“Key Drivers of a

Successful Academic Healthcare Merger”

Glenn K. Geeting, MD

Goals of Presentation

Identify drivers of recent merger trends

Identify reasons for failed mergers in the 1990’s.

Elicit key drivers anticipated to lead to successful merger by an Academic Medical Center.

Discussion

4

Healthcare in US is changing

7

agar.io

Independent hospitals/health systems

Owned/operated by HMA

Ephrata Community

HospitalCarlisle Regional (HMA) Heart of Lancaster

(HMA)

Lewistown Hospital

Holy Spirit

Good Samaritan

Lancaster Regional

Medical Center (HMA)

Altoona Regional

Memorial

of York

PinnacleHealth

Hanover

Mount Nittany

Medical Center

York

(WellSpan)

St. Joseph

Medical Center

Reading Hospital

Lancaster General

Penn State Hershey

Gettysburg

Owned/operated by WellSpan

Chambersburg

Healthcare in US is Consolidating

Johns Hopkins

PinnacleHealth

Hanover

Reading Hospital

St. Joseph

Medical Center

Memorial

of YorkYork

Lancaster General

Owned by/affiliated with WellSpan

Community Health

SystemsGeisinger

UPMC

Altoona Regional

Mount Nittany

Medical Center

Owned by/affiliated with Geisinger

Owned/operated by CHS

Seeking a partner/merger

Penn

Heart of Lancaster

Lewistown Hospital

Holy Spirit

Good

Samaritan

Ephrata Community

Hospital

Lancaster Regional

Medical Center

Carlisle Regional

Owned/operated by UPMC

Gettysburg

Chambersburg

Healthcare in US is Consolidating

America’s Health Insurance Plans

Pace of consolidation is increasing

71 hospital deals in 2015 announced as of Aug 31, the most since 1999

The top 5 companies are being consolidated into 3 massive corporations

Mathews AW, Health Law Speeds Merger Frenzy. Wall Street Journal, 9/22/15, B1-2.

Drivers of Healthcare Consolidation

Look at insurance, airlines, and telecommunications

national or international industries that are now oligopolies

Georgia Tech’s “rule of 3s”

“The ACA is the trigger.”• Robert Kocher, former White House health adviser

Cost is the biggest driver of healthcare reform

The Federal Trade Commission held a 2-day conference last year on healthcare consolidation

Three Basic Financial Drivers of Healthcare Consolidation Liquidity and balance sheet drivers

Economies of scale

Spreading fixed overhead costs to a larger base, gaining efficiency

Withstand systemic shocks

Operational metrics

Smaller hospitals desire a broader base to fill beds

“Uncontrolled variation is the enemy of quality.” Deming

Purchasing power

Case Study of a Failed MergerJaan Sidorov MD, Managed Care, November 2003

July 1997-November 1999

Geisinger Health System + Hershey Medical Center = Penn State Geisinger Health System

Both financially healthy

Climate of consolidation

Board of Directors

Chair appointed by Geisinger had the tie-breaking vote

Penn State Geisinger Health System

Advantages of Merging

Broad customer base, >1million people

No longer had to compete

Support of financially threatened academic health center

Access to greater capital

Integration of managed care principles

Greater negotiating leverage

Predicted 3y cost reductions of $105 million

Geisinger Health System

Northeast PA

Strong reputation for health care management

Geisinger Health Plan: not-for-profit HMO, physician-led, owned by the health system

Wanted the luster of affiliation with an academic health center

Hershey Medical Center

South Central PA

Penn State College of Medicine

Health insurance, education, and research costs were considerable

College of Medicine support formula

Academic structure, strong chairs of independent departments

”The Great Divorce” November 1999

“Winners and losers are inevitable”

Clinical and residency programs challenged with tackling leadership and ownership

Cost savings not realized. First year deficit of $30 million

Culture clash

strong academic departments vs. managing salaried physicians

Distrust from nearby providers and hospitals

The Final Straw- Microbiology service consolidation to Geisinger

Microbiology, Pathology, ID protest

“Long after the merger failed, there is still no shortage of unflattering anecdotes about delay, gaming, passive resistance, demeaning colleagues, bullying opponents, and failing to address conflicts of interest in a setting that was supposed to be dedicated to healing and service.”

Case Study of a Failed Merger

Lessons Learned

Leadership: manage winners and losers

Cultural differences are easily underestimated

Mergers do not automatically result in economies of scale

Not all stakeholders will welcome a merger

Mergers vs Systems

Unique definition in healthcare

Merger = combination of separate facility licenses into a single license

Allows shift of inpatient services across facilities

Reorganization or elimination of services

Potentially greater cost savings

May bypass state regulations

System = common ownership but separate facilities, licenses, and financial records

may impede clinical consolidation

Mergers vs Systems

Mergers in which hospitals consolidate financial reporting and licenses generate savings of approximately 14%: 2, 3, and 4 years after merger

Consolidation into Systems does not generate savings, even after 4 years

D. Dranove, R. Lindrooth , Hospital consolidation and costs: another look at the evidence. Journal of Health Economics 22 (2003) 983–997

Does Consolidation Affect Quality of Care?

Study of CA hospitals 1991-1996

No evidence that mergers and acquisitions measurably affect inpatient mortality, may increase myocardial infarction readmissions and early discharge for normal newborns

V. Ho, B.H. Hospital mergers and acquisitions: does market consolidation harm patients? Hamilton Journal of Health Economics 19 (2000) 767–791

9

* Source: Hospital Mergers and Acquisitions….Does Market Consolidation Harm Patients; Journal of Health Economics, March 2000

No Consolidation Pre

Merger

Post

Merger

Mortality

Rates

1991 1995 1991 1995

Heart

Attack

Mortality

9.6% 7.7% 9.7% 9.3%

Consolidation and Mortality

Reasons for failure in the 1990’s

Cultural differences

Emotional vs rational decision-making

Forced structure Failed to coordinate care

Information technology

Lack of payment reform/incentives

Health Affairs. November 2012;31:11 8

Drivers of a Successful Merger

Culture: everybody has a shared goal new unified values, mission & vision

Clear communications

Leadership: 2% of people in organization have huge impact on the other 98% (Ram Charan)

Collaboration is a key value

Ability to synchronize different points of view

10

Drivers of a Successful Merger

• Structured approach to managing change (ie.

don’t force change)

• Population Management / Grow Patient Base

– Payment reform will change provider behavior

11

Recommendations

Potential

Partners

Similar

Culture

Patient Base Triple

Aim

Change

Manage

ment

12

Recommendations

Communication (trust)

establish clear expectations

Develop capabilities for partnership

Learn from the past: rational decisions What is best for the new organization

Identify service lines that coordinate the continuum of care identify experts and develop teams

Have contingency plans13

Discussion

Group Members

Carolyn Barbieri

Glenn Geeting

Jerry Griffin

Brenda Mallory

John Potochny

Scott Russell

Sponsors: Jeff Miller, Mike Freeman 2

Interviews Conducted

Craig Hillemeier, MD, CEO of Penn State Hershey Medical Center and Health System, Senior Vice President for Health Affairs for Penn State, and Dean of College of Medicine

Robin Wittenstein, COO of Penn State Hershey Health System

Michael Freeman, Senior Director of Strategic Planning, Penn State Hershey Health System

Wayne Zolko, Associate Vice President for Finance and Business and Controller at Penn State Hershey Medical Center

Steve Ettinger, MD, Interventional Cardiology Program Director, E-MBA student with Penn State Smeal College of Business

R. Kevin Grigsby, MSW, DSW, 1st Senior Director, Member Organizational Development at Association of American Medical Colleges

David J Handel, MBA, former director of Indiana University Hospitals, and former executive vice president and chief operating officer, Clarian Health Partners, Indianapolis, Indiana.

Daniel A. Handel, MD, MBA, MPH, Chief Medical Officer and Executive Medical Director, Medical University of South Carolina 3

References

Mathews AW, Health Law Speeds Merger Frenzy. Wall Street Journal, 9/22/15, B1-2.

Washington, AE, Coye MJ, Feinberg DT. Academic Health Centers and the Evolution of the Health Care System. JAMA. 2013; 310(18): 1929-1930.

Handel, DJ, Kleit, SA, Handel, DA. The Development and Maturation of a Statewide Academic Health Care System: Clarian Health Partners/Indiana University Health. Academic Medicine. 2014; 89: 230-235.

Fuchs, VR. Current Challenges to Academic Health Centers. JAMA. 2013; 310(10): 1021-1022.

Fernandez B, Giger A. Three Prescriptions for Successful healthcare Mergers. Gallup Business Journal. Available at: http://www.gallup.com/businessjournal/179486/three-prescriptions-successful-healthcare-mergers.aspx.

References Saxena SB, Sharma A, Wong A. Succeeding in Hospital & Health Systems M&A and Why So Many Deals Have

Failed, and How to Succeed in the Future. Booz & Company. 2013.

Kastor JA. Mergers of Teaching Hospitals: Three Case Studies. Amer J Med. 2001;110:76-79.

Ahgren B. Is it Better to be Big? The Reconfiguration of 21st Century Hospitals: Responses to a Hospital Merger in Sweden. Health Policy. 2008;87:92–99.

Barro J, Cutler DM. Consolidation in the Medical Care Marketplace, A Case Study from Massachusetts. In National Bureau of Economic Research, Volume Title: Mergers and Productivity, ed. Kaplan SN. 2000. University of Chicago Press. Pg. 9-50.

Ho V, Hamilton BH. Hospital Mergers and Acquisitions: Does Market Consolidation Harm Patients? J Health Eco. 2000;19:767–791.

Dranove D, Lindrooth R. Hospital Consolidation and Costs: Another Look at the Evidence. J Health Eco. 2003;22:983–997.

Sidorov J. Case Study of a Failed Merger of Hospital Systems. Managed Care. 2003;Nov:56-60.

Andreopoulos S. Book Explores Successes, Failures of Academic Hospital Mergers Including UCSF-Stanford. Stanford Report, May 9, 2001. Available at: http://news.stanford.edu/news/2001/may9/book.html

Betbeze P. Greater Than the Sum of Its Parts Case Study: Bayhealth Medical Center Fierce Competitors Become Allies in Delaware Merger. Breakthroughs. 2010;September. Available at: http://www.healthleadersmedia.com/breakthroughs/257025/Hospital-Merger-and-Acquisition-Strategies

Maria Finarelli. Academic Medical Centers: What’s Their Role in Consolidating Health Care Markets? Health Strategies and Solutions. July 02, 2012

Institute of Medicine. Academic Health System Case Material. A corresponding document, Academic Health System Case Material. Available at: www.iom.edu/EssentialPrioritiesforAHSs.

Dzau V, Gottlieb G, Lipstein S, Schlichting N, Washington E . Essential Stewardship Priorities for Academic Health Systems. Institute of Medicine. 2014, September. Available at: http://www.iom.edu/Global/Perspectives/2014/AcademicHealthSystems.aspx

Meyer JA, Silow-Carroll S, Kutyla T, Stepnick LS, Rybowski LS. Hospital Quality: Ingredients for Success. A Case Study of Beth Israel Deaconess Medical Center. The Commonwealth Fund Available at: http://www.commonwealthfund.org/programs/quality/761_Meyer_hospital_quality_overview.pdf