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Hospitals Experience Short-Term Operating Margin Decline after M&A

The finances of acquired hospitals generally suffer for two years after mergers and acquisitions (M&A), according to a recent report from HFMA and the Deloitte Center for Health Solutions.


M&A activity has increased significantly in the past decade, driven by the pursuit of economies of scale and the potential for reducing the cost of care. The HFMA/Deloitte study examined more than 750 merger transactions between 2008 and 2014 to assess how M&A affects a hospital’s performance.


After factoring in market and hospital characteristics, the research revealed that acquired hospitals, on average, experienced a post-transaction decrease in operating expenses but an even larger decline in operating revenue, resulting in a decline in operating margins. However, the negative trends in hospital margins leveled off two years after the transaction, according to the research.


“Many of the hospital finance executives who were interviewed and involved in acquiring or merging hospitals admitted that they underestimated how cultural, competitive, and market differences of acquired organizations could limit the ability to realize post-transaction value,” the authors noted.


“There was a group of hospitals that performed better because they were much more intentional,” said the director of healthcare finance policy, strategy and development, for HFMA.


Based on executives’ survey responses and interviews, researchers identified eight strategies and business practices related to integration planning and execution that correlated with the achievement of higher margins.


Study analysts noted, “When a health system receives an M&A request for proposal, executives should develop a strategic rationale and rigorously test the transaction’s hypothesized value drivers.” And “A key factor in an acquired hospital’s likelihood of meeting quality-improvement and savings goals was leadership.”


A list of the eight strategies, including strategic vision and leadership, appears below:


  • Develop a strong strategic vision for pursuing the transaction
  • Have explicit financial and non- financial goals
  • Hold leadership accountable, often at the vice- president level, for integration effort;
  • Identify cultural differences between the organizations
  • Make clear and upfront decisions on executive and mid-management leadership
  • Align clinical and functional leadership early in the process
  • Follow best practices for integrating the acquired or merged organization into the parent organization
  • Implement project management best practices, with tracked targets and milestones, from day one of transaction close until two years after


(Source: (“Short-Term Financial Hit for Hospitals Post-M&A: Report,” HFMA Weekly News, October 12, 2017. To read the full report, contact clockee@veralon.com for a copy.)



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