M&A Study: Acquired Hospitals Often Struggle to Meet Financial Goals

Christopher Cheney, October 12, 2017

Research released today shows that hospitals acquired in an M&A deal often struggle to generate financial gains from economies of scale in the first two years after the transaction.

A study on hospital mergers and acquisitions published today provides insights about why many acquired hospitals fail to meet their post-transaction financial goals.

The research features quantitative analysis of more than 750 hospital M&A deals from 2008 to 2014, along with survey data collected from 90 hospital-finance leaders. The study was conducted by the Westchester, IL-based Healthcare Finance Management Association (HFMA) and the Deloitte Center for Health Solutions, a division of New York, NY-based consultancy Deloitte.

"This study makes it clear that mergers are unlikely to succeed unless leaders tackle the tough decisions early on," HFMA President and CEO Joseph Fifer, CPA, said in a prepared statement. "Prospective merger partners should sit down together and figure out what the organizational structure and management team will look like after the merger. They should also recognize that it takes sustained effort to blend organizational cultures."

In the first two years after a hospital M&A deal, the research shows many acquired hospitals struggle to achieve their financial objectives.

"Acquired hospitals collectively saw a decrease in operating expenses after a transaction; however, operating revenue tended to decline at a greater rate, resulting in a decline in acquired hospitals' operating margins. These trends leveled-off two years post-transaction," the researchers wrote.

There were two primary causes of weaker-than-expected financial performance. "Survey respondents acknowledged that immediate investments and additional staffing were sometimes required to improve quality at an acquired hospital, which can impact financial performance."

About 80% of executives surveyed said there were significant capital investments after an M&A transaction was completed. "Nearly 40 percent of all survey respondents used the capital to upgrade or implement clinical information systems, the top-reported use of capital," the researchers wrote.

The motivations to seek and complete an M&A deal varied between acquiring organizations and acquired hospitals.

About 40% of survey respondents at acquiring organizations said boosting market share was the top reason to pursue an M&A transaction. "Increased market share can help a health system broaden its physician network and expand its access to patients, both critical factors for bearing increased financial risk in an evolving, value-focused healthcare market," the researchers wrote.

At acquired hospitals, nearly a third of executives surveyed cited access to capital as their prime motivating factor for seeking an M&A deal.

"Many acquired organizations were in financial distress, or required investments in staff, health information technology, physician recruitment, facilities, medical equipment, or pension funding to improve operations and quality of care," the researcher wrote.

Significant numbers of the executives surveyed said the quality of patient services improved after an M&A transaction:

  • 27% reported increased Hospital Consumer Assessment of Healthcare Providers and Systems scores
  • 23% reported decreased hospital readmissions
  • 17% reported decreased physician appointment wait times
  • 17% reported reductions in patient mortality rate

The executive survey identified eight keys to success in an M&A deal:

  • Developing a strategic vision for the transaction
  • Identifying clear financial and non-financial goals
  • Holding leadership accountable for integration efforts
  • Identifying cultural differences between acquired and acquiring organizations
  • Establishing transparency in decision-making
  • Aligning clinical and functional leadership as early as possible
  • Following best practices for integrating the organizations
  • Following best practices for project management such as tracking targets and milestones
Christopher Cheney

Christopher Cheney is the senior finance editor at HealthLeaders Media.

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