The first installment of our two-part series looks at many of the things that can, and commonly do, go wrong.
Mergers and acquisitions have been a common occurrence in healthcare for years now, and of late, mega-mergers have become the norm — giant organizations that join forces, often in an attempt to leverage their newfound scale and keep dollars flowing in.
The problem is that these mega-mergers often don’t deliver on their promises. Organizations want more negotiating power when hashing out contracts with insurance companies, and they rarely get it. Credit ratings are being downgraded. Costs often rise, quality deteriorates, and some companies want out of these deals altogether six or seven years down the road.
Others work out just fine, of course, but for every healthcare entity that sees success in these deals, there’s another which just bet the farm and lost it.
The mission then becomes: How to avoid that fate?
HARD LOOK AT REALITY
RIta Numerof, PhD, president of healthcare consulting firm Numerof and Associates, expects a rocky road going forward. Mergers are difficult to do well under normal circumstances, but a mega-merger is rarely a normal circumstance — it’s more complex, and more challenging to do well given that the healthcare industry is going through a fairly big transition.
In most of these scenarios, said Numerof, the intent was honorable. They wanted to lower costs and improve quality and do better by the consumers who depend on them. That’s the message that’s expressed publicly, anyway, and the Federal Trade Commission and the Department of Justice have generally been willing to accept these sentiments.
Numerof said regulators should be taking a closer look at whether these deals are sound from a financial perspective, and in fact will deliver on that promise.
“I am very skeptical of this,” she said. “The reality is that around 40 percent of M&A in general, across industries, fail to deliver on the financial performance that the parents coming together in the first place wanted to achieve. The fact that there is so much evidence against the likelihood of success should be a data point the Department of Justice takes into account.”
A lot of the healthcare mergers that have taken place over the past five to eight years have been a response to the Affordable Care Act, said Numerof, and were intended as a bulwark against negotiations with insurance companies, essentially giving the buyers more negotiating clout when coming to the table as contract rates are being revisited.
It has also, she said, become a mechanism for these delivery systems to put more pressure on independent physicians, something of a dying breed in the industry.
The issue for these merging organizations is that, while they feel there’s safety in numbers, the deals add another layer of complexity into their business models.
CHANGING BUSINESS MODELS
Even under the best circumstances, M&A often fails to live up to the promise that was established.
“It’s because merger and acquisition integration, which would allow these mergers to realize the potential behind them, requires an enormous amount of work, and most organizations don’t take into account the time that’s required, the focus that’s required, and some of the cultural dynamics that are going to be at play,” said Numerof. “And many don’t take these considerations into account when they evaluate potential partners.”
When these deals are completed, there’s often a “glow” that follows, with a general sentiment that the decision will be good for business. Then reality sets in.
As an example, there’s one very successful pharmaceutical company that has a set of products centered around a speciality disease. The company was acquired for a significant chunk of change by one of the major pharma companies, which promised the smaller company that, due to its success, it would be allowed to operate as independently as possible.
Less than a year later, the company is being broken apart, and the components are being integrated into the infrastructure of the larger company. That has led to some bureaucratic overlay, and defections from people who don’t want to work for a larger company.
In some cases, mergers occur and then the participating parties want to jump ship.
“You have companies coming together, healthcare systems that came together with a lot of fanfare, and after about five to seven years they all agree this was not a good situation, and the company divests all of the assets and individual units,” said Numerof. “So this is very expensive, and not necessarily very good for the community.”
Size is almost never protective, she said. Bond ratings are going down. Some deals, like CVS-Aetna, which was recently approved by the DOJ, will have to do things very different than they have historically in order to be successful — and that will be a struggle in a challenging market environment.
In order to avoid risk, there are certain elements companies should consider.
“One of the first tenets is you’ve got to be very clear when defining the joined vision of the company, and articulate how the separate histories of these companies is going to come together to create a different whole,” said Numerof.
“One of the key points here is the strength of each of the companies. When two companies are weak, it’s like entering into a marriage. With two weak people, it doesn’t work. If you have strong companies coming together strategically because they both see opportunities for growth, where they can leverage each others’ trends, that puts them in a much better position.”
There are always opportunities for cost reduction, but they’ve got to have a new business model. That model has to take into account a new go-to-market strategy, and take into account what’s going to happen in terms of the portfolio — how customers are going to be taken care of, are what the infrastructure requirements are going to be.
An important consideration is redefining core roles and competencies, and sorting out which core values will endure in the combined entity. That will essentially be the glue that holds the enterprise together, and it will require communication; management structure will be crucially important in making the endeavor work long-term.
They’re all factors to consider, especially given that Numerof expects more mega-mergers in the future.
“I think we’re going to see more mega-mergers until the DOJ says,’This is not in the best interest of consumers, the economy, and the ability to compete,'” she said.