healthcenter. Geisinger had a longstandingif smaller commitment to researchand education in the form of its grad-uate education programs. Geisinger’sWeis Center for Research was incor-porated into the medical school, andit was expected that the system’s med-ical and postgraduate educationalprograms would become fully inte-grated.

Penn State’s health insurance andeducation costs were considerable.At the time of the merger, Penn Statespent approximately $75 million peryear on health care benefits for itsmore than 16,000 employees whowere not students. Large numbers ofPenn State University and HMC em-ployees signed up with PSGHPwithin a matter of months, and con-sideration was given to ultimatelymaking PSGHP the exclusive em-ployee-benefit option at both insti-tutions. In addition, given that PennState traditionally offered tuition dis-

counts to employees and families, theremoval of HMC employees fromPenn State’s books also was expectedto benefit the university’s bottomline.

HMC regarded Geisinger HealthPlan as an attractive asset. ThoughHMC had little reason to welcomeany HMO’s contracting style and uti-lization management, GeisingerHealth Plan was a not-for-profit rev-enue center owned by a health systemand led by physicians. It was expectedthat the HMO would grow consider-ably, and that the expansion ofPSGHP into the areas surroundingHMC would not only achieve addi-tional premium revenue for the bot-tom line, but would also fuel patientreferrals to Hershey.

Why did the merger fail? Consolidation and cutting costs

failed to deal effectively with the in-evitable winners and losers. Theprocess of consolidation generatedfew problems in nonclinical depart-ments (e.g., finance, marketing, andpublic relations); it stalled, however,when clinical departments at each ofthe two tertiary-care hospitals beganto tackle leadership, ownership of ter-tiary or highly profitable clinical ser-vices (e.g., bone marrow transplant,invasive cardiology services, tertiary-level children’s hospital care, high-risk obstetrics, and orthopedics), andmerging of postgraduate educationalprograms (i.e., how would residentssplit their time between two medicalcenters?).

Whenever a disagreement devel-oped, two camps — based on histor-ical affiliations with either Geisingeror HMC — quickly emerged. TheCEO, chief academic officer, andother system leaders then foundthemselves being lobbied by oppos-ing constituencies. Because complet-ing the merger also preoccupied thesystem’s leaders, unresolved dis-agreements and ongoing debate en-abled duplicative tertiary-care ser-vices to linger. Attempts to mediate



clinical program consolidation fromthe bottom up deteriorated into com-petitive advocacy. Overall system ver-sus local work-unit conflicts of in-terest played out in meetings, memos,and appeals to higher levels of au-thority, including the board of direc-tors and — if there were implicationsfor either the academic mission orthe medical school — the president ofPenn State University.

Lacking consensus, the two ter-tiary-care medical centers in Danvilleand Hershey continued to offer sep-arate and competing services. Thisdynamic was felt acutely by middlemanagers, many of whom respondedwith hardened loyalty to their imme-diate superiors. Long after the mergerfailed, there is still no shortage of un-flattering anecdotes about delay, gam-ing, passive resistance, demeaningcolleagues, bullying opponents, andfailing to address conflicts of interestin a setting that was supposed to bededicated to healing and service.

Theoretical cost savings never oc-curred and did not translate mean-ingfully into lower rates for healthcare purchasers or a better bottomline for the system. It was assumedthat economies of scale would occuras a result of the merger. Health caredelivery throughout the system’s ser-vice area remained a highly localizedenterprise, however, involving indi-vidualized encounters between onepractitioner and one patient in theclinic, catheterization lab, operatingroom, or delivery suite.

As the system promoted a one-size-fits-all approach to disparate set-tings across its wide service area, op-erational inefficiencies persisted andfixed costs remained. Due to the oftencontentious competition for re-sources among various departmentsand regions in the two camps notedabove, there was minimal incentive toreduce costs. The continuously ex-panding appetite for revenue andcapital to support patient care, edu-cation, and research cementedGeisinger’s and HMC’s reputations

as expensive tertiary-care facilities.Lacking any visible fulfillment of thesavings promised at the time of themerger, which was to be accom-plished with reduced service charges,the system failed to convince the localmarketplace that its high cost struc-ture was good for health care. At thesame time, the Pennsylvania attorneygeneral responded to local sentimentthat a monopoly in tertiary care incentral Pennsylvania combined withan exclusive relationship with a singleHMO was unlikely to result in lowerprices for consumers, and withheldfinal approval of the merger.

The cultures of the two mergedsystems were extremely different.While Graham Spanier, the presidentof Penn State had been quoted innews reports as saying,“The similar-ity of cultures between Penn Stateand Geisinger is another strength inthe relationship we are proposing,”his optimism quickly dissipated.HMC’s style of collective governanceby cooperating with independent andstrong academic departments clashedwith Geisinger’s style of managingfull time, salaried physicians in a mul-tispecialty group practice.

As Geisinger-pedigreed adminis-trators descended on HMC, acade-mic physicians already struggling tosecure grant support for research andto find time for teaching were con-fronted by management expectationsthat their clinical practices must beprofitably self-supporting. Conster-nation turned to anger when HMCphysicians were asked to examinetheir billing practices, outpatientclinic throughput, operating-roomtimes, support-staffing procedures,market-driven measures of physiciancompensation, indirect costs, the ex-pense of medical education, and un-funded research activities.

In south central Pennsylvania,there was a lack of community-provider support. There was alsopractitioner distrust, particularlywith respect to Geisinger andGeisinger’s HMO. Physicians in

northeastern and central Pennsylva-nia who were not associated withPSGHP suddenly were confrontedwith the presence of a large and pow-erful system that was intended toleverage services and contracts favor-able to its own interests. These physi-cians viewed this as an alarming ex-pansion of both Geisinger and HMCinto new areas of the state, with seri-ous implications for local indepen-dent practices and hospitals. Theyquickly assumed that the real pur-pose of the merger was to secure prof-its and restrict choice, and resistedany expectation to refer patients toPSGHP or to participate in its HMO.

Previously existing fragile rela-tionships between HMC and somelocal community hospitals — whichincluded the joint purchasing of sup-plies — were dissolved quickly, andother hospitals’ animosity towardHMC and Geisinger increased. Thedistrust also resonated among thenonphysician employees of HMC,complicating the contentious negoti-ations between the union represent-ing the nurses (who had watchedtheir tuition benefit evaporate) andthe newly constituted administrationof the HMC in the fall of 1997.

PSGHP could not deliver: Alreadysuspicious of HMC’s hunger forhigh-margin procedures and high oc-cupancy rates, hospitals in sur-rounding locales such as York, Lan-caster, Harrisburg, and Lebanonviewed PSGHP as an HMO with onepurpose: to funnel patients awayfrom them and to Hershey. Accord-ingly, they saw little advantage to par-ticipating in PSGHP’s network andeither delayed negotiating for as longas possible or offered unacceptablecontracting terms. Despite the pre-dictions about the statewide aggre-gation of health care entities, areacommunity hospitals remainedfiercely independent and continuedto enjoy local physician and patientloyalty. Since PSGHP failed to de-velop an adequate area-delivery net-work, most employer-purchasers of

NOVEMBER 2003 / MANAGED CARE 59


health insurance in the areas sur-rounding HMC effectively sided withtheir area’s community hospitals andrefused to offer PSGHP to their em-ployees.Accordingly, projected HMOmembership, premium revenues, andpatient referrals fell far short of ex-pectations.

The final strawBy the fall of 1999, Penn State

Geisinger Health System chairs hadbeen appointed for each of the majorclinical disciplines, but clinical de-partments at HMC continued to havesignificant autonomy. One southernregional vice president was quoted ashaving said that he viewed his role asbeing akin to running a “health caremall” for independent merchants,while each original Geisinger regionwas tightly administered by the re-gional vice presidents.

At the same time, academic chairswere appointed to oversee the variousteaching and research programs. As aresult, none of the senior leaders inplace prior to the merger experiencedany decrease in their level of respon-sibility, while at the same time addi-tional layers of administration wereadded. Given the complex chain ofcommand and the daunting chal-lenge of managing a large health caresystem, attempts by clinical leadersto promote integration or consolida-tion of programs and reduce costslanguished. Frustration mounted,and disaffection with the mergerbegan to be shared at the highest lev-els. Moreover, the board of directorsbecame polarized.

Below the senior level of manage-ment, the Penn State GeisingerHealth System functionally com-prised two affiliated yet distinctgroups, identified as either Geisingeror HMC. Physicians from either sidewere familiar with each other butfailed to systematically study or em-brace each other’s practice efficien-cies, management styles, or patient-care patterns. Except for a differentsign outside, individual providers and

support personnel in the clinics andhospitals saw no change in day-to-day operations, and business contin-ued as usual. At the same time, pro-jected revenue from clinicaloperations and cost efficiencies failedto materialize, and increasingly neg-ative actual-vs.-projected budget gapsbegan to develop in all four regions.

In the year following the merger,each region failed to achieve targetedbudget projections, and the deficitreached $30 million. As a result, dur-ing the second year of the merger,clinical program consolidation andcost management received height-ened urgency, and acrimony in-creased.

The attempt to consolidate theGeisinger and Hershey microbiologylaboratories was the final straw. Vansalready were transporting laboratoryspecimens throughout each of thefour regions from the outpatient clin-ics to each of the hospitals, and con-solidating the two laboratories wouldhave meant having the vans drive inone direction with no impact on clin-ical quality. Given that having onemicrobiology laboratory would havereduced overhead as well as the num-ber of employees, a significant savingsopportunity existed for the cost-per-test in an important revenue center.

Because administrative leaders atboth medical centers did not valuemicrobiology to the same degree ashighly visible tertiary-care servicessuch as open-heart surgery, the busi-ness plan for microbiology consoli-dation slowly advanced intactthrough the multiple layers of ad-ministration. Additionally, becauseGeisinger Medical Center appearedto have the most attractive cost struc-ture, a major academic health centerwith an on-site medical school wasabout to go without an on-site mi-crobiology laboratory.

When stakeholder physicians inmicrobiology at HMC learned of theplan, they publicly expressed gravereservations about the consolidation.The stakeholders included members

of the pathology department as wellas the infectious disease section ofthe department of medicine. The ar-gument quickly turned away from thealready-settled issues of savings, lay-offs, or overhead, and focused on theeducational implications for the Her-shey Pathology Residency and Infec-tious Disease Fellowship Programs, aswell as the teaching of medical stu-dents. Offers to develop informationtechnology solutions, distance learn-ing, or even transport or livingarrangements for on-site training atGeisinger Medical Center failed totake root, and rumors began to cir-culate that the residents and fellowswere going to refuse to travel to theGeisinger campus.

The chief academic officer (whostill served as dean of the medicalschool) wavered in his support of theconsolidation plan, and the stake-holder physicians appealed to thepresident of Penn State University.When the president of Penn State andthe Penn State Geisinger CEO failedto agree on the plan for consolidationof microbiology, consensus to undothe merger gained momentum. Dis-solution of Penn State Geisinger wasannounced in November 1999.

Lessons to be learnedSuperior leadership and manage-

ment are necessary for mergers in-volving health systems with previ-ously competing and tertiary-careprograms. Other writers on the topicof mergers have observed that if themerger is based on cutting costs, thefailure to quickly and effectively iden-tify the winners and losers in pro-gram consolidation will give cham-pions for duplicative programs timeto promote business as usual. More-over, the longer the delay, the harderand more dysfunctional the processbecomes (Blecher 1998, Weil 2000).

Executing a successful merger in-volving previously separate and com-peting health care entities necessi-tates not only strong leadership, butalso committed and nimble manage-



ment. If either of these attributes arelacking, success is threatened; if bothare missing, it is doomed.

Cultural differences and the im-pediments they cause can be under-estimated easily. Any organizationpossesses unique and immeasurablehistory, informal yet important rela-tional networks, management styles,local opinion leaders, and institu-tional pride that can be easily under-estimated in business plans but mayact as powerful determinants of thesuccess or failure of any merger(Baskin 2000; Pelligrini 2001).

In this instance, lingering differ-ences in culture — independent aca-demics committed to education andresearch on one side and full-timepracticing clinicians deferring to cen-tralized leadership on the other —effectively resulted in the inefficientpersistence of two separate clinicalorganizations. These persisted in asingle system, ironically named PennState Geisinger. A corollary lessonmay be that senior leaders caught upin the heady enthusiasm of a poten-tial merger may be less able to objec-tively assess the suitability of their re-spective organizations’ cultures.

Health system mergers do not au-tomatically result in economies ofscale. Greater organizational com-plexity superimposed on the sameworkforce and overhead will lead toexpanded management challenges.At the patient level, health care re-mains a highly individual process,and simply aggregating it into a sin-gle organization does not lead toheightened efficiency. Further, greaterorganizational complexity combinedwith business-as-usual patient caredoes not yield greater revenue norwill it lower cost and risks. It may, infact, lead to even greater financialstressors.

Not all stakeholders in the sur-rounding community will necessar-ily welcome a merger. While healthsystem administrators may assumethat anything that further enablestheir organization’s missions of pa-

tient care, education, or research islaudable, local health care and gov-ernment stakeholders are more likelyto discern that health systems merg-ers have more to do with reducingcompetition, increasing market share,and enhancing negotiating power.

Despite predictions of their cer-tain demise, many local hospitals andphysician practices have remainedquite independent (Bellandi 1995).Accordingly, depending on the mar-ketplace and the number and types ofleverage options, they can undercutthe success of the merger by, for ex-ample, foregoing any previously ex-isting collaborative agreements, al-tering referral patterns, and notcooperating with health insurancearrangements. The result may becommunity distrust, polarization oflocal health care providers, and in-creased regulatory scrutiny.

CONCLUSIONMerging two completely different

health systems would be difficultunder any circumstances. In the caseof Penn State Geisinger, it was as-sumed that underlying market forceswould favor a larger system compris-ing a large clinic, three hospitals, andan HMO with service-area domi-nance, greater revenue, lower costs,more capital, and increased patientreferrals. Not only were the goals ofthis systems merger not attained, butalso distinct cultural differences be-tween the systems and a lack of buy-in from local health care providerscreated additional challenges.

Leadership failed to convince inter-nal stakeholders of the merits of themerger while management continuedwith business as usual, allowing du-plicative programs to linger. Even theownership of an HMO could notovercome the local health careproviders’ reaction to the threat totheir market share. Furthermore,“ed-ucation and research” had little valueoutside the newly formed system.

As the nation’s health care systemcontinues to evolve, it remains to be

seen if large dominant health caresystems will emerge. On the basis ofwhat occurred with Penn StateGeisinger, health care leaders maywish to review the lessons that haveemerged: Bigger does not mean bet-ter, current leadership may not be upto the task of overcoming culturaldifferences, usual management maynot be up to achieving higher effi-ciencies, and resistance among inter-nal and external stakeholders cancoalesce quickly.

REFERENCESBaskin K, Goldstein J, Lindberg C. Merg-

ing, de-merging, and emerging atDeaconess Billings Clinic. PhysicianExec. 2000;26:20–25.

Bellandi D, Jaklevic MC. Still alone afterall these years. Mod Healthcare.1995;29:44–46, 48–50. Apr 9(14):44-6, 48-50.

Blecher MB. Size does matter. Hosp HealthNetw. 1998;72:28–30, 32, 34–36.

Pellegrini VD Jr. Mergers involving acade-mic health centers: a formidablechallenge. Clin Orthop. 2001;288–296.

Weil TP. Horizontal mergers in the UnitedStates health field: some practical re-alities. Health Serv Manag Res.2000;13:137–151.

case study of a failed merger of hospital systems

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