By Lynn H. Vogel, Ph.D.
Next Wave Health Advisors
Mergers and Acquisitions Seem Inevitable
Mergers and acquisitions have always been a part of the corporate landscape. Companies seeking greater market share, more control over their supply lines, adding products to their existing portfolios, and eliminating competition have often sought to accomplish these goals by acquiring or merging with other companies. In recent years, the healthcare industry has joined these types of efforts with health systems acquiring hospitals and other health systems, and hospitals and health systems acquiring physician practices. But healthcare has also added a unique component to these processes: affiliations that fall short of an actual formal merger or acquisition by entering into joint ventures, joint operating agreements, professional associations or agreements to facilitate interoperability through mutual cooperative associations. So, what has been typically known as “M&A” activities, becomes “MA&A” activities in healthcare. Unlike the corporate world in which formal changes in control typically follow from mergers and acquisition, affiliation agreements in healthcare can include mutual management or oversight responsibilities in addition to activities that result in changes in control. When lawyers, physicians and executives get together, there is almost no limit to their creativity in developing new organizational arrangements.
In a recent study conducted by Deloitte and HFMA, over 80% of the respondents stated that their organizations had entered into formal consolidation arrangements or were interested in looking at short- or longer-term arrangements.
Over half of the respondents in this study were looking for cost efficiencies, economies of scale, or improved or sustained competitive position.
Physician practices and independent practice associations are often a priority MA&A opportunity. The ratio of physician practices owned by hospitals increased from 1 in 7 in 2012, to 1 in 4 just three years later. An inflection year was in 2016 when physician practice ownership dropped below 50% for the first time.
Role of Information Technology in MA&A Activities
Information technology (IT) is typically not a priority consideration when hospitals and healthcare systems enter into MA&A activities — an unfortunate situation when one considers that IT represents not only a large cost component in any healthcare organization, but brings a significant measure of both value and risk to any healthcare MA&A activity. In fact, IT is seldom “at the table” during initial MA&A discussions. Formal due diligence processes, which take place during the earliest stages of almost every MA&A activity, seldom include IT. Most focus on financial and legal reviews, assuming that IT will simply “get it done” in whatever timeframe the senior executives, physicians and lawyers deem appropriate. While most IT organizations mount significant efforts to accomplish their assessments and initiate integration activities within whatever timeframe they are given, there are also lots of missed timeline targets because the IT tasks are typically more complicated that what the executives managing the MA&A work assume.
Initial Due Diligence Processes Need to Include Information Technology Risk and Value Assessments
Risk assessments are often a part of very early due diligence activities in any MA&A process — but the focus is more likely to be on a “profit and loss financial risk” than from risks inherent in IT, including data breaches and other cybersecurity challenges. On the other hand, value that comes from IT investments are too often not considered. As Dr. Andrew Rosenberg, CIO at Michigan Medicine noted recently in his CIO Chat, “The value proposition brought to the table by IT is limitless — the ability to interoperate is significantly driven by technology. From data sharing and analytics to cybersecurity and infrastructure, a detailed and systematic review of all things IT is warranted.” Healthcare organizations that ignore the risk and value aspects of IT early in any MA&A due diligence process — whether acquiring or merging with another hospital or heath system, or acquiring a physician practice — may not only miss opportunities to add specific value considerations to a deal, but may miss risks that can come back to haunt both the “acquirer” and the “acquired, merged or affiliated” after the deal has been completed.
Redefining the IT Activities in MA&A Opportunities
Often when the IT organization learns about MA&A opportunities (which typically occurs when the deal is about to be closed), staff rush to figure how the deal will change their workloads. It is common to see IT representatives (including staff from the Network, Desktop, Applications and Security teams) descend on an MA&A opportunity to try to figure out what they will have to do to “make it work.” This can easily overwhelm staff both from the IT organization and from the MA&A opportunity, as there is often little coordination as to schedules, questions are often duplicated, and requests are made for data that may not be readily available. As an alternative, IT should develop a formal Playbook for MA&A activities describing not only a structured process for initial due diligence work, but also a series of phased tools to use as the particular MA&A review progresses.
In his recent CIO Chat, Dr. Andrew Rosenberg, Michigan Medicine CIO, describes the approach taken by his team with the assistance of the Huntzinger Management Group in developing an MA&A Playbook. The result was that not only did the IT organization begin to engage in a more structured and disciplined approach to the institution’s MA&A activities, but the institution recognized that IT needed to be engaged much earlier in the overall MA&A workflow.
Huntzinger Management Group’s (Huntzinger) new MA&A Service Line recognizes the importance of including IT as a formal consideration early in any MA&A process. As such, Huntzinger brings a formal and disciplined process for looking at both the value and the risks that IT brings to any MA&A opportunity — essential for highlighting the potential for success as well as documenting the risks. Huntzinger’s methodology brings together the identification of entity types (e.g., ACOs, hospitals, health systems, physician practices), possible relationship opportunities (e.g., merger, acquisition, corporate and clinical affiliation, networks and joint ventures), relationship goals (e.g., cost reduction, clinical growth, enhanced capacity, specialty expansion, data access and management), with assessments of the IT capabilities that an MA&A opportunity might present. Ironically, as the IT role in MA&A assessments becomes more disciplined, it can bring a structure and formality to MA&A activities that can benefit both the initiator of those activities and the MA&A opportunity that is being presented.